In its bid to obtain government approval for the Vedanta deal, Cairn India had to accede to the government’s demands to bear royalty and cess burdens in proportion of its stake in the Rajasthan block. This also meant it had to refund ONGC the royalty it had paid on Cairn’s behalf since production was commissioned in August 2009. As a result, Cairn booked . 1,355 crore of extraordinary expenditure towards its share of royalty up to June 30, 2011.
Although the company received nearly 48% higher revenues from selling every barrel of crude oil in the September ’11 quarter compared to the year-ago period, its revenues stood 1% lower at . 2,652 crore. The key reason was the royalty burden, which amounted to nearly . 770 crore, which it did not have to bear last year. A sharp jump in other income meant that the pre-tax profit for the quarter was up 28%.
Within just two years of operating the Rajasthan fields, the company has reduced its debts substantially and is now a cash-rich company. As of end-September ’11, it held net cash of . 7,129 crore, or almost $1.5 billion. With strong operating cash flows, it is ready to meet all its capex requirements. The company faces a bright future ahead with a scalable reserve base in the Rajasthan fields and discoveries in other blocks. In the Rajasthan fields, it is scheduled to increase the output 40% to 175,000 bpd by March ’12. The production from the Rajasthan block could touch 240,000 bpd. However, these plans are dependent on receiving timely approvals from its joint venture partner ONGC and the government.
The Q2 results would appear dismal at first glance. However, it was known that it had to book the one-time loss on royalty burden. Its profitability will resume the new normal trajectory from the December quarter onwards. Its share price is expected to show a better link, with crude oil prices in the coming months.
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