Cairn India – Power Play for Crude Oil

In the Oil & Gas Sector, we am betting on Cairn India in preference to the other players such as ONGC, Aban Offshore and GAIL. Cairn India (CIL) is set to emerge as one of India’s leading petroleum producer – and possibly the largest onshore producer – once its oilfields in Rajasthan reach peak production in 2 years. Cairn India has commenced production at its largest Mangala field and scale it up gradually to 80,000 barrels per day by the end of this year.

The fortunes of Cairn India are directly related to the fortunes of crude oil and in the recent past crude has taken quite a beating. From a high of $145.29 a barrel in July 2008, crude plumetted to a low of $33.87 a barrel in December 2008. Since that low, it has steadily recovered though there is still a great deal of volatility.

Cairn India was formed in August 2006. It has bought most of Cairn Plc’s Indian E&P assets comprising 2 production, 1 development and 10 exploration blocks. CEP holds about 69% of Cairn India, which has 2P reserves of 473mmboe and resources of 199mmboe, with 97% of reserves in oil. Its main asset is RJ-ON-90/1, which includes the largest onland oil discovery in India in 22 years. Its production and EPS should surge when RJ-ON-9 0/1 comes on stream in 2009.

Assets in India (source: Cairn Presentation)

Cairn India made an important hydrocarbon discovery in Rajasthan in 2004 and, after further discoveries, has established in place reserves of 3.6 billion barrels of oil equivalent (boe). It holds 70% operator’s stake in this field and the remaining 30% is held by ONGC. Cairn India recently acquired exploration rights in one block in Sri Lanka.

Cairn India is India’s fastest growing oil exploration and production company. Rising crude oil prices obviously will be a bonus for Cairn India. Crude oil prices have a direct relation with Cairn’s valuations. It is estimated that a single dollar increase in crude oil prices would mean a 2% jump in valuations, other things remaining the same.

The crude oil produced from the Rajasthan fields has high wax content and therefore needs to be heated while being transported through a pipeline. The land-locked nature of the oil field also makes marketing of this crude difficult. Cairn India has overcome these difficulties by changing the point of delivery to the coast of Gujarat from Barmer and the cost of constructing the pipeline – nearly $800 million – was included in the field development programme expenses.

Company Description

Cairn India Q3 cons net profit up 23% at Rs 290.96 cr

Cairn India’s third quarter results of FY 2010 showed that the Q3 consolidated net sales were up 135% at Rs 495.46 crore versus Rs 210.82 crore, year-on-year, YoY. Cairn India’s consolidated net profit was up 23% at Rs 290.96 crore versus Rs 236.42 crore, YoY. Cairn India pointed out that the Mangala average gross production in Q3 was 15,430 barrels of oil per day (bopd) and Train one was currently producing 20,000 bopd. It was stated that completion of train two and three on track to be completed by H1CY10. The average oil price realization was USD 73.8 per barrel in Q3 and working interest production was 10,821 boepd from the Rajasthan block.

Financial Analysis of Cairn India – Production to ramp up in FY2013E

Volume and Sales Outlook

Cairn India’s production is expected to fully ramp up in FY2013E. The peak production is assumed at 180,000bpd (Net working Interest 126,000bpd) from FY2013E, with the Mangala field expected to achieve peak production of 125,000bpd (Net working Interest 87,500bpd) in FY2012E. The Bhagyam and Aishwariya fields are expected to achieve peak production of 40,000bpd (Net working Interest 28,000bpd) and 15,000bpd (Net working Interest 10,500bpd) in FY2012E and FY2013E, respectively. In FY2009, Cairn’s production from its extant (Ravva and Cambay) fields stood at 66,146boepd (Net working Interest 17,264boepd). By FY2013E, it is expected that the total production from all the fields at 244,932boepd (Net working Interest 143,912boepd), will register a CAGR of 94.1% over FY2009-13E. Post this period, natural decline in production based on water flooding will commence. However, with commencement of EOR, production at Rajasthan block is likely to sustain for the subsequent 4-5 years. On a Net working interest basis, the production is expected to increase 8.3x by FY2013E over FY2009 production levels. The MBA fields are likely to account for majority of the company’s total production by FY2013E.

Profits of Cairn India to grow eight-folds by FY2013 over FY2009

It is estimated that the Total Recouped costs of Cairn India will increase by 38.3% CAGR over FY2009-13E, with depletion expected to be a major cost head. Depletion cost is expected to be around US $5.5/bbl over the life of the Rajasthan field. On the Borrowings front, on account of the significant cash generation, Cairn India is expected to repay its entire debt in FY2013E and become a Debt-free company resulting in nil Interest costs thereon. Cairn India’s effective Tax rate is also likely to be lower on account of the benefits arising from the seven-year tax holiday that the MBA fields would avail. It is estimated that Cairn India’s effective Tax rate at around 18.6% in FY2013E. Cairn India is expected to register 69.2% CAGR in PAT over FY2009-13E, an eight-fold growth over FY2009 levels.

