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Cairn India (CAIR)
Energy
Finally some operational progress, but downgrade to REDUCE on valuation.
Cairn India announced commencement of production from the Bhagyam field in its key
Rajasthan block. We see this development as a positive as it puts execution back on
track, which had been impacted by regulatory delays during the pendency of the CNEVED
deal. However, we downgrade the stock to REDUCE given that the stock is trading
near our revised DCF-based target price of `350 (`335 previously). We also advocate
booking profits given (1) potential downside risks from decline in crude oil prices in light
of deteriorating oil demand and (2) recent appreciation in the Rupee.
Back to execution post completion of the CNE-VED deal
We see the commencement of oil production from the Bhagyam field in Cairn’s Rajasthan block as
a positive development that will help in shifting the focus back to execution towards achieving
Cairn’s spelt-out target of 175,000 b/d of oil production from its Rajasthan block by end-FY2012E.
We highlight that there had been delays in obtaining regulatory approvals for ramping up oil
production from the Rajasthan block during the pendency of the CNE-VED deal. We note that the
targeted peak oil production from Bhagyam is 40,000 b/d. The management expects to achieve its
target of 175,000 b/d by increasing production from its Mangala field after obtaining the
necessary statutory approvals.
Downgrade to REDUCE (ADD previously) with a revised target price of `350 (`335 previously)
We have downgraded the stock to REDUCE (versus ADD previously) given strong performance of
12.2% over the last one month. We note that the stock is trading near our revised DCF-based
target price of `350 versus `335 previously (see Exhibit 1). The upward revision in the target price
reflects (1) higher crude oil price assumption in the near term, (2) roll-forward of DCF and (3)
moderately higher production from the Rajasthan block. We would advocate investors to book
profits in the stock given (1) potential downside risks to crude oil prices given recent deterioration
in global oil demand and (2) recent appreciation in the Rupee.
Upside risks to fair value from higher-than-expected (1) crude prices and/or (2) recoverable reserves
Key upside risks stem from (1) higher-than-expected crude oil prices from any potential disruption
of supplies and (2) any potential announcement on upgrade of reserves estimates in the Rajasthan
block. We would also watch for announcement of the reserves potential at Cairn’s block in Sri
Lanka (SL 2007-01-001 in Mannar Basin), which will likely be disclosed in 1QCY12.
Revised earnings to reflect higher crude oil prices in near term
We have revised our FY2012-14E EPS to `46.7 (+7.2%), `58.3 (+6.8%) and `49 (+9.8%) to
reflect (1) higher crude oil prices, (2) moderately higher production and (3) other minor changes.
Two key variables to watch out for—(1) crude oil price and (2) Rupee
Crude oil prices. We see downside risks to crude oil prices given the recent deterioration
in global oil demand, which has resulted in a fairly comfortable demand-supply balance.
We note that IEA has recently revised its estimate for global oil demand for CY2012E to
1.1 mn b/d versus 1.3 mn b/d. On the other hand, we see ample increase in global supply
in CY2012E led by (1) 1 mn b/d increase in non-OPEC supply, (2) 0.6 mn b/d increase in
OPEC NGLs production and (3) higher production from Libya. This should ease the OPEC
spare capacity to 5.5 mn b/d (+1.3 mn b/d yoy) in CY2012E. Exhibit 2 gives our estimates
of global oil demand-supply balance.
Key assumptions behind earnings model
Volumes. We model gross production from the Rajasthan block at 6.7 mn tons (135 kb/d)
for FY2012E, 9 mn tons (180 kb/d) for FY2013E and 10.1 mn tons (202 kb/d) for
FY2014E. We assume gross production of 1.46 bn bbls (1 bn bbls net to Cairn) over the
life of the field, which is higher versus management’s guidance of 2P reserves of 1.15 bn
bbls.
Crude oil price assumption. We assume crude oil (Dated Brent) prices at US$113/bbl,
US$105/bbl and US$100/bbl for FY2012E, FY2013E and FY2014E versus US$110/bbl,
US$100/bbl and US$95/bbl previously. We assume FY2015E crude price at US$90/bbl and
an increase in crude prices by 2% in perpetuity beyond FY2015E. We model US$10/bbl
discount to Dated Brent for Cairn’s Rajasthan crude.
Exchange rate. We have modeled our exchange rate assumptions for FY2012E, FY2013E
and FY2014E at `48.7/US$, `52.5/US$ and `51/US$. We have assumed long-term
exchange rate from FY2015E at `50/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR)
Energy
Finally some operational progress, but downgrade to REDUCE on valuation.
