Cairn India’s management remains confident that the Rajasthan block presents a large upside. The company has successfully increased the resources from its discovered blocks by the use of cost-effective technologies.
A Mangala in-place resource has increased 56% since discovery in 2004. The Aishwariya in-place resource has increased 37% and, subject to regulatory approvals, Cairn’s production could rise by 10,000bpd.
We recently visited the Rajasthan development site and saw the construction of a processing plant, drilling of the development well and the pipeline installations.
We were informed about the key challenges and returned optimistic that Cairn will meet the oil production deadline.
One of the key impediments to the scheduled start of production has also been overcome. The company has received the RoU from the Rajasthan government. The construction of the pipeline has begun.
It plans to drill five exploratory wells in the onshore blocks KG-ONN-2003/1 in 2009/10 and has identified geological structures similar to KG-D6 in this block.
The commissioning of the Mangala block will free bandwidth for management, which we believe will re-focus on exploration activities to repeat similar success in other blocks.
We have a 12-month price target of Rs202 based on a DCF methodology. We derive a DCF value of Rs202/share, or $14.1/boe. We have assigned a premium of Rs21/share for a strong track record in striking oil.