| Cairn India More clarity emerges on Rajasthan Operational update hints at higher production levels Cairn reported its 4QCY08 results along with a positive operational update on the Rajasthan block. Cairn has set up 4 processing trains, which will carry crude from Rajasthan, with total capacity of 205,000bpd. The current peak production guidance is 175,000bpd and excess capacity provisioning hints at a possibility of higher production levels. Cairn is also waiting for a DGH approval for upgrading production level of Aishwarya field to 20,000bpd from 10,000/bpd. We note that in the past when Cairn has made such announcements, it has been able to get the approval. For its Mangala field, Cairn expects to achieve peak production of 125,000bpd by 1HCY10, ahead of our expectation of 1HCY11. Overall, peak production from Rajasthan is expected to be achieved by 2011, ahead of expectations of 2013. Cairn also hinted that capex for CY08-09 might be lower as it has optimized its capex spend. Cairn addressed the crude off-take concern by mentioning that even if the Indian government does not buy crude from Cairn, Cairn has an export clause in its PSC which will allow international sale of its crude. Our take: First oil is on track for 2HCY09 and cash flows will be more front ended than previously expected. The pipeline will be able to process the crude by 4QCY09 and will be completed by early 3QCY09. The setting up of processing trains implies that there is strong clarity about the production from the respective fields and the incremental capacity is a positive indication. Cairn is seeing a 10-15% decline in costs due to declining commodity prices, mainly steel. We see possible upside of ~5% to our TP, if we were to reassign the overall production as per the management guidance including assigning higher production to the Aishwarya. Maintain BUY – One of the cheapest E&P players We maintain our BUY rating and our SoTP-based TP of INR223/sh. Our DCF-based value for Cairn's Rajasthan block is the biggest contributor to our TP with 88% (INR196/sh). We value the Cambay and Ravva fields at INR12/sh and Cairn has net cash of INR15/sh. We also emphasize that Cairn India is one of the cheapest E&P companies in Asia and with a reserve portfolio which is going north. |
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