 "Rajasthan production ramp-up key for Cairn India's prospects")
Cain India stock has been moving in the Rs 272-310 range for quite some time now. The company’s first quarter results though ahead of analyst estimates failed to cheer the market and the stock did not break out of this range.
The 5% rise in crude production on sequential basis to 2,12,000 bopd (barrels of oil per day) as well as forex gains of around Rs 680 crore were not adequate to help revenues and profits grow. The net sales at Rs 4,063 crore still declined 8.5% y-o-y on the back of lower realisations while Net profit at Rs 3,127.23 declined 18.3%.
The stock thereby can come into a bullish mode only when there is substantial increase in production and reserve leading to earnings upgrade.
Analysts at HSBC now expect the Rajasthan oil output to increase further during rest of FY14, as more infill wells are brought on production. Out of 40 analysts recommendations post results, only 5 have hold ratings and one sell while majority ie 34 have Buy ratings. The consensus target price stands at Rs 377 for stock trading at Rs 292 levels.
Oil realizations
The average Brent prices during FY14 are seen at $100 a barrel compared to $111 a barrel during FY13 (analyst estimates). Cairn’s Rajasthan Crude realisations are typically at 8-13% discounts to Brent (as per management guidance). The realisations during the June 2013 quarter at $94.3 a barrel came at 8.4% discount to Brent and were lower than $100 a barrel seen in and March 2013 quarter each. The trend is likely to remain similar looking at lower Brent expectations in FY14.
Taking into account oil production from its other oil fields too, the average oil realizations for the company came at around $93.3 a barrel during the June 2013 quarter, substantially lower than $101 a barrel Cairn realized in June 2012 quarter.
In this backdrop, it is the production growth that will be crucial for company's revenues and profitability growth.
Capex and production
Cairn India plans investment of Rs 1,600 crore ($3 billion) over next three year i.e FY14-16 in pursuit of finding and producing more oil. Out of this majority i.e. Rs 13,000 crore is directed towards Rajasthan Block itself where company will drill more than 450 wells – approximately 100 exploration wells and more than 350 development wells. The company had exited FY13 with an oil production of 2,05,000 barrels of Oil per day (bopd) after Aishwarya Fields in the Rajasthan block started oil production.
The other two Mangala and Bhagyam fields in the Rajasthan Block have already been producing oil. The company now is betting big on the Barmer block in Rajasthan, which can provide a big boost to company’s oil reserves and production.
The company’s Rajasthan block produced around 1,73,000 bopd during the quarter.
Though the company has stopped giving production breakup, analysts see Rajasthan block’s 180 kbpd capacity production break up to as - Mangala: 150kbpd; Bhagyam: 20-25 kbpd; and Aishwariya: 5-10kbpd.The company is banking on increasing Bhagyam fields output to about 40 kbpd and the Barmer block to starting contributions. The company plans to exit the year with 210-215 kbpd output from Rajasthan block. Also with the planned capex, company targets adding 530 million barrels to its reserves. The achievement of this can lead to a turnaround in company’s prospects.
The 5% rise in crude production on sequential basis to 2,12,000 bopd (barrels of oil per day) as well as forex gains of around Rs 680 crore were not adequate to help revenues and profits grow. The net sales at Rs 4,063 crore still declined 8.5% y-o-y on the back of lower realisations while Net profit at Rs 3,127.23 declined 18.3%.
The stock thereby can come into a bullish mode only when there is substantial increase in production and reserve leading to earnings upgrade.
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On the positive side, the management has announced a huge capex and is confident of rise in production as well as upgrades in reserves. Analysts also see the possibility of the same.
Analysts at HSBC now expect the Rajasthan oil output to increase further during rest of FY14, as more infill wells are brought on production. Out of 40 analysts recommendations post results, only 5 have hold ratings and one sell while majority ie 34 have Buy ratings. The consensus target price stands at Rs 377 for stock trading at Rs 292 levels.
Oil realizations
The average Brent prices during FY14 are seen at $100 a barrel compared to $111 a barrel during FY13 (analyst estimates). Cairn’s Rajasthan Crude realisations are typically at 8-13% discounts to Brent (as per management guidance). The realisations during the June 2013 quarter at $94.3 a barrel came at 8.4% discount to Brent and were lower than $100 a barrel seen in and March 2013 quarter each. The trend is likely to remain similar looking at lower Brent expectations in FY14.
Taking into account oil production from its other oil fields too, the average oil realizations for the company came at around $93.3 a barrel during the June 2013 quarter, substantially lower than $101 a barrel Cairn realized in June 2012 quarter.
In this backdrop, it is the production growth that will be crucial for company's revenues and profitability growth.
Capex and production
Cairn India plans investment of Rs 1,600 crore ($3 billion) over next three year i.e FY14-16 in pursuit of finding and producing more oil. Out of this majority i.e. Rs 13,000 crore is directed towards Rajasthan Block itself where company will drill more than 450 wells – approximately 100 exploration wells and more than 350 development wells. The company had exited FY13 with an oil production of 2,05,000 barrels of Oil per day (bopd) after Aishwarya Fields in the Rajasthan block started oil production.
The other two Mangala and Bhagyam fields in the Rajasthan Block have already been producing oil. The company now is betting big on the Barmer block in Rajasthan, which can provide a big boost to company’s oil reserves and production.
The company’s Rajasthan block produced around 1,73,000 bopd during the quarter.
Though the company has stopped giving production breakup, analysts see Rajasthan block’s 180 kbpd capacity production break up to as - Mangala: 150kbpd; Bhagyam: 20-25 kbpd; and Aishwariya: 5-10kbpd.The company is banking on increasing Bhagyam fields output to about 40 kbpd and the Barmer block to starting contributions. The company plans to exit the year with 210-215 kbpd output from Rajasthan block. Also with the planned capex, company targets adding 530 million barrels to its reserves. The achievement of this can lead to a turnaround in company’s prospects.