UK-based Cairn Energy’s move to offload eight per cent stake in Cairn India saw the latter’s stock fall nearly seven per cent in a few trading sessions to Rs 327 levels today.
Analysts feel, Cairn Energy, which still holds 10 per cent in Cairn India, can offload more shares to fund its exploration requirements in different geographies. This will keep a check on Cairn India’s stock.
On the operations front, while the company maintains it will be able to achieve the guided output 190,000-200,000 barrel of oil per day (kbpd) by December, some analysts feel it may get delayed by a few months.
Hence, Cairn India’s stock may remain under check in the near term barring intermittent rallies if there are short-term spikes in crude oil prices.
| VOLUME GAINS | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 11,861 | 15,551 | 17,492 |
| % change y-o-y | 15.6 | 31.1 | 12.5 |
| OPM | 9,553 | 12,536 | 14,062 |
| OPM (%) | 80.5 | 80.6 | 80.4 |
| Net profit | 7,938 | 9,403 | 10,894 |
| % change y-o-y | 25.3 | 18.5 | 15.8 |
| EPS (Rs ) | 38.9 | 49.3 | 57.1 |
| PE (x) | 8.7 | 6.6 | 5.7 |
| E: Estimates Consolidated financials Source: India Infoline research | |||
From a longer-term perspective though, outlook for Cairn India remains good. Given the production ramp-up plans, analysts are bullish with target prices at Rs 366-380. Additional triggers could come from likely clearance of exploration and production activities in the Barmer Hill block, which is estimated to have good reserves and can boost production over a period of time.
Looming concern
Cairn Energy sold its eight per cent stakes or 152.6 million shares in Cairn India at Rs 323.12 to Citi Group, HSBC Global, Indus Capital Advisors (US) and Segantil India for roughly $910 million. The proceeds are expected to be utilised by Cairn Energy PLC for its exploration activities.
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Analysts feel they had expected Cairn Energy to offload stakes. However, the per share selling price came a little lower than their expectations. The Street is also concerned that Cairn Energy may use any upside in the stock price to offload further stakes to meet its investment requirements.
Production ramp-up
Meanwhile, Cairn India is already producing 1,75,000 barrels of oil per day from the Mangla and Bhagyam fields in its Rajasthan block. The pipeline de-bottlenecking was likely to increase the daily output to 1,90,000 barrels by December 2012.
However, analysts see the de-bottlenecking to take some more time. IDFC Securities’ analysts in their September 9 report observe the testing and validation of pipeline will take two quarters and, therefore, de-bottlenecking of the pipeline to carry extra volumes will extend to the March 2013 quarter.
Sujit Lodha at Asian Market Securities feels the technical problem indicated by the company is likely to lead to benefits of increased outflow to accrue only in FY14. However, these fields, along with the Aishwarya field, which is likely to produce about 20,000 barrels of oil per day, will boost the overall production in FY14. Analysts estimate Cairn India’s daily oil production to scale up to 2,10,000 barrels by FY14.
For further ramp-up to 240,000 barrels, IDFC’s analysts observe Cairn will depend on approvals for Barmer Hill, and exploration approvals are needed from the government for increases beyond that.
Outlook
Given the stock corelation with crude oil prices that were on an uptrend in early 2012, Cairn India had hit a 52-week high of Rs 400.95 on February 22. Since then, crude oil prices fell to $90 levels and are again up to $110 a barrel currently.
Going ahead, the views are mixed given the weak global growth and supply side issues and increasing geo-political tensions.
Soumya Dixit and Kunal Shah at Nirmal Bang observe, China, the second-largest consumer of oil, has reduced its imports by more than 30 per cent in the past four months following sluggish growth in the country. The US’ efforts to increase domestic oil production over the past few years would, thereby, also not lead to a significant jump in oil imports from West Asia. They see the WTI crude oil prices dropping and testing levels of $85-82 a barrel in the next three quarters.
In contrast, in a September 25 report, Barclays Research noted oil markets still look prone to further tightness and supply disruptions. Low levels of spare capacity and the potential for problems in West Asia mean the prospects of a very large oil price spike are high.
While crude oil prices are important drivers, Cairn’s rising output will provide cushion and drive bottomline growth. Even assuming a price of $90, analysts see profits rise 15 per cent in FY14. In the long-run, Cairn’s geographical presence is also expected to grow. Its E&P assets in Sri Lanka are being explored — here, out of the three wells drilled, the company has discovered hydrocarbons in two. Last month, Cairn also acquired a 60 per cent stake from PetroSA in an oil and gas exploration block on the west coast of South Africa. However, these are early days to arrive at production or other estimates.
Analysts expect the company to generate free cash flow (post-capital expenditure and dividend payout) of Rs 10,000 crore during FY12-14, which along with existing cash balance of Rs 7,000 crore (at end-March 2012) is likely to prove handy for acquisitions abroad providing further triggers.