Mannar discovery and ramp-up at Rajasthan will become a key value driver.
Cairn India has done it again. After being the first private company to discover large hydrocarbon deposits in India and following it up with production, the oil and gas giant has found natural gas reserves in the offshore Mannar basin of Sri Lanka, at a depth of 1,354 metres. And, if Cairn’s management is to be believed, the discovery is significant.
While further clarity is awaited before one can assign any monetary value to the discovery, the development did rub off positively on Cairn India’s stock. It did better than the broader market on Monday after the announcement, as well as on Tuesday despite the dip in crude oil price.
The management believes the discovery of a 25-metre column is significant and is optimistic about its prospects. It will be exploring two more wells in the Mannar Basin and will be aware of the commercial details only by early 2012. Cairn had set aside over $100 million as commitment towards exploration in Sri Lanka and has already spent close to $50 million.
This discovery as well as the clearing of the Cairn-Vedanta deal, have set the ball rolling. After the move by the Vedanta group to acquire a controlling stake in Cairn India, approvals for exploration and production activities (at new and existing fields) had slowed down. However, Cairn should now be able to get faster approvals from its joint venture partners and regulators in India, believe analysts. The issues of payment of cess and royalty (estimated one-time provision of Rs 1,370 crore towards royalty for FY11), though will impact its financials in the near term, is also largely discounted in its share price.
The key value driver for Cairn will be new discoveries going forward and the expected ramp-up at its Rajasthan fields. It is producing 125,000 barrels of oil a day from the Rajasthan fields at present. Analysts believe this figure is likely to double in the next 18 months.
The company is also likely to gain from a weakening rupee, though subdued crude oil prices will put realisations under check. Unless an increase in production at its Rajasthan fields (forms over 90 per cent of Cairn's current valuations) gets delayed unexpectedly, analysts believe there will be 15-20 per cent upside in the stock, over the next one year. Further clarity regarding the Sri Lanka discovery could provide additional triggers.
