Cairn India: the odd man out
The company's price realizations typically follow the trend in the crude price movement
Cairn India Ltd announced three new oil discoveries in its Rajasthan block on Wednesday. Of course, new discoveries are positive but the exact benefits of the development will be known at a later stage. The Cairn India stock went up by 1.4% on Wednesday on a day when the benchmark Sensex inched up 0.52%.
It’s quite possible that investors were pleased with the interim dividend of ₹ 5 per share announcement, which was pretty much on expected lines, given the concerns on cash utilization for this company. Investors would do well to recall the Street was extremely disappointed when the company told analysts in the June quarter earnings call about lending $1.25 billion to a subsidiary of Sesa Sterlite Ltd.
But other than that, there is another worry for Cairn India. At a time when lower crude oil prices have offered a solid reason for Indian oil stocks to be in fashion, Cairn India is the odd man out. The company’s price realizations typically follow the trend in the crude price movement. That means lower crude prices is equal to lower price realizations for Cairn India and vice versa.
Analysts maintain that the company could very well report a sequential decline in its realizations in the September quarter. The company’s realizations are at a discount to Brent crude. Cairn India’s average price realization for the June quarter stood at $97 per barrel of oil equivalent. That’s an important factor for investors to keep a tab on in the days to come. A weak outlook for crude oil prices hardly offers much comfort.
And then, there are concerns on production ramp-up. “After March-14 exit of 200,000 barrels per day (bpd), Rajasthan (block) production is down to ~183000 bpd and hence long-term guidance 7-10% CAGR now looks challenging," pointed out Motilal Oswal Securities Ltd in its June quarter results review.
Not surprisingly, Cairn India’s shareholders are unhappy. So far this fiscal year, while the S&P BSE Oil and Gas index has increased by 16%, the Cairn India stock has declined 2.5%.
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