New Delhi: Cairn India Ltd, controlled by billionaire Anil Agarwal, will start drilling its first new well in five years to raise output and help bolster the best profit margin for an oil company in Asia.
The company, which got the government’s approval last week to explore new oil pools in its biggest field in the western state of Rajasthan, is accelerating its plans to drill 30 wells in the year starting 1 April and a similar number in the following 12 months, chief executive officer P. Elango, said. Cairn India says the new deposits may increase its reserves by as much as 50% to 1.5 billion barrels.
“Our primary focus is to increase production and for that we have to undertake great exploration activities,” Elango said at his office in Gurgaon, near New Delhi. “In the future, through additional capacities we can add more production at small incremental costs.”
Cairn India needs new reserves to meet its target of raising production by 71% to 300,000 barrels a day as rivals including state-owned Oil and Natural Gas Corp. Ltd (ONGC), the nation’s biggest explorer, report a drop in output.
Cairn India’s Ebitda margin, or earnings before interest, tax, depreciation and amortization as a percentage of sales, was 76.18% in the quarter ended 31 December, according to data compiled by Bloomberg.
That’s the highest among Asia Pacific oil and gas companies with a market value of at least $5 billion and the most among the 50 companies in the Nifty index.
The measure was 44% for ONGC and 50% for Cnooc Ltd., China’s biggest offshore explorer, according to data compiled by Bloomberg.
“The exploration programme and the plan for enhanced oil recovery is going to help Cairn maintain oil production for a long time,” said Neelabh Sharma, a Mumbai-based analyst with BOB Capital Markets Ltd, a unit of state-run Bank of Baroda, who upgraded the company’s shares to buy from hold on 20 February. “The company’s earnings are directly linked to the price of Brent crude and as economies emerge from a slowdown, oil price will rise, helping Cairn.”
The explorer sells crude in India at rates linked to Brent oil prices, unlike state-owned ONGC, which is required to bear part of the country’s fuel subsidy.
Crude in London trading, a benchmark price for more than half of the world’s oil, has gained 2.7% this year, following a 3.5% increase last year. Average prices last year were a record $111.11 per barrel.
Cairn India reported 48% higher profit at Rs.3,340 crore ($612 million), or Rs.16.5 a share, in the third quarter ended 31 December after it increased production from the Rajasthan block. Cairn India has fallen 3.8% this year, compared with a 0.5% decline in the benchmark S&P BSE Sensex. The shares gained 0.03% to Rs.306.90 a piece on BSE on Friday.
The government approved Cairn India’s plan to raise production from the block in Barmer in Rajasthan state to 300,000 barrels a day, equivalent to about 40% of India’s current output. To reach that target, the company will need to find more oil in the area, Elango said. The block has proved reserves of 1 billion barrels.
Cairn India’s operating expenses in the Rajasthan block, including the cost of transporting crude to the coast for sale to refineries, is currently about $3 per barrel, Elango said. The company plans to start a project that will pump chemicals into producing oil wells to help flush out hard-to-extract crude from the reservoir in the year starting 1 April 2014. The operating cost to produce the additional crude will be in a range of $8 to $12 a barrel, he said.
“We’ll maintain this level of operating costs, which will incrementally go up when we deploy enhanced oil recovery methods to produce more oil,” Elango said. “We’re looking at how we can pull this deployment forward a bit. This project will help sustain the field’s production for a longer period.”
The explorer’s share of production from fields in India was 128,058 barrels of oil equivalent a day in the quarter, 29% higher than a year earlier and 1% lower than in the preceding quarter, the company said 21 January.
Net production from the Rajasthan field averaged 118,984 barrels of oil equivalent per day in the three months, compared with 87,585 barrels a day a year earlier and 120,261 barrels a day in the previous quarter.
“Our vision is to take the 175,000 barrels a day to 300,000 barrels,” Elango said. “It’s a long journey in which we have to drill several exploration wells. We’re very confident about the volume increasing.” Bloomberg