Cairn India: Going gets better

Cairn India recently signed an agreement to supply crude oil to the Jamnagar refinery of Reliance Industries within days of receiving government approval for selling its crude to private refiners. The pricing terms, however, remain the same, implying a nearly $7.5-11 discount to the benchmark Brent crude price. The company recently arranged for a financing facility of $1.6 billion, half of which was used to repay earlier high-cost debt. Availability of additional financing is expected to boost the company’s ability to expedite its production schedule. Both these developments imply better flexibility for the company in marketing as well as operations. A number of extraordinary items dominated Cairn India’s September ‘09 consolidated numbers, as its net profit at Rs 470 crore stood at more than double its net sales. The company wrote back an earlier provision of Rs 164 crore towards an arbitration process, followed by a write-back of deferred tax provisions worth Rs 129 crore, plus another Rs 52 crore towards MAT (minimum alternative tax) entitlement and Rs 17.5 crore of FBT (fringe benefit tax). The company had no revenue during the quarter from sale of crude oil as it sold the maiden cargo of 210,000 barrels of Rajasthan crude oil to MRPL in the first week of October ‘09. The company is currently setting up a 600-km pipeline to transport oil to the Gujarat coast, only 5% of which is currently pending. Till the pipeline gets functional, it has to transport the crude oil by trucks, incurring nearly $7-10 per barrel of transport cost. The company is currently producing 11,500 barrels of oil per day and is on its way to ramp it up to 125,000 bpd by June ‘10 in three phases. Based on the current oil prices, this level of production could earn annual sales of over Rs 13,000 crore that can earn net profit of around Rs 3,400 crore. At the current market price of Rs 273 the company is being valued at nearly 15 times this number and looks fully valued. The movement in crude oil prices will continue to remain a key factor for Cairn’s performance.