Cairn India (Q1 FY15)

Cairn India recorded net sales of Rs44.8bn for Q1 FY15 which was in line with our estimates.

July 28, 2014 2:50 IST | India Infoline News Service
CMP Rs347, Target Rs340, Downside 2.0%
  • Net sales at Rs44.8bn grew 10.3% yoy and were in line with our expectations. Net working interest production for Q1 FY15 was at 137,907boepd, an increase of 4.4% yoy but a decline of 3.4% qoq

  • Realization for Rajasthan crude was at 11.1% discount to Brent

  • Recurring PAT was better than estimates owing to higher other income

  • Resource estimates raised but no change to reserve estimates and production guidance

  • Expects gas production from the Raageshwari field to be meaningful in the years to come

  • Loan facility of US$1.25bn extended to a parent group company

  • Assign Reduce rating with a revised price target of Rs340

Result table
(Rs m) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 44,829 40,629 10.3 50,489 (11.2)
Inc/(dec) in stock 16 32 (52.2) 56 (72.4)
Personnel costs (404) (143) 183.2 (474) (14.9)
Operating expense (3,298) (2,404) 37.2 (3,448) (4.4)
Cess (7,293) (7,123) 2.4 (6,835) 6.7
Other expense (780) (893) (12.7) (1,349) (42.2)
Operating profit 33,069 30,099 9.9 38,439 (14.0)
OPM (%) 73.8 74.1 (31) bps 76.1 (237) bps
Depreciation (7,198) (5,193) 38.6 (6,367) 13.1
Exploration w/off (2,546) (1,001) 154.4 (1,608) 58.4
Interest (17) (105) (84.2) (109) (84.8)
Other income 4,184 1,251 234.4 4,070 2.8
Forex fluctuation 989 6,820 (85.5) (2,431) (140.7)
PBT 28,481 31,871 (10.6) 31,995 (11.0)
Tax (1,279) (599) 113.6 (1,641) (22.0)
Effective tax rate (%) 4.5 1.9 5.1
Extraordinary items (16,274) - - - -
Adjusted PAT 10,928 31,272 (65.1) 30,354 (64.0)
Adj. PAT margin (%) 24.4 77.0 60.1
Ann. EPS (Rs) 22.9 65.5 (65.0) 63.6 (64.0)
Source: Company, India Infoline Research

Increase in profit petroleum hits revenue growth

Cairn India recorded net sales of Rs44.8bn for Q1 FY15 which was in line with our estimates. The crude realizations for Rajasthan field were at a discount of 11.1% to Brent price in Q1 FY15 which was at the middle of the guided range. On a yoy basis the topline grew by 10.3% mainly on back of 1) higher production and 2) Steep depreciation in rupee against US$. During the quarter, working interest production volumes increased to 137,907boepd v/s 132,087boepd in Q1 FY14. Sequentially, volumes were lower when compared with 142,796boepd in Q4 FY14. While Rajasthan and Cambay fields witnessed yoy improvement in volumes, Ravva showed yoy fall in production. Sequentially, while Rajasthan and Ravva witnessed declines, Cambay registered growth. Lower revenues were due to increase in profit petroleum share for both DA-1 and DA-2

OPM in line with expectations

Operating margins were at 73.8%, a decline of 31bps yoy and 237bps qoq, much in line with our estimates. Yoy decline in OPM was on account of 144bps yoy increase in operating expenses as a percentage of net sales. This was partially offset by 126bps yoy reduction in cess as a percentage of sales. Sequentially the margins were under pressure as cess as a percentage of sales was higher by 273bps. Cess in Q4 FY14 included reversal of levy of Education Cess and SHE cess of 3% on Oil Cess following the order of Central Bureau of Excise & Customs. Also operating expenses as a percentage of sales was higher by 53bps yoy. Company reported foreign exchange fluctuation gain of Rs989bn. Recurring PAT at Rs27.2bn was higher than our expectations owing to a 234% jump in other income which was due to increase in investment income consequent to realisation of gains on maturity of investible funds.

Exceptional item hits APAT

With the implementation of Schedule II of the Companies Act 2013 from 1 April 2014, the Group has changed the method of depreciation on some of its oil and gas assets from ‘Straight Line’ method to the ‘Unit of Production’ method so as to be in compliance with the requirements of ‘Guidance Note on Accounting for Oil and Gas Producing Activities (Revised 2013)’ issued by the Institute of Chartered Accountants of India. As prescribed under Accounting Standard 6, “Depreciation Accounting”, the change has been made with retrospective effect and the additional charge due to the same for the period up to 31 March 2014, net of tax credit of Rs5bn, has been disclosed as an exceptional item. Further, the depreciation charge for the current quarter is higher and the profit after tax is lower by Rs961mn and Rs589mn respectively due to the aforementioned change.

Key updates on the Rajasthan block
  • 34 new wells were brought on production during the quarter contributing to the Block’s gross average production of 183,164 boepd. Sequential quarterly production was impacted by an unplanned outage at MPT in May 2014, resulting in reduced facility uptime of ~96%.

  • In line with adoption of high HSE standards, Cairn is planning to shutdown the processing terminal for around 10 days for routine operational and statutory maintenance activity in August, 2014. This could impact the daily gross average production rate for Q2 FY15.

  • Gas development

    ·  Plan to double gas production from Rageshwari Deep Gas (RDG) through existing pipeline by Q4 FY15 by installing additional compressors

    ·  Achieved significant progress towards technical alignment with JV on the Field Development Plan for the currently producing RDG field

    ·  The RDG field is estimated to contain around 1-3 Tcf of hydrocarbons In-place

    ·  The capacity of the planned gas infrastructure considers the significant multi tcf gas resource base expected to be found in the block through the ongoing exploration program

  • Initial assessment of Alkaline Surfactant Polymer pilot at Mangala has also been successful.

