CAIRN INDIA: Going’s Good, but Stock Hit by Poor Valuation

Cairn India’s production for the March 2011 quarter dipped 7.5% on a sequential basis. Still the company was able to improve profits by 22%, thanks to higher crude oil prices. It seems well on track to ramp up its production from Rajasthan block to 175,000 barrels per day, from 125,000 barrels currently, by the second half of 2012. However, market valuation of the company suffers from the stingy valuations its owners are assigning it.
Low production levels of yearago period make y-o-y comparison irrelevant. Thanks to partial commencement of its pipeline during the year, Cairn’s average daily gross production for March 2011 quarter was 161,194 barrels, against 174,282 barrels for the December 2010 quarter and just 17,532 barrels a year ago. The net profit of . 2,457.8 crore during the March 2011 quarter was its highest ever quarterly profit.
The company is currently producing from Mangala field, while the Bhagyam and Aishwarya fields are under development. 40,000 barrels per day production from Bhagyam is expected to start in the second half of 2011, while the Aishwarya is scheduled to commence operations from mid-2012 onwards. Its enhanced oil recovery programme that started in early 2010, which is supposed to be the source of one third of its total recoverable reserves, started water injection during the December 2010 quarter.
The company has substantial funds as well as cash flows at its disposal to see through all its investment plans. It ended FY11 with a consolidated cash balance of . 4,485 crore, while the cash generated during the year stood at . 6,712 crore. This has enabled the company to reduce its debt burden.
In spite of timely execution and spurt in oil prices, the company’s share price has been stagnating. The key reason was the unattractive level at which its large shareholders are valuing it.
Cairn Energy decided to sell its controlling stake at . 405 per share, which ONGC found expensive. Malaysia’s Petronas also chose to offload its 14.9% at . 329. If these experienced petroleum companies are not willing to give any higher valuation to Cairn’s shares, it will be difficult for retail shareholders to value them any higher.