Analysis: Cairn India to gain from higher reserves, oil output

After a knee-jerk reaction post results that saw the stock end 1.5 per cent lower at Rs 289 on Tuesday, Cairn India has bounced back to touch Rs 300 levels. Investors were disappointed with no immediate upside visible in production from the Rajasthan block. However, the company gave strong guidance for financial year 2013-14 with production levels of around 200,000–215,000 bopd (barrels of oil per day), as against current production levels of 175,000 bopd.

Cairn expects to maintain the production at the Mangla fields (Rajasthan) at around 150,000 bopd. The Bhagyam field (currently producing 25,000 bopd levels) should also reach 40,000 bopd in the second half of FY14, while the Aishwariya field that recently started production in March 2013 could see production touch 10,000 bopd. The balance is expected from Barmer Hill.

The guidance should allay some fears of investors on declining production from the Mangala oil fields. The management expects plateau production to be sustained at the current 150,000 bopd level through FY14 through the drilling of 48 infill wells, approvals for which are at an advanced stage.  Commencement of Enhanced Oil Recovery (EOR) thereafter should support output thereafter add analysts at Citigroup.

Financial performance

The company had reported a net profit of Rs 2563.6 crore (up 17.3% y-o-y) in the recently concluded quarter. The growth could have been better had the company not had to write-off Rs 366 crore worth of exploration expenses, Rs 260 crore towards Sri Lankan block and Rs 7.26 crore towards completion of 80 percent of 3‐D seismic survey in the South African block.

Revenue, on the other hand, increased 2% to Rs 4,363.4 crore despite 1.1% lower oil production. This was in the back of discount on company’s realisation reducing from 12.5% in the December 2012 quarter to 10.7% in the March 2013 quarter. Based on the new contracts concluded discount to Brent will be 8-13% versus 10-15% currently, which is good news and will boost profitability for Cairn, analysts say.

Outlook

Most analysts, including HSBC and Morgan Stanley maintain an “overweight” rating on Cairn. Analysts at HSBC consider reserve upgradation to be the major trigger. With the government approval for additional exploration in place, the company has already identified potential drilling targets. They analysts believe a significant reserve upside is likely over the next one – two years with in-place oil volume to double from the current guidance of c7 billion boe.

 
Alok Deshapande at Elara observes: “We expect the stock to deliver 13-15 percent returns over the next 18-24 months, driven by reserve upgrades rather than production guidance upticks.” While Deshpande has target price for the stock at Rs 330, analysts at HSBC have target price of Rs 400.

After a sharp 50% EPS growth in FY13, Nomura expects an EPS decline in FY14/15F mainly due to the increase in the government’s share of profit petroleum and higher provision for exploration write-offs.

Based on long term assumption of crude at $ 100/bl and Rs 54/$ Karvy Research has a target price of Rs 320 on the stock and maintains HOLD rating. The consensus target price for the stock as per Bloomberg data stands at Rs 374.