Cairn India - Is it the right time to buy?

Stock Opportunities Untested - but worth a good look
1

Cairn India is one of the largest players in the Oil Exploration and Production sector.

Lets look at the broad summary of fundamentals

CMP: Rs.288.25

T12 EPS: 77.20

PE: 3.74

PB: 1.73

PB can change based on recently March 2013 quarter and FY 13 financials.

The multiples look attractive given an earnings yield of over 25% (100/3.74). The company is in to a sector where oil prices are based on prevailing global crude oil prices, and these are not subject to any subsidy/price controls. The current crude oil prices are $90+ pb (nymex crude) and $100+ pb for brent crude. Recently oil prices dipped, but the same was offset partially by rupee depreciation thereby generating stable revenue in rupee terms.

The Rajasthan oil base was used to produce an average of 169, 390 barrels a day in FY 12-13 (128,267 in FY 12). The production per day can vary due to various factors such as working days, shutdowns, maintenance work, safety measures, etc. This is the production so for. Now for 2013-14 the management has given a guidance estimating a production of 200,000- 215,000 bpd from the Rajasthan block.

I have not done a detailed valuation exercise, but these indicators look very positive.

For those who want to look at further data points provided in March 2013 results, they are below:-

Crude oil sales arrangements have been finalized for volumes in excess of 200,000 bopd with PSU and private refiners for FY 2013-14. The crude is currently being supplied to four refineries.

In accordance with the RJ-ON-90/1 PSC, the crude is benchmarked to Bonny Light, West African low sulphur crude that is frequently traded in the region, with appropriate adjustments for crude quality. The implied crude price realisation for the financial year (average of twelve months up to March 2013) lies within the stated guidance of 10%-15% discount to Brent.

Welcome all valuepickrs to share their comments, views and suggestions on this.

2

Very good topic to start. Good one Sridhar.

It is a company which has the potential to be one of the best E&P (exploration and production) companies globally; with the likes of Chevron, Exxon,BP etc. The fact that it is not restricting itself to Indian oil and gas basins is a good sign. It needs a lot of guts, expertise and capital for an oil & gas company to step into a new oil block and explore. The Indian operations are going smooth and we are yet to reap postivies from the Sri Lankan and South African basins.

Many of the value investors would not look at Cairn being a large cap; my question is why not get into the core of this large cap trading at 4 PE and having such immense potential?

Lets discuss the negatives and positives of Cairn whether it fits into a value investors portfolio currently.

3

Cairn holds interest in oil and gas blocks located in Barmer, Mumbai offshore, Cambay Basin, kerala-konkan, palar-pennar(KG Basin), Mannar basin(Srilanka) and Orange basin(South Africa). They also operate pipeline and storage terminal. Cairn sells it oil to refiners and gas to public sector undertakings and private buyers.

Investment Rationale

)- Cairn expects to ramp up production from its Rajasthan field. There could be an upward revision of Rajasthan crude oil reserves which the market hasnt discounted yet.

)- Cairn can deliver strong production growth from Rajasthan field at a ~20% CAGR over FY2012-15e due to strong resource base and EOR (enhanced oil recovery) activities. They expect revenues and profits for Cairn to keep rising, driven by higher production in the Rajasthan block aided by high crude prices and a weak rupee.

)- Cairn has increased its resource base from 6.5 billion boe to 7.3 billion boe, with an impressive reserve-to-replacement ratio of 1.75x. This should enable it to further enhance production guideline from 210kbpd to 240kbpd in the next five years.

)- Recent discovery in the onshore KG basin augurs well for the company.

)- Higher production should enable Cairn to generate strong free cash flows. Cairn India should generate over USD 1 bn of free cash flow annually from FY2013-20e.

)- Effective utilization of cash will be critical to stock performance in the medium term and re-investment of cash in value accretive E&P opportunities will be positive for the company. Sri Lanka and South Africa basins are currently being invested in and pursued.

