Cairn India (Q4 FY12)

CMP Rs347, Target Rs412, Upside 18.7% 

• In-line topline growth, Mangala continues to produce at 125,000bopd as Bhagyam commences production
• Gross exit rate was at 150,000bopd while current production rate is at 175,000bopd
• Realization for Rajasthan crude was at 9% discount to Brent, Management maintains its guidance of 10-15% discount to Brent
• OPM falls 423bps yoy and 55bps sequentially
• The company has raised its reserve estimates for the Rajasthan field and also its peak production rate target to 300,000bopd
• Maintain BUY and raise 9-month price target to Rs412 on back of higher production estimates and reserve statistics

Source: Company, India Infoline Research

In-line topline numbers

Cairn India recorded net sales of Rs36.5bn for Q4 FY12 (in-line with estimates) as compared to Rs31bn in Q3 FY12 and Rs36.6bn in Q4 FY11. The sequential rise was due to higher production from the Rajasthan field and increase in realizations.

During the quarter, working interest production volumes were at 107,292boepd v/s 98,969boepd in Q3 FY12 and 94,129boed in Q4 FY11. Production at the Mangala field was maintained at the peak production rate of 125,000boepd, while Bhagyam field commenced production during the quarter. Realizations for the Rajasthan field were at an average discount of 9% to Brent. Overall realizations for crude oil were at 109.3/bbl in Q4 FY12 as compared to US$94.2/bbl in Q4 FY11 and US$101.1/bbl in Q3 FY12. Gas realizations were at US$4.4/mscf as against US$4.5/mscf in Q4 FY11 and US$4.4/mscf in Q3 FY12.

OPM falls 423bps and 55bps sequentially

Operating margins were lower by 423bps yoy and 55bps sequentially. Yoy decline was on the back of royalty costs and higher cess payments. Operating expenses as a percentage of sales was higher by 500bps yoy and 133bps qoq. While other income was higher by 141% yoy, forex losses of Rs2.2bn resulted in lower than expected net profit.

Key takeaways from the conference call

Financial updates

• The board has approved a dividend policy of approximate 20% dividend payout, the announcement of which is expected to be made towards the end of Q1 FY13.

• The company has guided for a gross capex of US$1-1.25bn for FY13 and FY14, 70% of it in EOR, Barmer hill, Pipeline expansion and de-bottlenecking

Update on Rajasthan field

• The company has raised its peak production estimate from 240kbpd to 300kbpd

• Top priorities now:

• Immediate Ramp up and de-bottlenecking of pipeline

• Maximum capacity of current pipelines is 350-400kbpd (as in other parts of world) so a new pipeline won’t be needed. This can be de-bottlenecked for the target of 300kbpd. Currently doing 10% expansion in pipeline.

• FDP for pilot project

• Work on the remaining ~80 km Salaya to Bhogat section of the pipeline is facing certain execution challenges. This section and the marine facility is expected to complete in H1 CY 2013.

• The current pipeline capacity is at 175,000 bopd. However, this will be de-bottlenecked in the coming months to add some ~10% of additional capacity. In parallel, further capacity is being augmented with incremental investments in order to handle higher volumes in line with the basin potential.

• Cairn India has successfully drilled and completed 11 horizontal wells in the Mangala field and all have been put on production. At Mangala, a total of 148 development wells have been drilled and completed with 96 producers and 33 injectors put in operation. The other wells will be brought on stream in a staged manner.

• Crude oil production from Bhagyam commenced in January 2012 and is currently producing ~25,000 bopd. It is expected to gradually ramp up to its currently approved plateau rate of 40,000 bopd. At Bhagyam a total of 62 development wells have been drilled to date with 21 Producers and 4 injectors. A further 12 producer wells have yet to be drilled.

• Development work on the Aishwariya field is currently underway, following an assessment of higher production potential and design optimisation due to increased reserves and resources. Key contracts including the main EPC have been awarded following receipt of JV approval in December 2011. The contractor has now been mobilised on-site. Crude oil production is expected to commence towards end CY 2012, subject to JV and GoI approval.

• The first phase of the EOR pilot consisting of four injectors, one producer and three logging observation wells has been drilled, completed and hooked up to the facilities. The initial production phase using only water injection which commenced in December, 2010 was completed in July 2011. The Polymer injection phase is progressing well since August 2011. Preparations continue for the injection of Alkali- Surfactant-Polymer (ASP), the next phase of the pilot. The results of the pilot have clearly demonstrated that the application of the polymer in the Mangala field will result in an increase in the overall recovery from the field as per earlier expectations.

Update on Sri Lanka

• Completed the first phase of exploration in the frontier Mannar Basin; the three well drilling campaign has resulted in two successive discoveries, establishing a working hydrocarbon system

• Following this success, Cairn Lanka has entered the second phase of exploration with the approval of the Government of Sri Lanka. Additional 600 sq km 3D seismic data has been being acquired which will firm up several promising leads and prepare the Operator for further exploration drilling in mid CY 2013.

Maintain BUY rating and raise target price to Rs412

We are now more convinced of Cairn India achieving a higher than 175,000bopd of peak production over the medium term. Considering this, the stock currently seems to be factoring in a long term crude oil average price of US$90/bbl against our expectation of US$100/bbl. Additionally, the company has guided for a liberal dividend policy. Hence we maintain our BUY rating and raise our 9-month price target to Rs412.