    ·  Water cut and Oil trends suggest formation of good oil bank.

    ·  Performance continues to be monitored and results are being further evaluated.

  • Detailed work on Polymer flood EOR is progressing for Bhagyam and Aishwariya fields

  • Barmer Hill and Satellite field development

    ·  During Q1 FY15, 3 wells including a Horizontal well were drilled and 2 re-entered.

    ·  All the 6 hydraulic fracking jobs undertaken during the quarter were successful with performance improving successively.

  • Production commenced from Mangala and Aishwariya BH fields; initial production rates encouraging in line with expectations

Rajasthan resource estimates reserved, no upgrades to reserves though

Since the re-commencement of exploration in the Rajasthan block in March 2013, Cairn has established 1.2bn boe of hydrocarbons in-place to date relative to its 3 year drill-out target of 3 bn boe. An additional ~0.6bn boe has been discovered and is either undergoing testing or awaiting testing. Through FY15-16, as a result of current drilling activities, Cairn anticipates establishing an additional 1.2 bn boe hydrocarbons in-place achieving target volumes significantly ahead of plan. These new discoveries and prospect volumes will take the total Rajasthan discovered hydrocarbons in-place to over 7 billion boe. An additional un-risked prospect inventory of approximately 3 bn boe has been identified for drill-out commencing FY16. Ongoing 3D seismic acquisition programs are now underway in Rajasthan. Cairn anticipates that these programs will identify additional prospects that will continue to replenish the prospect inventory.

Operational updates at other blocks

On-shore blocks

  • KG-ONN-2003/1: The Declaration of Commerciality for the Nagayalanka discovery is currently under Management Committee review. The evaluation of the results of the Nagayalanka appraisal wells and extended well test is in progress with the objective of optimizing the field development plan. Nagayalanka-NW-1 encountered over 230m of sand in the Jurassic Golapali Formation and an 80m synrift section. Fracking and flow testing of the reservoir sections have been completed and the well has been temporarily suspended pending further analysis.

  • In the KG-OSN-2009/3 block, 934 km2 of full fold 3D seismic data has been acquired to date. Planning has begun for an additional 3D seismic programme in the remaining area, with acquisition expected to begin by end of Q3 FY 15. Exploration is focused upon building a high quality prospect inventory across multiple play types.

  • Block MB-DWN-2009/1: 2128 line km of 2D broadband seismic has been acquired. The processing contract has been awarded and is expected to begin shortly. Planning for acquisition of additional 500 square kilometres of 3D seismic data is underway.

International Activity

  • Sri Lanka: In 2013, Cairn concluded appraisal and commercial studies to determine the next steps for the gas discoveries made on the block. Cairn continues discussions with the Sri Lankan Government regarding commercial terms necessary to monetize the discovered gas resources on the block.

  • South Africa: Initial interpretations of the 3D volumes over South Africa Block 1 indicate that the acreage contains exciting plays similar to those in offset blocks along the West African margin. A deep water oil and a shallow water gas play comprise two promising play fairways that we will work up through ongoing interpretation. Based on the preliminary assessment of the seismic data, a working petroleum system with multiple oil and gas plays is likely. The on-going seismic processing and technical evaluation is expected to identify drillable prospects during the remainder of 2014.

Unchanged production guidance

The company has guided for a flat production in FY15 based on average production of 181,530bopd in FY14. Considering the exit rate of 200,00bopd it would mean a 9% decline. This is significantly lower than our expectation of a sustained increase in production. In spite of flat production in FY15 the company has guided for a 7-10% CAGR in production over a three year period. Given that Mangala will be on a natural decline from FY15 and Bhagyam has seen its share of difficulties to scale up to its peak level of 40,000bopd we believe the production estimates are optimist.

Loan facility to Vedanta

Cairn India has forwarded a facility of US$1.25bn to Vedanta group company of which US$800mn has been disbursed and US$450mn will be disbursed in the ensuing quarters. The facility is for two years and the interest rates would be at LIBOR + 3%. It has a corporate guarantee from the parent company. The company believes that the cash flows would be adequate to meet the capex requirements over the next two years.

Assign Reduce rating with a revised price target of Rs340

We forecast the core earnings to decline for Cairn in both FY15 and FY16 due to 1) a flat production profile in FY15, 2) increase in operating costs and 3) shift in profit petroleum share for DA-1 from 30% to 40% and for DA-2 from 20% to 30%. While valuations appear cheap at P/E of 6.5x on FY16E EPS, we don’t see any fresh positive triggers for the stock in the near term and hence assign a Reduce rating with a revised price target of Rs340.

Financial summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues 175,242 187,617 170,113 168,622
yoy growth (%) 47.8 7.1 (9.3) (0.9)
Operating profit 134,880 140,981 124,037 120,522
OPM (%) 77.0 75.1 72.9 71.5
Pre-exceptional PAT 119,197 124,318 105,365 101,443
Reported PAT 120,564 124,318 89,091 101,443
yoy growth (%) 51.9 3.1 (28.3) 13.9
EPS (Rs) 62.4 65.2 55.2 53.2
P/E (x) 5.6 5.3 6.3 6.5
Price/Book (x) 1.4 1.2 1.0 0.9
EV/EBITDA (x) 4.5 4.6 4.0 3.4
Debt/Equity (x) 0.0 0.0 0.0 0.0
RoE (%) 24.8 23.6 17.2 14.8
RoCE (%) 25.8 25.0 18.3 15.8
Source: Company, India Infoline Research

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