CAIRN INDIA: Lower Realisations, Worries Over Output Growth to Weigh

Exploration firm Cairn India’s earnings in the quarter to September failed to impress investors despite a 46% growth in net profit. That is because the company reported an unexpected drop in realisations, while output growth was muted. Cairn India’s ability to achieve production growth will hinge on timely regulatory approvals. Cairn’s production from its Rajasthan fields averages 174,245 barrels of oil (bopd) daily, which is just 1% above the April-June ’13 quarter. However, this is much lower than the 180,000 bopd rate the company reported in July, when it announced its Q1 FY14 results. This has stoked concerns relating to further production growth, inspite of the company maintaining its year-end production guidance of above 200,000 bopd. A note from India Infoline said that despite Cairn India bringing 26 new wells into production, volumes in Rajasthan were stagnant QoQ. The wells — Mangala and Aishwarya — produced 152 thousand barrels per day (kbpd), indicating a decline in Mangala at around 145 kbpd, while Bhagyam produced 23.5 kbpd, short of the approved 40 kbpd plateau, the note said. Apart from concerns about the natural decline at the biggest field – Mangala, there are worries about the second largest field Bhagyam as well. A report from Nomura points out that over the last one year, Cairn drilled 13 additional wells in the Bhagyam field, but without any increase in production volumes. The report says that while 79 of FDP-approved 81 wells are drilled, production is well below FDP-approved rate of 40 kbpd. The Field Development Plan, or FDP, is the government-approved plan of action with specified deliverables and costs. Another negative was the lower realisations for Cairn’s crude oil. The Rajasthan realisation stood at $96 per barrel, implying a discount to Brent at around 13% as against 8.3% in the April-June period and 11% in FY13, due to a weakness in fuel oil prices. The company’s progress in ramping up production will depend on timely approvals from its JV partner ONGC as well as the government. It has received approvals for drilling 48 infill wells in Mangala and 18 in the Bhagyam field, while it awaits approval to launch an Enhanced Oil Recovery programme in Mangala and FDP to develop Barmer Hill reservoir. Cairn also continues to explore in the Rajasthan block for incremental resources. Investors will keenly watch progress on these fronts to raise production.