>CAIRN INDIA: Company's oil discount to Brent has been narrowing

Cairn continues to expand operations in Rajasthan, with production already at the original FDP (Field Development Plan) mandated level of ~175 kb/d. The management has guided to this growing to ~200 kb/d by end-FY13, with additions of ~15 kb/d from Bhagyam (from current ~25 kb/d) and start up of Aishwariya (10 kb/d) to add to the 150 kb/d being produced by Mangala. Major increases beyond that, however, are subject to further approvals coming through. Cairn is indicating that production can rise from existing fields itself to 240 kb/d (primarily via further increases from Bhagyam and Aishwariya fields). However, this increase has not been approved by either the management committee or via a revision in the FDP. We maintain our estimates of 210 kb/d as the peak production from these fields as of now. We will revisit this when clarity emerges on regulatory clearances over the next few quarters.



Significant reserves upside, monetisation subject to DGH
The ramp-up of volumes from 175 kb/d to 200 kb/d from the current proved reserves base (+EOR upside) of ~1000 mmboe is fairly well understood. But, the management has stated that the long-term guidance of ~300 kb/d production potential is subject to the proving up of ~530 mmboe risked exploration resources that it estimates on the rest of the block, in addition to the ~140 mmboe of risked resources on the Barmer Hill Formation. However, the catch here is that the rights to explore further on the block other than the current development area are facing some uncertainty at this point of time; Cairn has applied to the regulator to restart exploration and appraisal activity on the block. We believe while the prospectivity of the block and Cairn’s record of proving up resources is not in doubt, timelines on these to translate into production will likely take longer than what management expects. So we value these risked resources as an exploration option value and assume an EV/boe of ~US$7.5/boe for these in our SoTP valuations.


To read report in detail: CAIRN INDIA

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