Cairn India Limited - Exploration approval to bring back production growth, upgrade to BUY - Antique

Exploration approval likely

MoP&NG has decided to allow further exploration in blocks under production/development on the condition that cost-recovery shall be permitted only after commercial viability of new finds is established, reported Economic Times. Ministry sources indicated that this is a policy decision and not an approval to one particular company.

Highly positive for CIL

Cairn India Ltd. (CIL) was lobbying with the government to allow exploration in existing Rajasthan development area to explore prospective resources which lies in Barmer Hill formation (2bnboe resource potential) and exploration potential of 3.1bnboe. We believe that exploration approval is crucial for achieving the CIL envisaged target of 300Mbbl/d from current 175Mbbl/d. CIL has already made 19 discoveries during the exploration period but never appraised which can be put to appraisal post approval; these discoveries include: Vijaya and Vandana, N-R-4, Kameshwari, and Guda-GRF.

Though we lower near-term output estimates, we upgrade production estimates from FY15e onwards

CIL has indicated that due to inadequate pressure, the company may have to drill additional wells in Bhagyam field to increase output from current 25Mbbl/d to 40Mbbl/d envisaged. We estimate FY14e Rajasthan output to average at 185Mbbl/d, lower from 195Mbbl/d earlier. Also, we upgrade FY15e onwards production targets by 10-15Mbbl/d on exploration approval.

Host of new projects in the pipeline

CIL has a host of projects lined up in other areas which include appraisal drilling in KG Onshore basin (Nagayalanka) in 1QFY14 and drilling of an exploratory well in Sri Lanka by mid CY13. CIL has also initiated tendering for acquisition of 3D seismic data in South Africa. An exploration well is planned in Ravva by 1HFY14 while infill drilling program is expected in CB/OS-2 in 2HFY13.

Valuation and outlook

Upgrade to BUY on additional resource potential

With total expected recoverable resource of 487mmbbls valued at USD6/boe vs. our earlier estimate of 243mmbbls at USD8/boe, we upgrade CIL to BUY with a revised target price of INR371/sh, which leaves a potential upside of 18%. For our target price we value the existing MBA incl. EoR using DCF which gives implied value of USD10/boe at USD105/bbl long-term Brent prices with USD1.5/bbl increase, a 12% discount and INR52/USD.

Source : Equity Bulls

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