Cairn India announced commencement of production from the Bhagyam field in its key
Rajasthan block. We see this development as a positive as it puts execution back on
track, which had been impacted by regulatory delays during the pendency of the CNEVED
deal. However, we downgrade the stock to REDUCE given that the stock is trading
near our revised DCF-based target price of `350 (`335 previously). We also advocate
booking profits given (1) potential downside risks from decline in crude oil prices in light
of deteriorating oil demand and (2) recent appreciation in the Rupee.
Back to execution post completion of the CNE-VED deal
We see the commencement of oil production from the Bhagyam field in Cairn’s Rajasthan block as
a positive development that will help in shifting the focus back to execution towards achieving
Cairn’s spelt-out target of 175,000 b/d of oil production from its Rajasthan block by end-FY2012E.
We highlight that there had been delays in obtaining regulatory approvals for ramping up oil
production from the Rajasthan block during the pendency of the CNE-VED deal. We note that the
targeted peak oil production from Bhagyam is 40,000 b/d. The management expects to achieve its
target of 175,000 b/d by increasing production from its Mangala field after obtaining the
necessary statutory approvals.
Downgrade to REDUCE (ADD previously) with a revised target price of `350 (`335 previously)
We have downgraded the stock to REDUCE (versus ADD previously) given strong performance of
12.2% over the last one month. We note that the stock is trading near our revised DCF-based
target price of `350 versus `335 previously (see Exhibit 1). The upward revision in the target price
reflects (1) higher crude oil price assumption in the near term, (2) roll-forward of DCF and (3)
moderately higher production from the Rajasthan block. We would advocate investors to book
profits in the stock given (1) potential downside risks to crude oil prices given recent deterioration
in global oil demand and (2) recent appreciation in the Rupee.
Upside risks to fair value from higher-than-expected (1) crude prices and/or (2) recoverable reserves
Key upside risks stem from (1) higher-than-expected crude oil prices from any potential disruption
of supplies and (2) any potential announcement on upgrade of reserves estimates in the Rajasthan
block. We would also watch for announcement of the reserves potential at Cairn’s block in Sri
Lanka (SL 2007-01-001 in Mannar Basin), which will likely be disclosed in 1QCY12.
Revised earnings to reflect higher crude oil prices in near term
We have revised our FY2012-14E EPS to `46.7 (+7.2%), `58.3 (+6.8%) and `49 (+9.8%) to
reflect (1) higher crude oil prices, (2) moderately higher production and (3) other minor changes.
Two key variables to watch out for—(1) crude oil price and (2) Rupee
Crude oil prices. We see downside risks to crude oil prices given the recent deterioration
in global oil demand, which has resulted in a fairly comfortable demand-supply balance.
We note that IEA has recently revised its estimate for global oil demand for CY2012E to
1.1 mn b/d versus 1.3 mn b/d. On the other hand, we see ample increase in global supply
in CY2012E led by (1) 1 mn b/d increase in non-OPEC supply, (2) 0.6 mn b/d increase in
OPEC NGLs production and (3) higher production from Libya. This should ease the OPEC
spare capacity to 5.5 mn b/d (+1.3 mn b/d yoy) in CY2012E. Exhibit 2 gives our estimates
of global oil demand-supply balance.
Key assumptions behind earnings model
Volumes. We model gross production from the Rajasthan block at 6.7 mn tons (135 kb/d)
for FY2012E, 9 mn tons (180 kb/d) for FY2013E and 10.1 mn tons (202 kb/d) for
FY2014E. We assume gross production of 1.46 bn bbls (1 bn bbls net to Cairn) over the
life of the field, which is higher versus management’s guidance of 2P reserves of 1.15 bn
bbls.
Crude oil price assumption. We assume crude oil (Dated Brent) prices at US$113/bbl,
US$105/bbl and US$100/bbl for FY2012E, FY2013E and FY2014E versus US$110/bbl,
US$100/bbl and US$95/bbl previously. We assume FY2015E crude price at US$90/bbl and
an increase in crude prices by 2% in perpetuity beyond FY2015E. We model US$10/bbl
discount to Dated Brent for Cairn’s Rajasthan crude.
Exchange rate. We have modeled our exchange rate assumptions for FY2012E, FY2013E
and FY2014E at `48.7/US$, `52.5/US$ and `51/US$. We have assumed long-term
exchange rate from FY2015E at `50/US$.
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