Cairn India posted a 11% fall in its March ’12 quarter profits in spite of higher oil prices and higher production. While the . 217-crore forex loss is being blamed, the real culprit of profit stagnancy is the increased burden of government payments in the form of profit petroleum, royalty, cess and the income tax. The company’s contribution to the national exchequer stood at $2.4 billion, higher than its net profit for the whole year at $1.6 billion.
The March ’12 quarter saw Brent crude prices average 12% higher at $118.5 a barrel compared with a year earlier. Cairn’s share of production for the quarter also was up 11.3% to 107,292 barrels of oil equivalent per day (Boepd). In spite of both these key positive factors, the company ended up reporting a fall in net profit. The jump in its forex losses to . 217 crore from . 38 crore a year ago was responsible for the profit fall, no doubt. However, a bigger chunk of Cairn’s earnings are being consumed by government payments.
Thanks to the government’s pre-condition for Vedanta Group’s acquisition of Cairn about paying the proportionate royalty, Cairn India’s royalty burden has gone up. During the FY12 quarter, it paid . 3,688 crore as royalty against none last year. Cairn India also paid . 1,566 crore to the government in the form of profit petroleum or the government’s share in the producing petroleum blocks for FY12. This was its first year of profit petroleum.
Its cess payments to the government also shot up 34.7% to . 1,285 crore for the whole FY12. Cairn is also going to get affected adversely from the 80% increase in cess burden to . 4,500 per tonne or approx $12.3 per barrel in the recent Union Budget. The company’s cess payments for the March ’12 quarter were 46% at . 398.2 crore. Cairn India also provided for taxes at a higher rate in the March ’12 quarter compared to a year ago, because of deferred tax due to addition of the increased reserves. For the March ’12 quarter, Cairn’s effective rate of tax — calculated by dividing total tax provisions by pre-tax profit — jumped to 7.4% in the March ’12 quarter against 3.8% of March ’11 quarter.
The results were accompanied by quite a few important announcements that can benefit investors in the long run. The company has formalised its dividend policy committing to distribute 20% of its profits every year. Whether this becomes applicable from FY12 will depend on the completion of amalgamation process for its subsidiaries. At the current level of consolidated profits, the company can generate around 2.4% of dividend yield — may not be attractive right now, but which will become attractive in another 3-4 years’ time.
Increases in reserves estimates and the estimate of peak production are also a key positive. It has mentioned its recoverable reserves from the Rajasthan block are now estimated at 1.7 billion barrels, up 20% from 1.4 billion barrels estimated a year ago.
This can support a peak production rate of 300,000 barrels per day (bpd) compared to the earlier estimate of 240,000 bpd. Similarly, the discoveries in the Sri Lanka and KG onshore blocks are significant positive developments. If and when these get the necessary approvals, this will mean higher profits.
The March ’12 quarter saw Brent crude prices average 12% higher at $118.5 a barrel compared with a year earlier. Cairn’s share of production for the quarter also was up 11.3% to 107,292 barrels of oil equivalent per day (Boepd). In spite of both these key positive factors, the company ended up reporting a fall in net profit. The jump in its forex losses to . 217 crore from . 38 crore a year ago was responsible for the profit fall, no doubt. However, a bigger chunk of Cairn’s earnings are being consumed by government payments.
Thanks to the government’s pre-condition for Vedanta Group’s acquisition of Cairn about paying the proportionate royalty, Cairn India’s royalty burden has gone up. During the FY12 quarter, it paid . 3,688 crore as royalty against none last year. Cairn India also paid . 1,566 crore to the government in the form of profit petroleum or the government’s share in the producing petroleum blocks for FY12. This was its first year of profit petroleum.
Its cess payments to the government also shot up 34.7% to . 1,285 crore for the whole FY12. Cairn is also going to get affected adversely from the 80% increase in cess burden to . 4,500 per tonne or approx $12.3 per barrel in the recent Union Budget. The company’s cess payments for the March ’12 quarter were 46% at . 398.2 crore. Cairn India also provided for taxes at a higher rate in the March ’12 quarter compared to a year ago, because of deferred tax due to addition of the increased reserves. For the March ’12 quarter, Cairn’s effective rate of tax — calculated by dividing total tax provisions by pre-tax profit — jumped to 7.4% in the March ’12 quarter against 3.8% of March ’11 quarter.
The results were accompanied by quite a few important announcements that can benefit investors in the long run. The company has formalised its dividend policy committing to distribute 20% of its profits every year. Whether this becomes applicable from FY12 will depend on the completion of amalgamation process for its subsidiaries. At the current level of consolidated profits, the company can generate around 2.4% of dividend yield — may not be attractive right now, but which will become attractive in another 3-4 years’ time.
Increases in reserves estimates and the estimate of peak production are also a key positive. It has mentioned its recoverable reserves from the Rajasthan block are now estimated at 1.7 billion barrels, up 20% from 1.4 billion barrels estimated a year ago.
This can support a peak production rate of 300,000 barrels per day (bpd) compared to the earlier estimate of 240,000 bpd. Similarly, the discoveries in the Sri Lanka and KG onshore blocks are significant positive developments. If and when these get the necessary approvals, this will mean higher profits.
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