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Earnings downgrade to reflect lower crude prices. We cut our FY2015-17 EPS
estimates for Cairn India by 16-26% to factor in lower crude price assumptions. Our
expectations of lower crude prices in the near term and lack of comfort on production
growth constrain us from taking a positive view on the stock despite recent sharp
correction. We retain REDUCE rating with a revised DCF-based TP of `255 (`275 earlier),
which factors in moderate recovery in crude prices to US$90/bbl in the long term.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Lower crude prices in the near term may act as on overhang on the stock performance
We expect crude oil prices to sustain at lower levels over the next 6-12 months, as surplus
global crude production may take some time to disappear, while demand environment is
unlikely to get much respite (refer to our January 6 note Normal economics at play now for
details). Lower crude prices can act as a significant overhang on Cairn India stock given its high
sensitivity to the company’s profitability. Exhibit 1 shows our computations of per barrel
profitability of Cairn’s Rajasthan block, which can decline quite steeply if crude price sustains at
current levels in the near term.
Our concerns on production growth, accentuated further in a lower crude price environment
We continue to have concerns on the company’s earlier guidance of 7-10% CAGR growth in
production from Rajasthan block in FY2014-17E, as it requires (1) successful implementation
of EOR project to offset the decline in production from Mangala field, (2) augmentation of
production from Aishwariya and Bhagyam fields and (3) incremental contribution from
existing discoveries in Barmer Hill, Raageshwari and other satellite fields. In our view, the
development of tight oil discoveries in Barmer Hill and satellite fields may get delayed in a
lower crude price environment, given its presumably higher lifecycle costs of production.
Also, the history of disappointments versus the company’s guidance on ramp-up of crude oil
production from the Rajasthan block does not provide much comfort.
Reduce estimates to factor in lower crude price assumptions
We cut our FY2015-17 EPS estimates for Cairn India to `40.4 (-16%), `28.6 (-26%) and `25.8
(-17%) to factor in lower global crude price assumptions and other minor changes. We retain
our REDUCE rating on the stock, while reducing our DCF-based target price to `255 from `275
earlier. We note that 28% of our fair valuation of Cairn India is attributed to production from
Rajasthan block beyond May 2020, the current expiry date of PSC. We have assumed extension
of the PSC through the life of the RJ-ON-90/1 field with a 10% escalation in profit sharing with
the government from May 2020 onwards, over and above the peak level of 50%, which is
contracted in the existing PSC.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf
Earnings downgrade to reflect lower crude prices. We cut our FY2015-17 EPS
estimates for Cairn India by 16-26% to factor in lower crude price assumptions. Our
expectations of lower crude prices in the near term and lack of comfort on production
growth constrain us from taking a positive view on the stock despite recent sharp
correction. We retain REDUCE rating with a revised DCF-based TP of `255 (`275 earlier),
which factors in moderate recovery in crude prices to US$90/bbl in the long term.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Lower crude prices in the near term may act as on overhang on the stock performance
We expect crude oil prices to sustain at lower levels over the next 6-12 months, as surplus
global crude production may take some time to disappear, while demand environment is
unlikely to get much respite (refer to our January 6 note Normal economics at play now for
details). Lower crude prices can act as a significant overhang on Cairn India stock given its high
sensitivity to the company’s profitability. Exhibit 1 shows our computations of per barrel
profitability of Cairn’s Rajasthan block, which can decline quite steeply if crude price sustains at
current levels in the near term.
Our concerns on production growth, accentuated further in a lower crude price environment
We continue to have concerns on the company’s earlier guidance of 7-10% CAGR growth in
production from Rajasthan block in FY2014-17E, as it requires (1) successful implementation
of EOR project to offset the decline in production from Mangala field, (2) augmentation of
production from Aishwariya and Bhagyam fields and (3) incremental contribution from
existing discoveries in Barmer Hill, Raageshwari and other satellite fields. In our view, the
development of tight oil discoveries in Barmer Hill and satellite fields may get delayed in a
lower crude price environment, given its presumably higher lifecycle costs of production.
Also, the history of disappointments versus the company’s guidance on ramp-up of crude oil
production from the Rajasthan block does not provide much comfort.
Reduce estimates to factor in lower crude price assumptions
We cut our FY2015-17 EPS estimates for Cairn India to `40.4 (-16%), `28.6 (-26%) and `25.8
(-17%) to factor in lower global crude price assumptions and other minor changes. We retain
our REDUCE rating on the stock, while reducing our DCF-based target price to `255 from `275
earlier. We note that 28% of our fair valuation of Cairn India is attributed to production from
Rajasthan block beyond May 2020, the current expiry date of PSC. We have assumed extension
of the PSC through the life of the RJ-ON-90/1 field with a 10% escalation in profit sharing with
the government from May 2020 onwards, over and above the peak level of 50%, which is
contracted in the existing PSC.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf
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