>CAIRN INDIA: Started production from Bhagyam field; EOR pilot in the Mangala field, consisting of four injectors, one producer and three observation wells; & uPDATE ON Ravva & Cambay

Q3 FY12 provided a glimpse of normalized revenues & profits after royalty was made cost recoverable; with reported net profit of Rs 22.6 bn in line with our estimate of Rs 22 bn.


■ Topline adjustments at $ 237 mn in Q3 FY12
The topline for Q3 FY12 was reduced by $ 237 mn on account of royalty being made cost recoverable and profit sharing with the Govt. of India on production from the Rajasthan block. Adjustment towards royalty for the quarter stood at Rs6,285 mn, 2% lower than our expectation of Rs 6,435 mn. Profit petroleum shared with the Govt. was Rs 5,727 mn, which has been calculated as 20% of profit petroleum for the quarter.


■ Topline at Rs 31 bn
In spite of blended realization jumping by 33% y-o-y from $ 76/boe in Q3 FY11 to $ 100.3/boe in Q3 FY12, revenue is flat y-o-y owing to royalty being made cost recoverable. The q-o-q rise of 17% in the topline is due to inclusion of one-off impact of royalty adjustment in Q2 FY12, inspite of stagnant production and marginally lower realization q-o-q.


■ Mangala production @ 125 kbpd, Bhagyam starts producing
Mangala production for the quarter stood at 124.9 kbpd whereas the Saraswati field is producing at its peak level of 0.25 kbpd. Production from Bhagyam field has started on Jan 19, 2012 and the management has guided for ramp up of output to the approved peak level of 40 kbpd by Mar 2012. The company has retained its guidance for FY12 exit production rate of 175 kbpd.


■ Other income boosted by forex gain of Rs 3 bn
The company reported a forex gain of Rs 3 bn in Q3 FY12 due to the swift depreciation of the rupee against the US dollar. DD&A expense during the quarter stood at $ 8/bbl, which is in line with management guidance. Tax rate came in at 5% during Q3 FY12, as against 9.2% in Q3 FY11. The management has
maintained its tax rate guidance at ~10%.


■ Net profit in line with estimates
Net profit for Q3 FY12 at Rs 22.6 bn was 2.8% higher than our estimate of Rs 22 bn. EPS for the quarter was Rs 11.9, 196% higher q-o-q & 12% y-o-y.


PERFORMANCE HIGHLIGHTS


■ Bhagyam to touch 40 kbpd by Mar 2012
Cairn India has started production from Bhagyam field on Jan 19, subsequent to receipt of Govt. approval for the same. Further work on the development of the Bhagyam field is ongoing. A total of 62 development wells have been drilled. Well results from the Bhagyam development drilling have been as per expectations. The reservoir and facilities will require some time for gradual and safe ramp up to reach the currently approved plateau of 40 kbpd. The company expects to receive approval soon for increasing output from Mangala to 150 kbpd. 148 development wells have been drilled in Mangala, of which 85 are currently producing and 30 injector wells are injecting water into the reservoirs. The company has retained its guidance of FY12 production exit rate of 175 kbpd.


■ Expansion of MPT facilities underway
The company is expanding its production facilities at the MPT to achieve processing capacity beyond the current level of 175 kbpd by end-2012. The current facility can handle higher volumes in line with the basin potential through incremental investments and augmentation of facilities, subject to JV & GoI approval. Further investments have been planned to augment processing capacity and pipeline infrastructure to deliver the envisaged basin potential. The management has guided for flat production of 175 kbpd (+/- 5-8%) for CY12.


■ Update on other exploratory activities
Mangala EOR: The first phase of the EOR pilot in the Mangala field, consisting of four injectors, one producer and three observation wells have been drilled, completed and hooked up to the facilities. After completion of baseline water flood for more than six months, polymer injection started in Aug 2011. Preparation for the commencement of the ASP phase is currently underway. The results to date are encouraging and based on these results, FDP for a full field application of polymer flood in the Mangala field is under preparation and is expected to be submitted by H1 CY12. This will be the start of the process for monetizing the full EOR potential of the block.


■ Ravva & Cambay: Recent infill drilling and workover campaigns have helped slow down the rate of production decline from the Ravva field. A 4D seismic survey was carried out previously to help identify bypassed oil zones in the reservoir along with prospects in the deeper zones. Interpretation of the seismic data is currently in progress. The spare gas processing capacity of the CB/OS-2 facilities is planned to be utilized by tolling and processing ONGC’s gas from its North Tapti field (adjacent to the Cambay field). ONGC has completed the North Tapti pipeline tie-in with the CB/OS-2 facilities. An infill drilling campaign is planned in the Cambay field to sustain production.


■ SL 2007-01-001: Cairn Lanka has successfully completed the first phase of the exploration campaign in Sri Lanka Block SL-2007- 01-001. The exploration programme involved the acquisition, processing and interpretation of 1,753 sq km of 3D seismic data and the drilling of three well deep water wells. This resulted in two successive gas and condensate discoveries: the CLPL-Dorado- 91H/1z well and, the CLPL-Barracuda-1G/1 well. The third well, CLPL-Dorado North 1- 82K/1 was plugged and abandoned as a dry hole on Dec 14, 2011. Following this success, Cairn Lanka has notified the government of Sri Lanka of its
intention to enter the second phase of exploration


Other blocks: In the KG-ONN-2003/1 block, an exploration well, Nagayalanka SE-1, is being drilled to test and appraise the Nagayalanka Discovery. Cairn India has decided to sell off its stake in the KG-DWN-98/2 block to its JV partner ONGC and focus on other areas of strategic interest elsewhere in its portfolio. 3D seismic data processing and interpretation has been completed in the KK-DWN-2004/1 block.


Outlook
The receipt of approval for production start from Bhagyam marks a return to constructive engagement between Cairn India, ONGC and the Govt. on the issues of ramping up production and realizing the full potential of the Barmer basin. We expect long pending approvals for higher peak production levels from the MBA fields to be given in a timely manner going ahead. We expect output from Rajasthan to reach the targeted level of 175 kbpd by end-FY12 and stay at these levels till end-2012. We expect production of 210 kbpd from the MBA fields from Jan 2013 onwards.


Valuation
As production from Rajasthan improves going forward, so would the profit sharing with the Govt., resulting in a higher portion of the operating cash flow being unavailable for the company. As the block is expected to produce at its peak level from FY14E-21E, revenues would be stagnant whereas profit shared with the Govt. would keep on increasing resulting in a lower topline y-o-y from FY14E onwards. On the other hand, operating costs would go up as opex/bbl for crude produced from EOR reserves is expected to be around $ 7/bbl as against $ 2.5/bbl currently. Hence, we expect the company to report its peak earnings in FY13E, and report lower earnings y-o-y going forward resulting in a series of lower cash flows going forward.


With the stock rallying over the previous 3 months, our previous price target of Rs 334 has been achieved. We introduce our FY14 estimates and roll forward our price target from Mar 2012 to Mar 2013. As a consequence of falling cash flows from FY14E onwards, our price target drops to Rs 318 and we rate the stock as UNDERPERFORMER.


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