Cairn may ramp up volumes faster as Vedanta deal nears

Cairn India, the oil explorer, may see a faster ramp-up at its Rajasthan oil fields as the deal with Vedanta Resources nears completion.

Analysts said the Cairn’s operational performance was subdued for several months due to uncertainty over government approval to the deal under which Vedanta has agreed to buy Cairn India operations for around $9.6 billion.

Cairn holds three blocks in Rajasthan’s Barmer region, out of which Mangla field, the only operational field, currently produce close to 125,000 barrels per day (bpd). The other two fields - Bhagyam and Aishwarya are expected to start very soon.

“We forecast the growth of Cairn’s production volumes by 2X between FY11 and FY14 and estimate Rajasthan gross oil volumes to reach 175,000 bpd by March 2012 and peak of 215,000 bpd by December 2012 from the current 125,000 bpd - one of the best growth profiles among the emerging market ‘oily’ stocks,” said Nilesh Banerjee and team from brokerage Goldman Sachs in a report published on September 20.

While analysts are bullish, they say that two key points to watch out for will be the effect of the royalty burden on Cairn and the oil prices.

“For a crude price of $100 per barrel, the burden of royalty on the company could be up to $15-$17, which could impact its earnings,” said Jigar Shah, head of research of international brokerage Kimeng Securities.

Besides, a drop in crude prices, which the world is currently witnessing, will also be a negative for Cairn. So far, due to the global turmoil, benchmark Brent crude prices have come down 10.74% from a peak of $126.74 per barrel to the current price of $113.13 per barrel.

“The worst is over for Cairn as far is valuation is concerned and there is already clarity on the royalty burden and that has already been factored in,” said a senior analyst with a leading domestic brokerage.

He said due to the deal overhang, the company’s projects have been hanging fire for a long time and production ramp-up was slow. Besides, of late, the company had not given any guidance on volumes beyond the earlier levels. Therefore, the next trigger for the company will be any revision in reserve accretion. Jigar from Kimeng said the peak production from the Barmer fields may go up to 300,000 bpd from the current estimates of 275,000 bpd. “If this happens, it will be the much needed relief for the stock,” he said.