Management reaffirmed Rajasthan exit production guidance for FY14 at 200-215 kbpd (thousand barrel per day), which assumes Mangala sustaining at 150 kbpd and Bhagyam ramping up to 40 kbpd. While Aishwariya has started production in March, contribution is not very significant currently with only two producing wells; performance has, however, been per expectations so far and the management expects to ramp up to the FDP(field development plan)-approved level of 10 kbpd in the next few months. FDPs for three low permeability discoveries (Barmer Hill, NI, NE) have been submitted to the OC (operating committee), with production likely to commence during FY14.
Mangala, no decline envisaged: Belying earlier concerns on a potential decline in Mangala from H2FY14e (estimates), management expects plateau production to be sustained at the current 150 kbpd level through FY14 by drilling 48 infill wells, approvals for which are at an advanced stage (OC approved, MCmanaging committee--yet to). The likely commencement of EOR (enhanced oil recovery) thereafter is expected to sustain the plateau beyond that.
Other call takeaways: (i) Net capex estimated at $3bn over three years (80% on Raj.);
(ii) Total 450 wells to be drilled in Raj. over three years; (iii) filed an integrated development plan with the government to reduce the lead time for approvals;
(iv) pricing discount of Raj. crude expected to narrow to 8-13% (vs. 10-15% currently); (v) Bhagyam has approval for 33 additional wells to get to 40 kbpd by H2FY14e.
In-line quarter: Q4 profit after tax of R25.6bn (-19% q-o-q, +17% y-o-y) was in line with estimates. While Ebitda (earnings before interest, taxes, depreciation, and amortisation) at R32.6bn was sequentially flat driven by flat Raj. production, PAT was impacted by the Sri Lanka dry well write-off. A final dividend of R6.5/share was announced, taking the full year payout to 20%. Net cash stands at $3.07bn.
Reiterate Buy: While the broad contours of Cairns growth strategy have been given some shape by the management, the key for stock performance will be the ability to successfully deliver on its robust growth guidance combined with its ability to monetise its material exploration prospects. Our forecasts (FY14 exit at 195 kbpd) are a tad below management guidance given recent disappointments in Bhagyam and concerns on Mangala which, along with the recent stock weakness, provide some cushion. Maintain Buy.
Investment strategy & valuation: We rate Cairn shares Buy with a R381 target price. Cairn's ownership of valuable oil reserves in Rajasthan started generating steady cash flows from FY10, with potential to generate further upside from enhanced oil recovery and exploration. With the issue of royalty payable resolved and given Cairn's readiness to ramp up production from other fields in the block, we expect approvals to be more forthcoming, which should pave the way for production to ramp up steadily over the next few years. Gas discoveries in Sri Lanka and oil discoveries in onshore KG are added positives, which could over time manifest as a premium to NAV (net assets value) or drive a shift in valuation to going-concern (P/E).
Our R381 target price is based on NAVs of under-development and producing assets and implicitly incorporates Rajasthan exploration upside.