The Cairn India Ltd stock has fallen by 5% since it announced its March quarter results. The obvious reason for the beating is because global crude oil prices have fallen and the company is the only direct play on crude prices in India.
State-run upstream oil company, Oil and Natural Gas Corp. Ltd (ONGC), on the other hand, is surrounded by subsidy concerns. But the good thing for Cairn India is the rupee has been weak against the dollar and “for every Rs 2 per dollar weaker rupee, Cairn’s fair value increases by Rs 10 a share and FY13 earnings per share by Rs 2.7,” says a note from Jefferies India Pvt Ltd.
The company is in the process of ramping up production at its key asset in Rajasthan. In April, Cairn India received government approval for increasing offtake at its Mangala oilfield in Rajasthan to 150 kbpd (kilo barrels per day) from 125 kbpd. According to the firm’s March results press statement, crude oil production from Bhagyam in Rajasthan is at about 25 kbpd and is expected to gradually ramp up to its currently approved plateau rate of 40 kbpd.
Cairn India’s average output from its Rajasthan block in April and May stood at 159kbpd and 171 kbpd, respectively, according to people famaliar with the matter. In the March quarter, average production at its Rajasthan block stood at 137 kbpd. The company has increased its potential production guidance from Rajasthan by 25% to 300 kbpd. While that augurs well, investors would do well to keep tabs on the production ramp-up progress and pipeline capacity increase.
At Rs 329, the Cairn India stock trades at 6.3 times its estimated earnings for this fiscal year, while ONGC stock trades at 8.6 times. That makes Cairn India valuations look relatively attractive. Plus, at the end of FY12, the company had zero debt on its books and cash and bank balances to the tune of Rs 7,013 crore.
Nevertheless, analysts are not enthusiastic. For example, while Jefferies expects Cairn India to generate $1 billion free cash flow annually over the next few years it maintains that cash utilization will be a challenge.
“Except for an extremely bullish view of long-term crude above $120 per barrel, we see limited scope for upside from here; for those bearish on crude, it may be time to sell,” wrote Arya Sen of Jefferies in a note last month when the stock was trading at Rs 315 per share.