It appears that the concerns on the oil prices have been overplayed on the stock. At current valuations, we still favour an investment in the stock with a longer-term horizon. The debt equity ratios remain almost nil, with growing return ratios as a result of commencement of production from Rajasthan. There is an enhanced earnings visibility for Cairn India, subject to scheduled production of oil & gas.

RELEVANT NEWS
Start preparing for oil at $200 a barrel: Swaminathan S Anklesaria Aiyar, ET Bureau

Barmer pumps up Cairn India Q3 23 per cent

NEW DELHI: Buoyed by ramping up output from Barmer oilfield, Cairn India on Thursday reported a 23 per cent rise in net profit to Rs 291 crore in the third quarter.

The company had a net profit of Rs 290.96 crore in October-December compared with Rs 236.42 crore in the corresponding period previous fiscal, Cairn said in a press statement.

Cairn started output from Mangala – the nation’s largest onland oil find in more than two decades in late August 2009, and is currently producing about 20,000 barrels a day.

Turnover more than doubled to Rs 495.46 crore from Rs 210.82 crore a year ago.

Cairn said it sold four parcels of Barmer crude to Mangalore Refinery and Petrochemicals Ltd and two parcels to Reliance Industries in the quarter.

“Trial parcels to Indian Oil Corp (the third buyer) will commence soon,” it said.

Cairn India, which currently trucks the oil to Gujarat coast, has laid a pipeline from Mangala to Salaya in Gujarat. Commissioning of the pipeline, by next quarter, would bring down the transportation cost.
Cairn India CEO and Managing Director Rahul Dhir said, “The construction of the crude oil pipeline from Mangala Process Terminal to Salaya is a significant achievement. This pipeline will provide the critical infrastructure needed to connect the oil fields in the Barmer basin to the markets.”

Petronas buys 2.3 pc stake in Cairn India for $240 mn

15 Oct 2009, 1258 hrs IST, PTI

NEW DELHI: Malaysian oil firm Petronas has bought 2.3 per cent stake in Cairn India for USD 240 million (around Rs 1,100 crore) to raise its holding in Cairn India, which gave the nation its largest oil find in recent times, to near 15 per cent.

Petronas International Corp, which held 239.83 million shares, or 12.64 per cent, in Cairn, will buy 43.6 million additional shares from Cairn UK Holdings Ltd – the parent firm of Cairn India, the company said in a statement here.

Cairn UK Holdings, which had 64.68 per cent stake in the Indian arm, will see its shareholding fall to 62.38 per cent. After the buyout, Petronas holding in Cairn India will rise to 14.94 per cent.

The company has also agreed to sell a 10 per cent interest in six of its operated blocks off the cost of Greenland to Petronas. Petronas will pay Cairn USD 70 million under the farm out agreement that gives the Malaysian state- owned oil firm an option to raise its interest to 20 per cent.

The USD 310 million Cairn got from Petronas, “will be targeted for additional investment in Greenland exploration,” the statement said. The companies have agreed to cooperate on an 80/20 basis on any other bidding rounds in Greenland.

Cairn India, yesterday, stated that it has raised USD 1.6 billion funds from domestic and overseas lenders to repay old debt and accelerate the Rajasthan project where crude oil production started a few weeks back.

Cairn, on August 29, started crude oil production from the Mangala oilfield in the Rajasthan block, the current output from where is around 10,000 barrels per day. It will touch a peak of 175,000 bpd (8.75 million tons a year) or 20 per cent the nation’s current production by 2011.

“We are delighted that Petronas is joining with us in Greenland as we take forward our leading exploration position,” Cairn Energy Plc Chief Executive Officer Bill Gammell said.

“The acquisition of additional Cairn India shares by Petronas reflects our shared belief in the continuing growth potential of Rajasthan while giving Cairn increased financial and operational flexibility in line with our growing confidence in

28th May 2009: Cairn’s Rajasthan oil to flow from next week (Economic Times)

MUMBAI: Cairn India, the country’s second-largest crude oil producer after ONGC, is set to start production from its Rajasthan fields next week.

Cairn, a subsidiary of Edinburgh-based Cairn Energy, plans to start production from the first train of 30,000 barrels of oil per day and will introduce a second train of 50,000 barrels per day by the fourth quarter of 2009.