)- Cairnâs lifting costs at US$4/bbl, which includes pipeline expenses, are among the lowest in Asia. This aspect is particularly helpful in a low oil price environment. Even in a lower oil price environment,risk is lower.

)- Cairn is one of the preferred ways to play the twin macro themes of higher crude price and weaker rupee.

Risks:

)- Government interference

)- Revenue share of the government will put pressure on earnings.

)- Bulk of Cairnâs value comes from a single block - the Rajasthan fields which account for 80% of Cairnâs reserves and resources.

Stock Valuation and Recommendation

At CMP of Rs285 Cairn India is trading 5.86x FY13E and 5.93x FY14E EPS and 3.20x FY13E and 2.50x FY14E EV/EBITDA

Makes it a good value play for long term investors.

4

i have few doubts ( still have to read the AR)

)- where can we find the terms of PSC between the company and the govt. Is the govt share of rev going to increase with time. Presently NP margin for the company is very high.

)- the revenue doesnt seem to be increasing much for the last 3 qtrs.

)- promoters - vedanta group - anil agarwal ???

The business is generating lots of cash. Co. is debt free now. NP for fy 13 is about 12000 cr. Co has planned capex of US $ 3 bn ( ~ 18000 cr) over 3 yrs. When the cash position is comfortable, why is the company not paying any dividend.

5

correction - the company has declared an interim div of rs 5 in oct 12 an rs 6.5 in Apr 13, which makes a div payout of close to 4 % at present share price of 288.

also as per chairman msg of ar FY 12 - dividend payout will be 20 % of consolidated profits, which is a positive sign.

6

Cairn is the one of the pure listed plays on indian petroleum products.The valuation is pretty less when compared to even ongc who has to share its profits based on whims and fancies of govt.
the valuation is also low due to anil agarwals pedigree of mistreating minority shareholders.This share will move up as soon as dividend payout is increased.

7

Few aspects need to be taken care prior to investing

1). Management group - Vedanta group is not known to be investor friendly. Also, the current objective of Anil Agarwal is to be among the largest player in the resources space globally. Some of his business (Aluminium) is straddled with Debt. The problem was solved by merging loss making/ high debt companies with cash rich debt free companies like Sesa goa to the detriment of minority shareholders of Sesa goa and sterlite. There is no surety that this might not happen with Cairn sometime in future.

2). Oil & gas and for that matter the resources business is to be valued based on the reserves. On this front the indication are that the company has sufficient resources.

3). Shale gas and its impact on global oil prices.

8

Thanks Mokhtar for putting up the production and resource base figures.

Also the recent news regarding discovery on the onshore KG basin looks promising.

Earlier I though KG basin is kind of saturated. Does this also include the Ravva project ? (…sorry for my ignorance)

What about the Cambay basin? Is it going to produce more going forward or flatten or reduce?

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)- Cairnâs

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)- Government interference

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)- Bulk of Cairnâs Cairnâs

9

Vedanta group; yes Anil Agarwal is notorius for its human rights exploitation and bending environmental norms. So it should not be mixed up with Vedanta treating shareholder with hostility. It has received criticism from NGO’s and human right agencies for this.

Coming to Cairn India which was priorly owned by Cairn energy is operating in India since 1996 and in such a short duration created a massive oil and gas pool in the country. It to date retains a 10% shareholding in Cairn India Limited because they know Cairn India Limited has the potential to account for more than 30% of Indiaâs oil production (fact). Most of the management from the beginning is retained and have a great vision.

About Revenue and NP;

The Capex program for Indian asset has come to its end and now would be the time to optimized their assets.

About Shale Gas;

The legal framework in India is not lucrative for companies to explore shale gas in India. Shale gas will not be cheap gas in most circumstances. It will require a relatively high price to make it profitable to produce.

The alternative sources of oil have a long time to get established in the market. In terms of viability; this is only possible with high investments in these sectors. If the oil price is below 110$ a barrel it is not economical for exploration of unconventional oil when there is abundant conventional oil & gas at the moment.

Cairn is an integrated oil and gas player so shale gas wont have any impact infact it would be better and they might want to explore this option as well.

