Cairn India Limited - Expediting exploration though higher capex and lower oil prices limit upside - Antique

Result highlights

Cairn India Ltd (CIL) reported a 4QFY13 net profit of INR25.6bn, 3% lower than our estimate due to higher unsuccessful & exploration expenses from INR2650m write-off in Sri Lanka and INR650m of 3D seismic activities in South Africa. Average crude realization for the quarter was up 5% QoQ to USD100.6/bbl while RJ realization stood at USD98.3/bbl implying a 12.9% discount to Brent which is inline QoQ. Other producing assets (Ravva and CB/OS-2) witnessed fall in production due to natural decline. Gross Rajasthan block (RJ) output during the quarter averaged at 169.4Mbbls/d while CIL's total WI production was at 127Mbbls/d up 18% YoY and down 1% QoQ.

Maintains production guidance of 200-215Mbbl/d for FY14e end

Shelving recent market concerns on expected natural decline in Mangla output and lower Bhagyam output, CIL has maintained to reach gross RJ production of 200-215Mbbls/d by FY14e end. and is confident of a plateau production of 150Mbbls/d in Mangala through FY14 with drilling of 48 infill wells for which OC approval is already in place while MC approval is awaited. With drilling of 31 news production wells at EoR locations already approved by MC, Bhagyam output is expected to reach 40Mbbls/d (approved rate) during 2HFY14. Aishwarya is expected to reach 10Mbbls/d by mid of FY14 end supporting 200Mbbls/d of RJ output. Production is expected to reach 200-215Mbbls/d by FY14 end with additional output either from Aishwarya ramp-up to 25Mbbls/d or output from Barmer discoveries under appraisal. We maintain our estimate of FY14e Rajasthan output at average of 183Mbbls/d.

Increase in Rajasthan capital expenditure to expedite exploration drilling

MoP&NG has allowed further exploration in blocks under production/development on condition that cost-recovery shall be permitted only after commercial viability. CIL has submitted an ambitious exploration program which entails gross RJ capex of USD3.1bn over next three years. Plan include 100 exploration wells and more than 350 development wells with capex of USD750m on RJ exploration (CIL to bear full capex on risk basis, recoverable on commerciality), USD1.7bn gross on RJ production sustenance (MBA + EoR + Infill drilling) and USD650m on RJ Additional Production (BH + Satellite fields). Gross RJ capex of USD3.1bn is 30% higher than our earlier estimates, which we believe limit upsides in near term.

Access to 5.1bn potential resources

CIL to explore future development & prospective resources at 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 300Mbbls/d from current 175Mbbls/d. We ascribe a value of USD6/boe for potential of 400MMbbls net to CIL at 17% recovery factor.

Maintain BUY with revised target price of INR351/sh

We lower our FY14e EPS by 13% due to reduction in our oil price assumption to USD105/bbl and partial write-off of RJ exploration expense in the first 2 years. We maintain our BUY on CIL with a revised target price of INR351/sh, which leaves a potential upside of 20%.

Source : Equity Bulls

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