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Cairn India: Analyst meet extracts… - Views on News from Equitymaster

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Cairn India: Analyst meet extracts…
Mar 28, 2007

Cairn India held an analyst meet yesterday to discuss the company’s development plans in Rajasthan and future growth strategies going forward. What is the company’s business?

Cairn India Limited (CIL) is one of the largest private sector E&P companies in India with proved and probable reserves (2P) of 472 million barrel of oil and oil equivalent (mmboe). Cairn Energy PLC, an LSE listed crude oil and natural gas Exploration and Production company is the promoter of CIL. CIL has a large resource base with 2P reserves of 472 mmboe and gross contingent reserves of 413 mmboe. Company has 15 blocks in India including 2 recently awarded under NELP VI bocks. It currently has two producing properties.

Key Extracts...

On Rajasthan field development plans: Cairn India has drilled 140 wells in the Rajasthan block, which has led to 20 discoveries. Production of oil at the Rajasthan fields is scheduled to begin from 2009. Field development plan (FDPs) for the 4 fields – Mangala, Aishwariya, Raageshwari and Saraswati has started. However, the FDP for Bhagyam and Shakti is pending. Civil work is currently being undertaken ahead of the main construction. Drilling schedule for Mangala is set to commence from 2008. Total amount spent for the development till 2006 is US$ 680 m. Cairn India has estimated the Plateau Operating expenditure at less than US$ 4 per barrel. This is commendable as the oil in Rajasthan field has high viscosity, which tends to have higher production cost. Thus, the work is progressing on schedule on the upstream segment in the Rajasthan blocks (with potential of minimum 3.6 bn barrel of oil equivalent).

Company will also be using technology support in the form of EOR (enhanced oil recovery) for sustained plateau production in the Rajasthan fields. Company plans to use methods such as 2P water flooding and polymer flooding to increase the recovery rate to as high as 45%. The recovery targets planned by the company are better than its peer ONGC, which has a recovery rate of 28%. However, the cost of production is likely to increase to around US$ 10 per barrel due to usage of such technologies.

On midstream status: On the midstream side (pipeline), the progress has been made with alignment with ONGC on pipeline evacuation. However, necessary government approval for the pipeline is still pending. Cairn expects pipeline capex to be around US$ 1 m per kilometer. This excludes the cost of heating stations and storage facilities. Higher viscosity of oil calls for heating stations at specific intervals so that the uninterrupted flow of oil through the pipeline is ensured. The company expects solution to the midstream issue to be in place by first half of 2007.

On the current producing fields: The company currently has two producing properties viz. Ravva fields (in Andhra Pradesh) (Cairn is the operator with a stake of 22.5%) and CB/OS-2 (Cambay basin) (Cairn India is the operator with a stake of 40%). These fields had operated gross field production of 82,772 barrels of oil and oil equivalent (BOEPD). Cairns India has working interest of 22,329 BOEPD in these blocks, whereas the net entitlement to the company stands at 14,592 BOEPD. Cutting edge technology (reflected by the recovery rate of as high as 60%) has increased the production in the Ravva fields post acquisition of stake by the company. This is likely to be sustained on the back of deepwater exploration in the future and technological support. In the Cambay basin, the company has planned four well drilling programme in 2007 to access untapped gas and appraise further crude potential. Currently, field development plan is undertaken in one of the fields in the blocks.

What to expect?

With Rajasthan fields expected to come on stream in 2009, company’s production is expected to rise from 22,330 BOEPD (current) to around 115,000 BOEPD (in 2010). Also, the production mix is set to change significantly in the favour of crude oil (to 93% from 56% currently), which is going to increase revenues at a faster pace. Superior technological excellence and execution capabilities are a big positive for the company. Company has shown superior operating performance in current operating fields by not only increasing the recovery factor but by also being a cost efficient player.

Against the offer price of Rs 160, the stock current trades at a price of Rs 124 (decline of 23%) translating into an EV/Reserve of US$ 10.3 per barrel. Uncertainties relating to midstream project, which can have an effect on the production status of the Rajasthan fields is likely to be resolved in the first half of the current year. This is likely to be a positive for the company.

However, we expect realization from the Rajasthan blocks (with PSU OMCs demanding an discount), inferior quality of the crude oil and long gestation period (first oil from Rajasthan in 2009) to weigh heavily on the company’s performance at least in the medium term. Add to this the risk of decline in crude oil prices. Taking into account these factors, we believe that the risk-reward ratio seems to be heavily skewed in favour of the former.

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