10

Hi Nadakarni,

Just to give you some idea about the shale gas production prospects in India, I just want to put some highlights.

  1. India is believed to have about 63 trillion cubic feet of recoverable shale gas reserves, more than 20 times the size of the countryas largest gas depositReliance Industriesa KG-D6 block in the Krishna-Godavari basin off the eastern coast.

2)But experts say it may take years for the country to access and realize profits from the valuable natural resource because of a lack of infrastructure, opposition to raising gas prices and paucity of information about exactly where to find the gas.

  1. The shale gas extraction process is tedious process also known as hydraulic processing, which can also cost more or take time to bring out the gas.

  2. The supply will increase in future but the timing of output, extraction costs, etc will still add up to costs and make prices stable.

So the case of cheap oil as soon as shale comes out is not highly probable in my personal opinion.

Probably Mokhtar would be able to confirm if I’m right or if I’ve missed something here. Think about it water is abundant and available in plenty but drinking water price is gradually going up.

Source:http://blogs.wsj.com/indiarealtime/2013/06/11/why-india-cant-unlock-its-shale-gas/

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Disclosure: I am holding Cairn as n investment.

The above views are just for informative purpose, not a recommendation to buy or sell.

12

Yes, Cairn India looks interesting in the large cap space especially after the liberal dividends last year. If they get some govt approvals, they can scale up quite a lot…also there was lot of focus on granting approvals to the oil & gas sector in this budget.

Ayush

13

Highlights of the Concall by Capital Market

  • Average daily gross operated production stood at 213229 barrels of oil equivalent per day (boepd) in Q2FY’14 up by 3% on a year on year basis (working Interest production at 132862 boepd up by 3%)

  • Average price realisation stood at USD 95.3 per barrel down by 1% compared to corresponding previous year period. Average gas price realisation stood at USD 5.9 per mscf up by 29% compared to corresponding previous year period. Average oil price realisation stood at USD 96.7 per boe down by 1% compared to corresponding previous year period

  • The company maintained its trajectory of gross production growth in Rajasthan to an average of 175,478 boepd during the quarter, up 1% QoQ. The asset is currently producing around 178,000 boepd, and remains on track to deliver a FY’14 exit production target of over 200,000 boepd

  • Cairn India remains on track for its FY’14 exit gross production target of over 225,000 boepd including over 200,000 boepd from the Rajasthan block

  • During the quarter, Cairn India received approvals for drilling additional infill wells in Mangala and Bhagyam. The Mangala polymer EOR FDP, the world’s largest such project, has been approved by the JV partner. Company is working with the Government for the final approvals post which full field implementation is expected in FY’15

  • The company focus is on the significant resources in the low permeability reservoirs within the RJ Barmer Hill formation through usage of advanced technology to achieve optimal commercial rates, with infrastructure and development facilities in place

  • Several high impact exploration wells are planned to be drilled over the next two quarters in the Rajasthan block to help in realizing the objective of drilling out 50% of the 530 million barrels of gross recoverable risked prospective resources by end of FY’14

  • The company also plans to drill an exploration well in the Ravva block within this financial year, besides further exploration activities in other blocks in the portfolio

  • The company’s aggressive exploration and development drilling programme is set to continue with more than 450 exploration, appraisal and development wells planned over the three year period till FY 2015-16, including 100 E&A wells to be drilled in the Rajasthan block

  • To meet the above production and exploration targets, 8 rigs are expected to be added taking the total count to 13, by the end of FY’14.

  • Of the US$ 3 billion total capex planned till FY 2015-16, the company-wide gross capex incurred during the quarter was US$ 137 million, of which 28% was on exploration activity and balance on the production enhancement and sustenance programs, across the assets. The gross cumulative Rajasthan development capital expenditure as on 30 Sept, 2013 was US$ 4 billion, of which US$ 98 million was spent during the quarter including US$ 16 million in DA 2.

