)
As geopolitical tensions increased last month, it raised the risk of higher crude oil prices, firm so far. This, with ONGC’s approval of increased development costs related to Bhagyam fields that could boost Cairn’s crude oil production in the long run, propped up sentiments in the Cairn India counter. As a result, Cairn’s share prices gained momentum and hit a 52-week high of Rs 351 on Tuesday. The upmove provides respite to investors as the stock has traded in a range (Rs 300-340) since September.
ONGC is Cairn’s partner in the Rajasthan block, which includes Bhagyam fields. While Cairn had indicated plans to end FY14 with a production run-rate of more than 200,000 boepd (barrels of oil per day) from the Rajasthan block, analysts estimate a slightly lower production. However, with production volumes to grow in FY15 and FY16, it should boost Cairn’s prospects. As the Street starts factoring FY15 and FY16 estimates, the stock is also likely to track the consensus one-year target, which, by 11 analysts polled by Bloomberg (10 having buy and one hold rating) since February, is Rs 402. This indicates an upside of 16 per cent from the current Rs 345.
ONGC, a few days back, had approved Cairn India's plan of raising the development cost of Bhagyam field 30 per cent. With more funds at its disposal, it will speed the production in the Bhagyam field (a part of the prolific Rajasthan block), feel analysts. The Rajasthan block is estimated to account for 85 per cent of Cairn’s total petroleum output in FY14. Analysts at Elara Capital say the per well production at Bhagyam fields has been lower due to the higher-than-expected viscosity and lower reservoir pressure. However, the drilling of a higher number of wells should enhance production from 25,000 boepd to 40,000. The increased production from the Rajasthan block holds key to Cairn’s prospects, given the company had seen production of 175,000 boepd during FY13, which analysts estimate at 180,000-185,000 boepd for FY14.
The upside in production from MBA (Mangala, Bhagyam and Aishwarya) fields and Barmer block is likely to push production significantly in FY15 and FY16, feel analysts. The Street has also started anticipating approvals for higher production from some existing and new fields, which, if it happens, will further boost their estimates. As of now, however, analysts as Chirag Dhaisule at LKP Securities estimate FY15 and FY16 production (at Rajasthan block) to increase to 207,000 and 210,000 boepd, while analysts at Elara see production at 205,000 and 207,000 boepd, respectively. This means a 12 per cent increase in production in FY15 over FY14.
As growing production will boost prospects, the other factors to be watched for include crude petroleum prices and rupee-dollar exchange rate. Though the rupee of late has started appreciating and as of now trades at sub-60 levels, analysts do not see it below 60 in FY15. Most have taken an average rate of 60 in their estimates for Cairn for the current financial year.
Brent crude oil, too, has been estimated at lower levels compared to current prices. While Dhaisule of LKP estimates per barrel crude oil price at $100 and $90 for FY15 and FY16, respectively, analysts at Elara estimate per barrel price at $100 for each of the two years. The current price is $105 a barrel. Analysts at Ambit in their February report said based on their assessment of marginal cost of crude oil production and break-even price required by OPEC to match state budgets, they see crude oil price stabilising at $90 a barrel.
Nevertheless, the key factor to be watched for will be the impact of slowdown in China and any negative surprise has the potential to alter analysts’ estimates and Cairn’s prospects. Also, analysts at Ambit raise concerns after FY16. They say Cairn India’s single-asset dependence, along with regulatory challenges (production ramp-up approvals), limits their production growth visibility after FY16; after which they build stable-to-declining production. Hence, Cairn’s ability to find new output avenues will be crucial. On this, it is already working on new blocks like those in Sri Lanka and eastern coast of India.
