Cairn India Ltd delivered strong financial results for the quarter ended December, though the stock continues to be in the shadow of uncertainty over the Vedanta Resources Plc deal. The company’s revenue increased by 15% to about Rs3,100 crore compared with the September quarter and net profit increased by 27% to Rs2,010 crore.
For the calendar year, Cairn India has maintained its earlier production guidance of 175,000 barrels per day (bpd) of oil. The company maintains that the Mangla reservoir performance and surface facilities are ready to support production of 150,000 bpd, but it is awaiting necessary approvals. It has also said that crude oil production from the Bhagyam field is expected to commence in the second half of this calendar year and achieve the approved plateau rate of 40,000 bpd by the end of the year.
Given that, if approvals for the incremental Mangla production are in place, then the company may well surpass its production guidance for the year, assuming it is able to produce what it intends to from both the fields.
Since the Vedanta deal was announced, the stock has underperformed, but the underperformance has been marginal compared with the Sensex. The bigger disappointment is that the stock could not rally in the recent past, when crude oil prices have been rising, due to the overhang of the deal. Cairn India is the stock most leveraged to crude oil prices (Oil and Natural Gas Corp. Ltd has subsidy issues). Cairn’s current stock price discounts long-term crude oil price of about $80 (Rs3,632) per barrel.
This column wrote in December that while the absence of non-compete fee to minority shareholders appears unfair, investors would still gain at the open offer price of Rs355 per share (which discounts long-term crude oil price of about $90 per barrel) if the deal goes through. On the other hand, if the deal does not go through and crude oil prices remain strong, then the appreciation in the stock could be more than the offer price. With the outlook for crude oil looking good and the company’s strong operations, investors would do well to be patient.
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