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Highlights of the Concall by Capital Mkt;

  • Average daily gross operated production stood at 224493 barrels of oil equivalent per day (boepd) in Q3FY’14 up by 10% on a year on year basis (working Interest production at 140830 boepd up by 10%)
  • Average price realisation stood at USD 94.9 per boe same as in corresponding previous year period. Average gas price realisation stood at USD 5.9 per mscf up by 23% compared to corresponding previous year period. Average oil price realisation stood at USD 96.4 per barrel up by 0.11% compared to corresponding previous year period
  • The average crude price realisation for the quarter was US$ 95.6/bbl, an implied 12.5% discount to Dated Brent, within the guided range of 8-13% for the year
  • During this quarter, Cairn tested the Barmer Hill formation in the Aishwariya 4-Z well at an initial rate of 450 bopd and recognized Aishwariya Barmer Hill as the 27th discovery on the block, confirming further potential that exists in the formation.
  • Since the resumption of exploration in Rajasthan block in March 2013, 9 exploration and appraisal wells have been drilled until Q3FY 14 and the initial results have been encouraging with 3 discoveries and a success ratio of over 50%
  • Cairn India started Q3FY14 with only 1 exploration drilling rig but 2 rigs were added to the drilling program during the quarter. At the end of the quarter, mobilization of a fourth drilling rig was completed and it started rigging up in preparation to drill. With 4 rigs now available for exploration, Cairn intends to drill out 50% of gross prospective resource base towards the end of FY 14 including 2 high impact wells which will test potential gas accumulations in the deeper section.
  • During the quarter, a 15k jack-up rig was mobilized in the Ravva block that has commenced drilling the âhigh value, high risk’ deep LO-110 exploration prospect.
  • A Declaration of Commerciality for the Nagayalanka discovery in KG onshore block has been submitted to the Management Committee during the quarter and will be followed by a FDP in the next financial year. The production rate is expected to be over 10,000 bopd with first oil expected in 2017.
  • Conditional clearance by the Government has been received and exploration activity has restarted in KG offshore block. The planning and tendering for the acquisition of 3D seismic data is underway, with the acquisition of 1000 sq km of 3D seismic expected by Q1FY15. Following approval during Q2 FY14, the Minimum Work Programme has been reduced by 35% in proportion to the âNo Go’ area
  • Conditional clearance by the Government has been received and exploration activity has restarted in Mumbai offshore block. The tendering for the 2D seismic programme is underway for the acquisition of approximately 2,000 line-km, expected within Q4FY 14.
  • The exploration activity is on hold in Palar-Pennar block
  • Cairn India is in appraisal planning and commercial discussions with the Sri Lankan Government to monetize the discovered gas resources. In addition to this, Cairn has also submitted a bid for a block in Mannar Basin in November 2013.
  • The interpretation of the 3D seismic data acquired in 2013 has commenced in the South African block. The acquisition of approximately 3,000 line-km of 2D seismic data will commence in Q4 FY14 and will facilitate exploration evaluation in block areas not covered by the 2013 3D seismic.
  • As per the management, the Rajasthan block remains on track to deliver the expected FY14 exit production rate of over 200,000 boepd. A total of 42 new wells were brought on line during the quarter, compared to 26 in Q2 FY 14.
  • During the quarter, FDP approval has been received from Management committee for the Mangala field Polymer Flood Enhanced Oil Recovery (EOR) programme. Major contracts for the execution are being awarded and polymer injection is expected to commence by Q4 FY 15.
  • Approvals for Aishwariya field are also in place for enhancing its daily production rate in excess of 20,000 boepd
  • Production remains on track to meet the fiscal year exit guidance of over 225,000 boepd from all producing assets, supported by continued infill drilling
15

Highlights of the Concall by Capital ,Mkt;