“We are ready for production and it’s just a matter of time. We are consulting all the stakeholders including government officials for a suitable date,” Rahul Dhir, Cairn India’s managing director and CEO, told ET.

Mr Dhir said that the company is close to an agreement with the government on the formula for the pricing of its Barmer crude oil. “The agreement on pricing is imminent and is not a constraint for the production of crude oil,” he added.

When the fields hit peak production of 1,75,000 barrels of oil per day in 2011, they will contribute over 20% of the country’s domestic crude oil production, marking a significant step in India achieving energy security.

Reliance Industries’ KG basin gas production will reach a peak of 80 million metric standard cubic metres per day (mmscmd), or 5,50,000 barrels of oil per day (bopd) of oil equivalent, by December 2009. Together with Cairn India’s crude production from Barmer oilfields, it will contribute to over 60% of India’s oil and gas production and will be instrumental in projected reduction in oil and gas import bills.

India is Asia’s third-largest oil consumer and imported 2.56 million barrels per day (bpd) in 2008-09, an increase of 5.3% over the previous year. India spent $68 billion on imported crude in 2007-08.

Cairn plans to initially transport the crude oil from its Rajasthan fields to the Gujarat coast by trucks till 2009-end when the company will commission the world’s longest heat-insulated pipeline.

“The transportation by trucks will cost $7-10 per barrel,” Mr Dhir said. Cairn India’s March quarter net profit plunged 84% on falling crude prices and higher costs. Its consolidated quarterly net profit fell to Rs 18.68 crore from 1.164 billion a year before.

According to Mr Dhir the quarter was marked by lower operating income and also there was one-time impact from foreign exchange exposure. Income from operations in the quarter ended March declined to Rs 182 crore from Rs 316 crore a year ago.

21st May 2009: Cairn India will sell its Rajasthan crude oil at a discount of about $16 a barrel to the grade of Oil and Natural Gas Corp’s Mumbai High crude oil. (Business India)

Cairn India will sell its Rajasthan crude oil at a discount of about $16 a barrel to the grade of Oil and Natural Gas Corp’s Mumbai High crude oil.

Cairn and its first customer Indian Oil Corporation have almost reached an agreement on selling Rajasthan crude at a discount to Nigerian Bonny Light crude oil (the grade to which ONGC’s Mumbai High crude is benchmarked), industry sources said.

The discount would be the difference in Gross Product Worth (GPW) between the premium Bonny Light and the Mangala crude of Rajasthan and a 2.14 per cent concession for higher pour point and viscosity of the Cairn crude.

The GPW differential is the variation in products that Mangala crude will produce when compared to premium fuel produced from Bonny Light crude. Mangala crude cannot produce products like LPG and so the GPW differential or discount has been put at around 14 per cent, they said.

Additionally, crude turns solid at normal temperature and is viscious and so a further discount of 2.14 per cent has been given. The final price to IOC would be 16.14 per cent discount to $75 a barrel – the three-year average of Bonny Light cruden, sources added.

The government has found in IOC, Hindustan Petroleum and Mangalore Refinery buyers of only 2.6 million tonnes of the 8.75 million tonnes peak output planned by Cairn India by 2011.

6th May 2009: Cairn eyes Rs 5k cr from Rajasthan oilfield in ’10 (Business Standard)

Oil exploration company Cairn India Ltd is expecting its oilfield at Barmer in Rajasthan to generate around $1 billion (Rs 5,000 crore) revenue in 2010.

Barmer is likely to commence production during the third quarter of the current fiscal and reach an output of 175,000 barrels of oil per day (bopd) in 2010.

According to a company source, Cairn has made 25 discoveries of hydrocarbon in Rajasthan and invested around $2 billion (around Rs 10,000 crore) so far.

India currently imports 2 million bopd while the domestic production is around 650,000 bopd.

Cairn India expects to generate around $2 billion (around Rs 10,000 crore) revenues every year starting 2011, said the official.

“The government has nominated Indian Oil Corporation and Mangalore Refinery & Petrochemicals Ltd, a unit of explorer Oil & Natural Gas Corporation, for purchasing the company’s crude oil,” the source said.

The company has also discovered oil reserves of 3.7 billion barrels, of which two billion barrels are in the three main fields known as Mangala, Bhagyam and Aishwarya in Rajasthan.

It is also planning to carry out fresh studies at the Ravva oil and gas field in Andhra Pradesh.

Cairn has a 22.5 per cent participating interest in the Ravva field, while ONGC and Videocon have 40 and 25 per cent respectively. Marubeni-owned Ravva Oil (Singapore) owns a further 12.5 per cent stake in the project.