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Cairn India (Cairn) put up a dismal show in the September quarter on the back of lower production, higher costs and soft realisations. Revenues at Rs 3,982 crore (down 14.4 per cent year-on-year) were lower than Bloomberg estimates of Rs 4,373 crore. Likewise, the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin fell 818 basis points to 66.7 per cent and was lower than expectations.
Yet, a majority of analysts remain positive on the stock, given the long-term growth potential in the business. Of 28 polled after results by Bloomberg, 16 have a buy, 11 have a hold and one a sell rating on the stock. Their average one-year target price of Rs 338 indicates an upside of 17 per cent. After results, which came after market hours on Tuesday, the stock gained four per cent to close at Rs 289.
One reason for that could be its underperformance versus the Sensex as well as the BSE Oil and Gas index in recent months. However, for the stock to gain further, it is essential that the production keeps growing as the outlook for crude oil prices remains benign — these two have a key influence on Cairn’s financials.
Q2 a blip
Lower volumes (Rajasthan output down seven per cent on a year ago) and realisations (down 4.7 per cent to $91.5 a barrel) pulled down Cairn’s revenue in the quarter. The Rajasthan block, which accounts for over 90 per cent of Cairn’s output, saw production decline due to a planned maintenance shutdown at the Mangala Processing Terminal for nine days. Cambay CB-OS-2 field’s output increased 23 per cent year-on-year, but wasn’t enough to offset the Rajasthan block’s lower production. This, with higher exploration expenses (up 161.6 per cent to Rs 134 crore) and maintenance costs, led to contraction in Ebitda margin. The net profit at Rs 2,278 crore (down by 32.7 per cent on a year ago) in the September quarter was in line with estimates. This was partly aided by the other income that jumped 212 per cent to Rs 346 crore, offset, to an extent, by higher tax rate.
Outlook
The management expects the production from the Rajasthan fields to normalise and flattish production growth in 2014-15. But medium-term prospects look good. Cairn has made three discoveries in the quarter and brought two satellite fields into production. It also received the approval of its joint-venture partner Oil and Natural Gas Corporation to triple the production at its Aishwarya fields (part of the Rajasthan block) to 30,000 barrels of oil per day (bopd).
The management expects the production to increase by seven-10 per cent compound annual growth over 2014 to 2017. Most analysts believe it is achievable.
There is potential for more gains. The Rajasthan block had oil and gas resources of seven billion barrels of oil equivalent (boe) at end-FY14. The company raised it to 10 billion boe in the June quarter. While the current exploration programme is targeting the initial seven billion boe reserves, analysts say the company has tested almost half of the new three billion boe hydrocarbon reserves, with the remaining to be tested by FY16.
On the flip side, while lower-than-expected reserves accretion or production are key risks, consistently lower crude oil prices are not good news for Cairn and could keep its stock under pressure. The company has disbursed the remaining $450 million of a $1.25-billion loan to its parent, Vedanta, in this quarter. This move had met with criticism from investors. The Cairn management though had clarified the deal was at an arm’s length and on commercial terms.
For now, analysts believe the known bad news is largely priced in and the downside limited for the stock.
“In a worst-case scenario, assuming the long-term oil price at $85 a barrel and no production growth over three years, we arrive at a target price of Rs 270 a share, at which Cairn trades at an inexpensive 2.5 times FY16 estimated enterprise value/Ebitda, implying almost negligible downside from current levels,” says Amit Rustogi of Antique Stock Broking.
Yet, a majority of analysts remain positive on the stock, given the long-term growth potential in the business. Of 28 polled after results by Bloomberg, 16 have a buy, 11 have a hold and one a sell rating on the stock. Their average one-year target price of Rs 338 indicates an upside of 17 per cent. After results, which came after market hours on Tuesday, the stock gained four per cent to close at Rs 289.
| THE PROSPECTS |
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One reason for that could be its underperformance versus the Sensex as well as the BSE Oil and Gas index in recent months. However, for the stock to gain further, it is essential that the production keeps growing as the outlook for crude oil prices remains benign — these two have a key influence on Cairn’s financials.
Q2 a blip
Lower volumes (Rajasthan output down seven per cent on a year ago) and realisations (down 4.7 per cent to $91.5 a barrel) pulled down Cairn’s revenue in the quarter. The Rajasthan block, which accounts for over 90 per cent of Cairn’s output, saw production decline due to a planned maintenance shutdown at the Mangala Processing Terminal for nine days. Cambay CB-OS-2 field’s output increased 23 per cent year-on-year, but wasn’t enough to offset the Rajasthan block’s lower production. This, with higher exploration expenses (up 161.6 per cent to Rs 134 crore) and maintenance costs, led to contraction in Ebitda margin. The net profit at Rs 2,278 crore (down by 32.7 per cent on a year ago) in the September quarter was in line with estimates. This was partly aided by the other income that jumped 212 per cent to Rs 346 crore, offset, to an extent, by higher tax rate.
Outlook
The management expects the production from the Rajasthan fields to normalise and flattish production growth in 2014-15. But medium-term prospects look good. Cairn has made three discoveries in the quarter and brought two satellite fields into production. It also received the approval of its joint-venture partner Oil and Natural Gas Corporation to triple the production at its Aishwarya fields (part of the Rajasthan block) to 30,000 barrels of oil per day (bopd).
The management expects the production to increase by seven-10 per cent compound annual growth over 2014 to 2017. Most analysts believe it is achievable.
There is potential for more gains. The Rajasthan block had oil and gas resources of seven billion barrels of oil equivalent (boe) at end-FY14. The company raised it to 10 billion boe in the June quarter. While the current exploration programme is targeting the initial seven billion boe reserves, analysts say the company has tested almost half of the new three billion boe hydrocarbon reserves, with the remaining to be tested by FY16.
On the flip side, while lower-than-expected reserves accretion or production are key risks, consistently lower crude oil prices are not good news for Cairn and could keep its stock under pressure. The company has disbursed the remaining $450 million of a $1.25-billion loan to its parent, Vedanta, in this quarter. This move had met with criticism from investors. The Cairn management though had clarified the deal was at an arm’s length and on commercial terms.
For now, analysts believe the known bad news is largely priced in and the downside limited for the stock.
“In a worst-case scenario, assuming the long-term oil price at $85 a barrel and no production growth over three years, we arrive at a target price of Rs 270 a share, at which Cairn trades at an inexpensive 2.5 times FY16 estimated enterprise value/Ebitda, implying almost negligible downside from current levels,” says Amit Rustogi of Antique Stock Broking.
