Wednesday, September 12, 2012

>CAIRN INDIA: Media articles suggest production may be restricted to 175 kb/d in FY2013

Follow-up actions and expectations. We have revised our EPS estimates of Cairn
India by +4-6% over FY2013-15 to reflect (1) weaker Rupee forecasts of our Economists team and (2) slower ramp-up in oil production from the Rajasthan block. We maintain our ADD rating on the stock with a revised 12-month forward target price of `375 (`360 previously). In our view, more visibility on (1) higher reserves and (2) production ramp-up would be critical to stock performance.

Media articles suggest production may be restricted to 175 kb/d in FY2013
As per recent media articles, the management committee of Cairn’s Rajasthan block has decided to limit oil production to 175 kb/d in FY2013, lower than the company’s earlier guidance of 190-200 kb/d by 4QFY13. Apparently, DGH and MOPNG have raised concerns about (1) lower-than anticipated production from Bhagyam field and (2) delays in augmentation of pipeline capacity. We note that Cairn’s oil production from the Rajasthan block increased to 172.8 kb/d in July 2012 from 171 kb/d in May-June 2012; however, it remains lower than the targeted 175 kb/d.

Expect delays in production ramp-up versus ‘aggressive’ guidance
We do not rule out slower ramp-up of oil production from the Rajasthan block in the medium term versus Cairn’s original guidance of ~240 kb/d by end-CY2013, given (1) unexpected behavior of the Bhagyam field, which may require drilling of more wells to achieve peak production of 40 kb/d, (2) inordinate delays in debottlenecking the pipeline and (3) likely delays in approvals from Government/DGH for higher oil production, which will be contingent on reservoir performance.

Cash utilization will determine growth beyond the Rajasthan block
We expect Cairn India to generate US$5.1 bn of free cash flow, over the next four years, led by a gradual ramp-up in oil production from the Rajasthan block. We believe effective utilization of cash will be critical to stock performance in the medium term: (1) re-investment of cash in value accretive E&P opportunities will be positive, (2) dividend payout will be neutral to shareholders and (3) any ‘movement’ of cash to Group entities other than dividends will be negative.

To read report in detail: CAIRN INDIA