Reserves boost for Cairn India

Cairn India has increased estimates of its Rajasthan resource base and Mangala field’s production potential, as per an update submitted by the company to the exchanges.

Gross discovered resource base estimate for Rajasthan block has been increased to 4 billion barrels of oil equivalent (boe) from 3.7 billion boe earlier.

Additionally, gross risked exploration resource estimate has been pegged at about 2.5 billion boe, taking the recoverable resources to 250 million boe from 35 million boe earlier.

With this, Rajasthan’s total 2P (proved and probable) and contingent base stands at around 1.4 billion boe, up from 1 billion boe earlier.

Cairn India’s total production vision has increased to 240 kilo barrels per day (kbpd) from 175 kbpd at lower incremental capex.
Analysts maintain that its fifth train is unlikely. Also, train one capacity is expected to be ramped up to 50 kbpd.

According to the management, production can be increased to 2,10,000 barrels of oil per day (bopd) from the MBA fields, currently under development. Earlier production estimate was at 1,75,000 bopd.

Rahul Singh, Saurabh Handa and Garima Misra of Citigroup Global Markets feel the announcement validates their assumption of appraisal/ exploration upside at Rs 35 per share (about 12% of net asset value), which we had factored in to reflect the early signs of improved reservoir quality.

“In addition, we assume 3-9% higher enhanced oil recovery from MBA, resulting in a Rs 17 per share contribution to NAV. Cairn is our top sector pick with a target of Rs 323,” the Citigroup analysts wrote in a note to clients on March 23.

At Rs 292.80, the stock trades at 10.8 times its estimated earnings for 2011. Analysts like the stock in the space and maintain that it is the most levered play on crude. Increase in crude price by $1 per barrel is likely to increase Cairn’s earnings per share by about Rs 0.6 per share. Going forward, any possible M&A activity also augurs well. Investors could consider the stock on declines.