Oil and gas stocks have been the flavour of the season in this rally, but the stock of hydrocarbon explorer Cairn India has been sluggish. Even its uptrend in April was reversed after the company, during its results announcement, projected flat production at the mainstay Rajasthan asset in 2014-15.
Despite some gains after the election results, the Cairn stock is up just around 9 per cent since September, much lower than its peers. At ₹348, it has gained 18 per cent since our last buy call in August last year. But the stock still trades cheap at about five times its trailing twelve-month earnings, far lower than what public sector explorers ONGC and Oil India quote at (10-14 times). Investors with a long-term perspective can consider buying the Cairn stock.
Growth to reviveWhile output growth in Rajasthan may be subdued in the coming year, it should again pick up thereafter. Cairn India plans to invest $3 billion (about ₹18,000 crore) over the next three years, 80 per cent of it in the Rajasthan block where production is expected to increase from 2,00,000 barrels of oil equivalent per day (boepd) currently to 3,00,000 boepd over the next few years. In the past, the company has been able to meet its production targets, the latest instance being the 2,00,000 boepd production rate in Rajasthan in March 2014, up from 1,75,000 boepd a year ago.
This lends confidence to its projection and execution abilities. While strengthening of the rupee in recent months is negative for the company, it is offset by crude oil prices ruling at high levels. Improvement in global economic conditions should keep crude oil prices elevated.
Recent reports suggest that Cairn India may be granted only a five-year extension until 2025 for the Rajasthan block, and not the 10-year extension until 2030 it has been asking for. This could impact returns and consequently the company’s investment plans. That said, there seems to be a good case for giving the longer extension to Cairn India. Gas-producing fields are given 10-year extensions. While currently the Rajasthan asset primarily produces crude oil, gas output has also commenced with the Raageshwari gas field starting production from March 2013. The company expects gas output to also improve significantly in the coming years. In this context, the expected doubling of gas prices from $4.2 per mbtu currently will provide a boost.
With the new government stressing indigenous energy production, there is a good possibility that Cairn India’s request for a longer extension will be considered favourably.
In the smaller assets, output has been falling at Ravva due to natural decline, but the company managed to grow production at Cambay by almost 44 per cent last year through new well drilling. Together, the output at Cairn India’s assets in the recent March quarter grew 11 per cent over the year-ago period to more than 2,24,000 boepd; the company’s share at about 1,43,000 boepd was up 13 per cent. This aided the 18 per cent year-on-year jump in net profit to ₹3,035 crore.
Cairn India’s other exploration assets include those in the Krishna-Godavari offshore, Sri Lanka and South Africa. Success in these assets, though uncertain, could provide a fillip to output.
The company is debt-free and has formidable cash reserves (about ₹23,000 crore). Part of the money is being used towards the ongoing share buyback programme.
However, with erstwhile parent Cairn Energy being slapped with a tax demand and its residual holding in Cairn India placed under restrictions, participation in the buyback programme is likely to be low. A successful buyback programme would have increased the earnings per share for the remaining shareholders.
Concerns about optimal use of the huge fund chest have also been a drag on the stock. But the big-ticket investment plans lined up and a generous dividend policy should alleviate these concerns to a good extent. The current dividend yield of the stock is a healthy 3.6 per cent.