CAIRN India

 

 

 

With the commissioning of its pipeline, Cairn India's profits are set to soar in FY11 . Its growing resource base and focussed efforts on E&P make it lucrative for long-term investors

   CAIRN India remains an attractive pick in the E&P industry despite the steady gain in its share price over the past one year. The commissioning of its pipeline marks an inflexion point, while its Rajasthan unit development and exploration efforts in other blocks offer a support for future growth. Long-term investors can add this scrip to their portfolio.

BUSINESS:

Cairn India, a 62.4% subsidiary of Cairn Energy (UK), owns and operates petroleum E&P assets in Indian subcontinent that include Ravva field in KG basin and Cambay basin in Gujarat. Additionally, the company holds stakes in 13 blocks in India and one in Sri Lanka. The company's most prolific field in Rajasthan began production in September 2009, which is scheduled to achieve a plateau level of 175,000 bpd in 2011. While Cairn is the operator with a 70% stake, ONGC holds the rest 30% stake in this field. Malaysian petroleum major Petronas owns over 14.9% in the company, institutional investors hold a 17.8% stake and retail investors hold around 2.5%.

GROWTH DRIVERS:

The company has just recently commissioned its 590-km crude oil carrying pipeline from Barmer in Rajasthan to Salaya in Gujarat. Simultaneously, it has scaled up production from Rajasthan to 60,000 barrels per day (bpd) from an average of 17,500 bpd during March 2010 quarter. Commissioning of the pipeline will help the company sell its entire current output to refiners such as Reliance Industries, Essar Oil and Indian Oil. At the same time, the cost of transportation will come down significantly from $8.5 per barrel it was spending on trucks.

   The Rajasthan fields are now firmly on their way to achieve the production level of 175,000 bpd by the end 2011 that can be further scaled up to 240,000 bpd with government approvals in 2012. The company has already signed agreements for selling 143,000 bpd of its oil that can be achieved sometime next year as domestic refiners gradually adjust to the new crude. With the consolidation of this mega-project, the company is focussing on exploration work in its other blocks. In the March 2010 quarter alone, it spent in excess of Rs 130 crore on exploration activities. It has completed 3D seismic data collection in Sri Lanka and Palar fields and 4D data collection in Ravva. Even in its Rajasthan blocks, the company has been continuously exploring possibilities to increase the reservoir as well as the recoverable reserves. Its gas fields named Raageshwari recently achieved production rate of 21 million cubic feet per day, which was almost five times of expectations.

   The company has steadily increased its estimates of recoverable reserves as its exploration efforts in Rajasthan are on the fast track. The estimated overall reserves stood at 4.5 billion barrels of oil equivalent at the time of the company's IPO in December 2006, which has been revised to 6.5 billion barrels in March 2010. Although only a portion of it is recoverable, the incremental benefit to the company will be huge over a period of time.

FINANCIALS:

Despite higher production coming from the Rajasthan fields, Cairn's profit for the March 2010 quarter was lower than the immediately preceding quarter as it wrote off over Rs 130 crore in exploration expenses. The company is selling the crude at nearly 12% discount to Brent prices.

   The company has ensured strong cash flows in the past to enable timely execution of the large investment projects in Rajasthan. During FY10, the free cash flow from operations stood at Rs 808 crore, marginally lower than FY09. At present, it holds a cash balance of Rs 2,630 crore, with outstanding debt at nearly Rs 3,500 crore. The company's stock performance in the past had been closely linked to the oil prices. However, the scenario has changed with the projects getting commissioned.

VALUATIONS:

The company's current valuations are linked to its future earnings from the Rajasthan fields. As a result, the market capitalisation appears very high at 56 times its earnings for FY10. However, the company's net profits could touch Rs 4,500 crore for FY11, which discounts the current market capitalisation 13 times. This is comparable to the established oil producers such as ONGC and Oil India. However, the company has further scope for ramping up its capacity as it is aiming to reach 240,000 bpd in Rajasthan in 2012 that may boost its growth going forward.

CONCERNS:

A sustained fall in the global crude oil prices could prove a depressor for Cairn's profitability and share price. Similarly, petroleum E&P business has its own inherent risks and unsuccessful exploration efforts could impact the company's profits negatively.