CAIRN INDIA: Rajasthan Work, Re Slide to Benefit Co

Cairn India has emerged as a value creator for investors after the quarter to June results season, in sharp contrast to other petroleum companies whose stocks dropped as much as 11% after they reported their earnings. But for Cairn India, the outlook appears positive. The company’s profit for the Apr-June 2013 quarter was down 18% y-o-y, but the stand-out feature was higher production at akey Rajasthan block during this quarter. The Cairn India stock had lost almost 12% in May and June 2013 after it became clear that production in Rajasthan stagnated during the second half of FY13 raising doubts whether it would drop before rebounding later. Yet, during the Apr-June ’13 quarter, the company was able to marginally raise output in Rajasthan to almost 173,000 barrels per day (bpd) — close to 3% higher than the year-ago period — and scale it up further to 180,000 bpd by the time of the June earnings announcement. The stock has gained 4.3% since reporting earnings for the quarter to June. The company was also able to substantially improve output from its small CB/OS-2 field in Cambay Basin, which had fallen over 18% y-o-y during FY13. The field’s oil production jumped 81% y-o-y to 8,554 barrels per day during the quarter. Similarly, the Apr-Jun ’13 quarter was the first full quarter of natural gas sales of an average rate of 4 million cubic feet daily. Industry analysts are hopeful of more exploration activity in Rajasthan. “Cairn has drilled only 3 exploration and appraisal wells in Rajasthan so far and did not report much news on exploration results. However, it plans to drill 34 E&A wells and targets half of the 530 mmboe risked prospective resources in the year. It has awarded contracts for three more exploration rigs, which are all expected to arrive by the end of the calendar year,” says a report from Jefferies. A weak rupee and the rise in international oil prices are positives for the oil producer. “Cairn’s earnings outlook in the rest of FY14E is much better due to weakening of the rupee and rebound in oil price in the last few weeks. ….We see significant rise in reserves in its main Rajasthan asset as the main share price driver,” a recent Merrill Lynch report said. That should be comforting for long-term investors in Cairn India.