Cairn India Oil Drilling And Exploration stock Cairn India

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Cairn India Ltd (updated - 25 Jan 2012)
Exploration company Cairn India’s December quarter numbers were better than expected as improved realisations made up for the higher royalty burden. The company’s net sales as well as production volumes stagnated compared to the year-ago period. However, higher other income, gains on rupee depreciation and fall in interest costs pushed up its profits. It is set to achieve a jump of 40% in production by March-end.

Cairn’s net realisations improved 32% to $98.4 per barrel in the December quarter, even as total production fell 1.3% to 98,969 barrels of oil equivalent per day (boepd). However, this did not help it achieve any sales growth due to the additional burden of royalty and profit petroleum. The company paid a royalty of Rs 628.5 crore and Rs 573 crore of profit petroleum towards the Rajasthan block.

Unique conditions in the December quarter, which impacted Reliance Industries’ numbers, actually helped Cairn India. The December quarter saw a price differential between heavy and light crude oil grades falling to record levels due to weak naphtha and strong fuel oil prices. This sharply pulled up RIL’s refining margins and helped Cairn price its crude a little higher. As against a typical 10-15% discount to Brent, Cairn’s oil was sold at a discount of 8.3% during the December quarter. Although flat at the revenue level, the company gained from a three-fold jump in other income to Rs 112.4 crore and a twothird fall in interest cost to Rs 24 crore. Both these factors and a forex gain of Rs 301 crore helped it post a 13% growth in net profit at Rs 2,262 crore.

The company continues to remain debt-free with an ever growing cash pile which is $1.2 billion over and above its debt. Recently, it commenced production from the Bhagyam field in the Rajasthan block, which has an approved production limit of 40,000 barrels per day. With this, the company is in a position to move significantly close to its target production of 175,000 barrels per day by March-end, which will be a gain of 40% on its current production level.

At a time when the entire Indian petroleum industry is grappling with a number of problems - under-recoveries for the oil marketing companies, subsidy burden for public sector producers and low margins for standalone refiners - Cairn India remains the only company that is benefiting from the market conditions now. The Cairn stock is already at the level of the Vedanta Group’s acquisition price of Rs 355 and is currently trading at a price-to-earnings multiple (P/E) of 8.4, which is comparable with its peers ONGC and Oil India.
Source - Economic Times

The brokerage has increased valuation of its sum of the parts (SOTP) to Rs 326 per share from Rs 319 earlier. This valuation is lower than the current market price of the stock (Rs 348) because unlike other brokerages, Edelweiss has assumed a long-term crude price at $95 a barrel while calculating SOTP. The market is estimating the long-term average of crude at $105 a barrel.

Apart from these discoveries, higher crude oil prices have also helped in the stock’s recent rise.

The company has guided for a peak production of 240,000 barrels per day from the Mangala, Bhagyam and Aishwarya (MBA) fields, along with satellite fields. Cairn announced on Tuesday gross oil production from operating units was 167,663 barrels of oil per day (bopd) and 160,635 bopd during Q4 and the full year, respectively, as compared with 148,288 bopd and 135,811 bopd in the corresponding prior periods. Analysts believe MBA fields alone can produce 240,000 bpd. Additional output from satellite fields would be an added bonus.

Vedanta Group, the new owner, hinted at a special first dividend up to Rs 2,700 crore this financial year and increased dividend payouts in future. A combination of these factors is driving Cairn’s stock price, in an otherwise subdued market.

Cairn India Ltd (updated - 14 April 2012)
New discoveries a positive for Cairn India
In the past six months, Cairn India has made two major oil and gas discoveries in the subcontinent. In November, it announced a gas find in the offshore Mannar Basin of Sri Lanka. Last week, its second oil discovery in the Krishna-Godavari basin (on-shore block) was announced. The management has conveyed these discoveries have estimated reserves of 550 million barrels (57 million barrels in the first and 500 million barrels in the latest one). The recovery rates are likely to be 10 per cent, given the impermeable nature of the reservoir. The company will, therefore, need to undertake fracking and stimulation to recover the oil. Fracking or hydraulic fracturing is used in impermeable and tight reservoirs.

Though fracking is a somewhat controversial technique globally, oil experts believe since the oil is light and low in viscosity; it would flow to the surface easily. Edelweiss Securities believes while Cairn will operate the block during exploration, ONGC will do so during production. Assuming $10 a barrel of value for reserves, Cairn’s net value accretion will be Rs 1,350 crore, implying value addition of Rs 7 per share.