The Hindu Business Line : Cairn India pvt placement to cover rising costs

In a stock exchange filing back in January, Cairn India spoke about “increasing cost challenges” in its project due to the general demand for engineering resources and materials. Those cost challenges appear to be behind the private placement of shares to Petronas and Orient Global Tamarind Fund Pte Ltd to raise Rs 2,534 crore, announced today.

Globally, the cost of engineering equipment, oil rigs, steel pipes and even technically qualified personnel has been on the rise in recent times. The money raised now will give the company the flexibility to invest in the project while simultaneously scouting for other opportunities in exploration and production.

Cairn’s project to produce oil from the Barmer fields is under execution and it recently secured statutory approval to lay a pipeline to the Gujarat coast for transporting its crude oil. The pipeline cost of about Rs 2,500 crore was not included in the original project cost and may have to be shared between Cairn and ONGC in a 70:30 ratio now. The Government has yet to decide on whether the company can recover the pipeline cost from its customers.

Meanwhile, the market today gave an initial thumbs down to the private placement. The Cairn India stock, on a rising tide in the last few days following the uptrend in global oil prices, was marked down by over 6 per cent to Rs 214 during the day.

Though the Sensex suffered a fall of similar proportions today, there is no mistaking the unfavourable reaction to the private placement that will result in a 6 per cent equity dilution. The stock should recover quickly considering that Cairn will benefit significantly from the rising oil price regime when its oil starts flowing by the second-half of 2009.

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