  • Average daily gross operated production stood at 224429 barrels of oil equivalent per day (boepd) in Q4FY’14 up by 11% on a year on year basis (working Interest production at 142796 boepd up by 13%)
  • Average daily gross operated production stood at 218651 barrels of oil equivalent per day (boepd) in FY’14 up by 6% on a year on year basis (working Interest production at 137127 boepd up by 7%)
  • Average price realisation stood at USD 94.4 per barrel of oil equivalent in Q4FY’14 down 5% on a YoY basis. Average gas price realisation stood at USD 6.1 per mscf up by 20% compared to corresponding previous year period. Average oil price realisation stood at USD 95.7 per barrel down by 5% compared to corresponding previous year period.
  • Average price realisation stood at USD 94.5 per barrel of oil equivalent in FY’14 down 3% on a YoY basis. Average gas price realisation stood at USD 5.7 per mscf up by 24% compared to corresponding previous year period. Average oil price realisation stood at USD 95.8 per barrel down by 3% compared to corresponding previous year period.
  • Since resumption of exploration in March 2013 in Rajasthan block, the company has drilled out 50% of gross prospective resource base of 530 million barrels of oil equivalent. The on-going exploration program has been successful in opening up 5 new play types, proving up a resource base of over 1 billion boe in place, in addition to existing 4.2 billion boe. Of the 17 exploration wells drilled to date, over 80% have shown hydrocarbons.
  • With the conditional clearance received from the Government last quarter, the exploration activity has resumed in Mumbai offshore block. The tender for acquisition of ~2,000 line-km of 2D seismic programme has been awarded and the same is expected to begin in the near term. Planning for acquisition of additional 500 square kilometre of 3D seismic data is underway
  • Cairn India achieved its target FY’14 exit rate of production from Rajasthan of 200,000 boepd. During the quarter, the Block produced 17.2 mmboe of oil equivalent, achieving record total production for the year of 66.3 mmboe.
  • A total of 129 new wells were brought on production during the year, with 45 wells added in Q4 FY 14. This has led to the Rajasthan Block achieving gross average production of 181,530 boepd for FY 14, up 7% YoY
  • During the year, the Ravva block produced 27,386 boepd, with a plant uptime of 99.8%.
  • In March 2014, the company commenced the 5th phase of Ravva development drilling using a mat supported jackup rig. The infill drilling campaigns and prudent reservoir management is expected to result in the overall recovery factor of over 50%.
  • During the year, the cambay block produced 9,735 boepd, with a plant uptime of 98.6%
  • Considering the significant potential in the Rajasthan asset, the company continues to focus on key development projects to enhance recovery with overall planned net capex of US$ 3 billion by FY17.
  • The company targets to achieve reserve replacement ratio of 150% in next 3 years subject to PSC extension till 2030 and a 3 year production CAGR of 7-10% from known discoveries with flat production in FY15.
  • Oil Industry is looking forward to PSC extension policy, fiscal model for the next round of NELP auctions and shale gas policy for Pre-NELP and NELP blocks
16

Highlights of the Concall by Capital Mkt;

