Cairn India: Profits in the pipeline

Numbers will get better as transportation of crude oil shifts from trucks to pipelines and new fields deliver.

The June quarter may not have been favourable for Cairn India, but the coming quarters are expected to see stability in operations and costs. The company’s June quarter results surprised analysts, as depreciation, depletion and amortisation (DD&A) costs increased to Rs 166 crore from Rs 38.2 crore in the March quarter.

This was due to the commissioning of the 590-km Balmer-Salaya pipeline, which contributed around 80 per cent to the DD&A costs, reckon analysts. The company took such a big hit on account of the straight line method of calculating depreciation. The commissioning of fields in Rajasthan boosted production in the state by 153 per cent sequentially to 44,381 barrels of oil per day. Overall, production rose 38 per cent at 94,950 boepd (barrels of oil equivalent per day).

While production was strong, sales were not. Cairn had an inventory of 1.1 million barrels in its pipeline, as against the total production of four million barrels in the Mangala field, which stunted the expected revenue and profit growth. Net earnings at Rs 281.4 crore were higher 15 per cent sequentially, but lower than estimates. However, they are set to grow in FY11, as the effect of the higher Rajasthan production kicks in.

With the commissioning of the Train-II, Cairn now produces over 100,000 bpd of crude at Rajasthan and is expected to touch 125,000 bpd in the next few months with the commissioning of Train-III. The company mentions it has arranged for an offtake of around 143,000 bpd from refiners.

Currently, much of the crude at Rajasthan is transported through trucks, which bloats the operating costs. For example, operating costs at Mangala fields were $9.3 a barrel, while production costs were just $4.3 per barrel. Trucking costs are estimated at around $7.2 per barrel, while pipeline transport is just $2.1 per barrel. Going ahead, the management expects they will be able to cut down operating costs to $3.5 a barrel and transportation costs to $1.5 per barrel. Enhanced volumes and cost cuts will, therefore, start ringing in, as operational parameters stabilise.