 "Cairn: Prospects rise on rupee, crude")
Cairn India's stock has recently broken above the Rs 270-320 range it had been moving in since February. The company's first-quarter results, though ahead of analyst estimates, had failed to cheer the market and the stock did not break out of this range. But, thanks to the sharp rupee depreciation and a surge in global crude oil prices (up six per cent), the company is expected to gain.
"Cairn benefits from rupee depreciation since it prices half its sales in dollars and holds bank deposits in dollars in its overseas accounts," said Jigar Shah of Kim Eng, in a note dated August 26. Analysts at Kotak Securities say Cairn's earnings per share (EPS) increases by 2.3 per cent if there is a depreciation of one rupee against the dollar.
Notably, the company is also set to benefit from a rise in volumes. "Concerns over output rise have mitigated following approvals from the government and its partner, Oil and Natural Gas Corporation, in the March quarter. We expect a steady rise in output volume for FY14. This would enable Cairn to meet its target of 200,000-215,000 barrels a day."
After the June results, the management had announced a huge capital expenditure and sounded confident of increasing the output and upgrading reserves.
Cairn targets adding 530 million barrels to its reserves (it had earlier pegged the expected ultimate recovery at 1.76 billion).
While the consensus target price for the stock (now at Rs 325), by Bloomberg data, is Rs 376, recommendations in two-three days from Kotak and Kim Eng have target prices of Rs 370 and Rs 443, respectively.
The average Brent prices for FY14 were earlier estimated at $100 a barrel, compared with $111 during FY13. However, analysts are estimating the FY14 prices at $105-110, as they expect prices to remain elevated for the next four-six months due to tight supplies and geopolitical issues. "We expect crude oil prices to remain at high levels over the next six months, led by 'temporary' supply tightness in the global oil market," say Kotak's analysts in a report dated August 29.
Cairn's Rajasthan crude oil realisations are typically at an eight-13 per cent discount to Brent (by management forecast), due to higher wax content. The realisations during the June quarter at $94.3 a barrel came at the 8.4 per cent discount to Brent and were lower than a $100 a barrel seen in the March quarter. Overall, the net realisation in FY14 is likely to remain close (if not more) to that seen in FY13, supported by the recent rise in crude oil prices.
Production picking up
Against this backdrop, it is the output growth that will be crucial. Cairn plans an investment of Rs 16,000 crore ($3 billion) over three years to find and produce oil. Of this, the majority, that is Rs 13,000 crore, is directed towards the Rajasthan Block, where the company will drill 450 wells, 100 exploration and 350 development. The company had exited FY13 with an oil output of 205,000 barrels of oil per day (bopd) after the Aishwarya fields in the Rajasthan block started output.
The other fields, Mangala and Bhagyam in the Rajasthan block, have been producing oil. The company is also betting big on the Barmer block in Rajasthan, which can provide a big boost. Though the company has stopped giving an output break-up, analysts see Rajasthan block's 180,000 bopd capacity output break-up as: Mangala (150,000 bopd); Bhagyam (20,000-25,000 bopd); and Aishwariya (5,000-10,000 bopd). The company is aiming to increase Bhagyam fields output to 40,000 bopd and the Barmer block to start contributions. With this, the company plans to exit the year with 210,000-215,000 bopd output from the Rajasthan block, which produced 173,000 bopd during the June quarter.
"Cairn benefits from rupee depreciation since it prices half its sales in dollars and holds bank deposits in dollars in its overseas accounts," said Jigar Shah of Kim Eng, in a note dated August 26. Analysts at Kotak Securities say Cairn's earnings per share (EPS) increases by 2.3 per cent if there is a depreciation of one rupee against the dollar.
Notably, the company is also set to benefit from a rise in volumes. "Concerns over output rise have mitigated following approvals from the government and its partner, Oil and Natural Gas Corporation, in the March quarter. We expect a steady rise in output volume for FY14. This would enable Cairn to meet its target of 200,000-215,000 barrels a day."
After the June results, the management had announced a huge capital expenditure and sounded confident of increasing the output and upgrading reserves.
Cairn targets adding 530 million barrels to its reserves (it had earlier pegged the expected ultimate recovery at 1.76 billion).
While the consensus target price for the stock (now at Rs 325), by Bloomberg data, is Rs 376, recommendations in two-three days from Kotak and Kim Eng have target prices of Rs 370 and Rs 443, respectively.
The average Brent prices for FY14 were earlier estimated at $100 a barrel, compared with $111 during FY13. However, analysts are estimating the FY14 prices at $105-110, as they expect prices to remain elevated for the next four-six months due to tight supplies and geopolitical issues. "We expect crude oil prices to remain at high levels over the next six months, led by 'temporary' supply tightness in the global oil market," say Kotak's analysts in a report dated August 29.
Cairn's Rajasthan crude oil realisations are typically at an eight-13 per cent discount to Brent (by management forecast), due to higher wax content. The realisations during the June quarter at $94.3 a barrel came at the 8.4 per cent discount to Brent and were lower than a $100 a barrel seen in the March quarter. Overall, the net realisation in FY14 is likely to remain close (if not more) to that seen in FY13, supported by the recent rise in crude oil prices.
Production picking up
Against this backdrop, it is the output growth that will be crucial. Cairn plans an investment of Rs 16,000 crore ($3 billion) over three years to find and produce oil. Of this, the majority, that is Rs 13,000 crore, is directed towards the Rajasthan Block, where the company will drill 450 wells, 100 exploration and 350 development. The company had exited FY13 with an oil output of 205,000 barrels of oil per day (bopd) after the Aishwarya fields in the Rajasthan block started output.
The other fields, Mangala and Bhagyam in the Rajasthan block, have been producing oil. The company is also betting big on the Barmer block in Rajasthan, which can provide a big boost. Though the company has stopped giving an output break-up, analysts see Rajasthan block's 180,000 bopd capacity output break-up as: Mangala (150,000 bopd); Bhagyam (20,000-25,000 bopd); and Aishwariya (5,000-10,000 bopd). The company is aiming to increase Bhagyam fields output to 40,000 bopd and the Barmer block to start contributions. With this, the company plans to exit the year with 210,000-215,000 bopd output from the Rajasthan block, which produced 173,000 bopd during the June quarter.