>CAIRN: Expect more in Rajasthan beyond known sands

■Rajasthan block is the most important asset of this India-focussed E&P company. Cairn has three oil and gas-producing and nine exploration blocks. Rajasthan is the most important of these; we believe it accounts for c95% of Cairn’s current market value. While this is a fair valuation for disclosed estimated in-place oil volume of c6.5bn boe in Rajasthan, we believe there is possibility of significant upside in this onland block beyond the estimated in-place volume. The block currently produces 100,000 bbl/d of oil; we believe Cairn is on track to achieve peak production of c240,000 bbl/d by FY14.

Our analysis shows 40% potential upside in resource base in Rajasthan. Our analysis is based on potential c100% upside in oil-in-place volume from an unconventional oilbearing source, the Barmer reservoir, overlying the main reservoir. Another reason is a set
of geological features (“stratigraphic traps”) that are yet to be explored. Our probability
weighted estimate of the upside is equivalent to c40% of the current resource base. We
ascribe a value for reserves upside that accounts for c16% of our target price.

■ The upside could ensure replacement of produced reserves for 5-10 years. As per
management, the current focus is on the ongoing development of the Rajasthan asset. Once this is achieved, management is likely to refocus on exploratory drilling in the block, which then could help establish these upsides. These upgrades over the next 2-5 years could ensure reserve replacement for a considerable period. We expect the Barmer formation to commence production in FY14.

■ Valuation and risks. We have valued Cairn on DCF for production from known reserves and a risk-weighted multiple for reserves upsides. Our FY12e EPS is in line with consensus (oil price assumption USD76/bbl in FY12). We rate the stock Overweight with a target price of INR360. Our target increases by INR48/share if Cairn is exempt from oil field cess. Catalysts are guidance for higher peak production, upgrades of reserves, and exemption from oil field cess. Risks include non-renewal of production-sharing contracts, slower ramp-up of production, lack of reserves upgrades and a lower oil price.

To read the full report: CAIRN