Cairn India saw its average daily gross production grow almost 22 per cent year-on-year during the September quarter to 207,245 barrels of oil equivalent per day (boepd), led by a 37 per cent rise in output at its Rajasthan block to 171,801 boepd. This, with rupee depreciation, saw revenues growing 68 per cent year-on-year to Rs 4,443 crore in the quarter. Helped by deferred tax benefits, Cairn’s bottom line grew threefold to Rs 2,322 crore.
However, sequentially, output from the Rajasthan blocks did not see much increase, leading to flat gross daily production. While per-barrel average price realisation ($96.7) fell 2.6 per cent compared to $99.3 in the June quarter, leading to flat revenues, forex losses of Rs 786 crore also impacted the bottom line, which fell 39.3 per cent sequentially.
With de-bottlenecking of the pipeline, earlier forecast for completion by December-end, still some time away, output from the Rajasthan block is likely to remain close to 175,000 boepd (from four fields, i.e. Mangala, Bhagyam, Saraswati and Raageshwari). The de-bottlenecking is crucial for the volumes from Rajasthan to grow to 190,000 boepd in the first phase. Analysts at IDFC Securities, in their September report, had indicated that testing and validation would take two quarters and, therefore, de-bottlenecking to carry enhanced volumes would extend to the fourth quarter. Thus, in spite of the Mangala fields already producing close to optimalility (15,000 boepd) and Bhagyam and Aishwarya having approval for producing 40,000 boepd, and 10,000 boepd, respectively, overall production will not cross 200,000 boepd soon.
This will keep a cap on the stock, which analysts expect to remain range-bound. Nilesh Ghuge at BRICS believes ramp-up of the Bhagyam field to 40,000 boepd and commencement of production at Aishwarya field will be key to drive medium-term growth. Also, timely regulatory approvals for production, exploration and infrastructure are critical for the next phase of growth, said Ghuge.
Meanwhile, on the crude oil price front, not much upside is expected from current Brent prices, of close to $110 a barrel. The company maintains its per-barrel realisation will remain at a 10-15 per cent discount to Brent. For the current quarter, the per-barrel realisation suggests the discount was a little over 10 per cent.
Another factor that can keep limiting the stock is Cairn Energy Plc looking at reducing its stake in Cairn India, to raise funds for its other exploration sites. A while earlier, it had sold eight per cent or 152.6 million shares of its holding in Cairn India, at Rs 323.12 to Citigroup, HSBC Global, Indus Capital Advisors (US) and Segantil India, raising $910 million. It is left with 10 per cent and analysts feel it could utilise any rally in the stock for further reduction in its stake.
Positively, the stock could get a boost if the company gets clearances for carrying out exploration and production in the Barmer Hill region (Rajasthan). This region holds promise and is crucial for Cairn India achieving output of over 240,000 boepd.
Second, the company announced it had got government approval for transfer of participating interests in various producing blocks from its foreign subsidiaries to itself, by merging these latter arms. This should now enable the company to pay its first dividend, a meeting for which is being held on October 31. Cairn had earlier announced a dividend policy for a 20 per cent payout, observe analysts. On this basis, it could announce a payout of Rs 1,590 crore for 2011-12 or Rs 8 a share.
On the whole, while there are concerns over production ramp-up not happening in FY13, given expectations of strong production growth (around 40 per cent over the next two years) backed by a strong reserve base (1.7 billion boe) according to Prabhudas Lilladher analysts, Cairn India remains a strong fundamental destination for long-term investors.