  • Average daily gross operated production stood at 226597 barrels of oil equivalent per day (boepd) in Q1FY’15 up by 3% on a year on year basis (working Interest production at 137907 boepd up by 4%)
  • Average price realisation stood at USD 97 per barrel up 4% on a YoY basis. Average gas price realisation stood at USD 5.6 per mscf up by 15% compared to corresponding previous year period. Average oil price realisation stood at USD 98.2 per boe up by 4% compared to corresponding previous year period.
  • The company has established 1.2 billion boe of hydrocarbons in-place, since resumption of exploration in Rajasthan. An additional 0.6 billion boe has been discovered and is either currently undergoing testing or is awaiting testing
  • The company is on track to achieve the addition of 3 billion boe of in-place hydrocarbons anticipating establishing an additional 1.2 billion boe hydrocarbons in-place during FY15/16, and taking total Rajasthan discovered hydrocarbons in place to approximately 7 billion boe.
  • Cairn India also intends to add further 3 billion boe of unrisked in-place hydrocarbons to be drilled up in future exploration campaigns, beginning FY16
  • During Q1 FY15, the company has drilled three successful exploration and four successful appraisal wells.
  • Cairn India 3D seismic data acquisition programme for 1,900 square kilometres is currently underway and will further help in identifying new exploration leads and augment the prospective resource base. As at 30th June, 2014, the company has acquired 411 square kilometres of 3D seismic data
  • In 2013, Cairn India concluded appraisal and commercial studies to determine the next steps for the gas discoveries made on the Sri lanka block. The company continues discussions with the Sri Lankan Government regarding commercial terms necessary to monetize the discovered gas resources on the block.
  • The company is on track to commence polymer injection in Mangala field by 4QFY15 to enhance oil recovery rates. The company has started construction of surface facilities and drilling of EOR wells using two rigs.
  • The company has commenced production from Mangala and Aishwariya BH fields; initial production rates were encouraging
  • Cairn India has planned 10 day shutdown in 2QFY15 at Mangala Processing terminal
  • Cairn India has changed the method of depreciation of its oil and gas assets from âStraight Line’ method to âUnit of Production’ method in line with the Companies Act 2013. This has resulted in higher depreciation of Rs 96.1 crore in the current quarter and one-time prior period impact of Rs 1627 crore.
  • The company has extended USD 1.25 billion inter-corporate loan facility to a subsidiary of Sesa Sterlite for two years, backed by a corporate guarantee from Vedanta Resources PLC at Libor rate +3%. Management indicated that this is a two year facility and will yield better returns than its fixed deposits.
17

I have been troubled by the numbers of Cairn since I started studying it. Seemed like a great stock that hadn’t been recognized. Today I see this article.

http://www.business-standard.com/article/company/cairn-stock-falls-6-6-over-1-25-bn-loan-to-parent-114072500155_1.html

_Corporate governance advocates and analysts have slammed Cairn India, an Anil Agarwal group company, for extending a loan of $1.25 billion to Sesa Sterlite, another group company, at generous terms, instead of using the cash for development of its operations.
_ _
Cairn India’s stock on Thursday fell 6.5 per cent to Rs 322 a share, losing Rs 4,400 crore of market value, as angry investors gave a sell order on the company’s shares. Cairn had indicated after its June quarter results on Wednesday that the two-year facility to the foreign Sesa subsidiary will yield better returns than its fixed deposits. This was the first time the company made this disclosure._

Obviously the market knew better then me.

Sanjay.

18

Unfortunately these kind of issues will crop up every now and then and it will almost always be the small guys like us who will be caught on the wrong side. I tend to pick a stock based on value but I don’t invest until the trend is also clear. If you look at cairn, it has severely underperformed NIFTY in the last 1mo, 3mo, 6mo, 1yr, 3yr, 5yr timeframe. For a stock which is part of nifty, this is a clear indication that something is amiss. Folks like us might be smart, but remember the market is right 90% of the time. It’s only the remaining 10% of irrationality that we want to profit from.

However, note that in general during such sell-offs the market will tend to overreact and drive the price down far lower than warranted. If that happens, you could make some money out of this irrationality in the shorter run. But in the longer run, I’d stay away from a stock whose management is not acting in the best interests of shareholders.

19

An investor unfriendly and opaque group. One only has to look up what they tried to do with Sterlite Industries, their one time flagship, many years ago. Not sure if the merger of Sterlite with Sesa Goa created more value for the shareholders or destroyed it. The cairn stock has been floundering ever since the company changed hands.

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NETWORTH
387.78 BILLION Rs
6.463 BILLION $


PROFIT
124.31 BILLION Rs
2.07 Billion $


LOAN TO VEDANTA
1.25 Billion $





Assumption of Rs/$ Exchange Rate of 60
Stock is trading at 0.92 times its book value
Stock is providing a good dividend yield of 3.68%.


Though the company is reporting regular profits, it is not paying out tax
Promoters have pledged 65.81% of their holding


I cannot understand a couple of things

1) If it is a debt free company why have promoters pledged their shares?
Is it against some guarantees?
2) While giving an inter-company loan is completely unnaceptable is the value of loan that significant on company valuation.

I have only recently started looking at this stock... would appreciate some inputs