Cairn Slides Despite Strong Fundamentals

The Cairn India scrip has been trading near its 52-week low for the past 2-3 weeks, reflecting the uncertainties surrounding global oil prices and concerns over the company’s ability to ramp up production.
The pessimism over the stock appears unjustified, as the company’s fundamentals are strong, with steadily increasing oil production. Analysts tracking the company have been the most bullish over the past three years. Cairn India’s scrip has lost nearly 15% over the past one year, although the company did well operationally. It reached its targeted production level above 170,000 barrels per day and posted the highest ever net profit in calendar year 2012, in addition to declaring a maiden dividend. However, the company had to revise its production target from 240,000 barrels per day to 210,000 barrels per day by FY14 end. “With the lower than expected productivity of Bhagyam, Cairn now believes that its existing MBA fields, EOR efforts and Barmer Hill discoveries will help it reach around 210kbpd by end of FY14. This is negative considering it is now short of reaching its earlier guidance of ‘significant part of 240kbpd’ in CY2013,” mentioned a recent Morgan Stanley report.
To its credit, the company is again focusing on exploration at the Rajasthan block to tap its full potential. The company spudded an exploratory well in the block recently. The company is cash rich, and its cash generation is likely to stay ahead of its capital expenditure. However, that raises the question how it will use the cash. The company had reported a net cash balance of over . 14,600 crore at the end of December 2012, or . 76 per share.
This could lead to higher dividend payouts, but there is a risk. “The next dividend announcement is expected in April. In the absence of a higher payout, investors are likely to value the cash at a discount to factor in cash allocation related risks,” noted the Morgan Stanley report.
The scrip’s current valuation at just 4.8 times its earnings for the past 12 months is significantly at a discount to those of its peers like ONGC and Oil India, which range between 9.5 and 11.5.
According to Bloomberg, the company is being tracked by over 60 analysts and threefourths of them are bullish on it. The average rating on a 5-point scale for the scrip has improved to a 3-year high of 4.3, while the average 1-year price target, at . 382, is 33% above the current market price.