Saturday, April 3, 2010


Investment conclusion: We reiterate our OW rating on and raise our price target to Rs372/share, implying 26% upside, factoring in: 1) higher reserve potential and increased resource base of the Rajasthan field; 2) higher production potential from the Mangala field; 3)
Cairn signing definitive crude sale contracts, thereby reducing off take concerns.

Resource base getting better: Cairn India has increased gross discovered resource base estimates for the Rajasthan block from 3.7bn boe to 4.0bn boe. Also, Cairn estimates that the Rajasthan basin would have exploration upside with a potential resource base of 2.5bn boe. Overall, we have increased Cairn’s net 2P reserve estimates by 222mn boe to 1.2bn boe.

MBA production ramp-up higher and faster: Cairn expects to reach Mangala plateau production of 125kbpd in 2H10 and sees upside in production potential to 150kbpd, subject to government approvals. We expect Mangala to reach 150kbpd in F4Q13.

Off take concerns fading: One of our biggest concerns, off take of Cairn’s crude, seems to be moving behind us with the company signing sales arrangements for 143kbpd and pricing in line with our assumption of a 12.5% discount to Brent.

Future promising: With the current resources, Cairn is looking at increasing its production from 185kbpd to 240kbpd. Overall we have assumed Cairn’s production will increase from 185k/day to 210k/day in 2013. So, another 10% increase in production would increase our
EPS and DCF estimates by 10% and 13%, respectively.

Valuation: Stock price is discounting a crude oil price of US$78/bbl and is trading on a P/E of 6.2x F2012e. Also the premium of Cairn India over Cairn Plc’s stock price has been lost and it is now at a discount of 3%.

To read the full report: CAIRN INDIA