Oil and gas company Cairn India Ltd’s shares have risen by 5.8% in the past two trading sessions, after the firm announced an increase in reserves at its Rajasthan
field. The potential resource for the Rajasthan block has been revised to 6.5 billion barrels of oil equivalent (boe). Earlier, the discovered resource base stood at 3.7 billion boe, which has been revised to 4 billion boe, apart from which there is a prospective resource base of 2.5 billion boe. The prospective resource is based on seismic and well data analysis, a large part of which has been validated independently.
The company’s total recoverable reserves stand revised at 1.4 billion boe, versus the earlier estimate of 1.1 billion boe. The shares haven’t risen as much as the increase in the estimate of recoverable reserves simply because analysts’ models were already factoring in higher reserves. Citigroup, for instance, has had a recoverable reserves estimate of 1.5 billion boe.
Prior to the rise in past two trading sessions, Cairn’s shares have been subdued after its quarterly result announcement in January. Despite a 10% rise in the price of crude oil since end-January, Cairn’s shares rose by only around 4%, underperforming even the Nifty index on the National Stock Exchange. This was because of the markets’ disappointment at a delay in the increase of production at its Rajasthan oilfields.
Analysts had factored in an increase in production to 125,000 barrels a day by the end of the first half of this year. But infrastructure, especially at the buyers’ end, still needs to fall in place, and those levels of production will be achieved only in the second half of this year.
Graphic: Yogesh Kumar / Mint
According to an analyst, a delay of a quarter or two in production ramp-up isn’t a serious concern and doesn’t affect the valuations of the company materially based on discounted cash flow. What’s more important, according to him, is that the reserves estimate has increased and this will ultimately lead to higher cash flows.
Besides, the company has said that there is a production potential of 150,000 barrels a day at the Rajasthan oilfields, higher than the previous estimate of 125,000 barrels. Of course, it would need government approvals and also capacity upgrade of one of its processing trains to achieve the higher production levels.
According to a recent Royal Bank of Scotland report, these shouldn’t be an issue: “We believe that the government will not object to the prospect of higher oil production, and regulatory red tape will not hamper a rise in production. Hence, we expect the government to approve a rise in Mangala production by 2QFY11 (the second quarter of the next fiscal), which would allow it to reach 150 kbd (150,000 barrels a day) by 4QFY11 (the fourth quarter of the fiscal). Debottlenecking of train capacity could be done within a quarter, in our view.”
If production levels rise, as indicated above, cash flows would accrue earlier than anticipated, which is another positive for the stock.