Cairn India has reduced its capital expenditure programme for the current financial year by 40%, a move that could accelerate the fall in output from the country’s largest onshore oil block at Barmer in Rajasthan. Production at Barmer is believed to have reduced to 159,000 barrels per day (bpd) in September compared with 167,000 bpd in July and 170,000 bpd in August. The company needs to utilise the expensive “polymer-injection” technique to pump out more.
“Investment of $300 million in FY16, 62% in core MBA (Mangala, Bhagyam and Aishwariya) fields, 15% in growth projects of Barmer Hill and gas and 23% in exploration,” Cairn India said in a recent presentation.
The Cairn India stock has fallen close to 44% since January, 2015 whereas the 30-share Sensex has lost 7.3%. The stock closed at Rs 134.65 on Wednesday on the BSE.
“Given the lower capex on exploration, we won’t much growth in production from the new area. Also given the lower crude oil price company has guided flattish production for FY16-17. Thus, we won’t see major operational trigger in near term and stock would remain in the range of Rs 140-165. Also the announced merger would partially address the cash fungibility issue coupled with lower valuation to the merger,” said Dhaval Joshi of Emkay Global Financial Services in a recent note.
The slash in capex is primarily seen because of falling crude oil prices. The Brent crude oil price plummet to six-year low and little signs of recovery over $50 per barrel, the private explorer is selling crude oil from the Barmer block in Rajasthan at a discount of as high as 14.3% to Brent. In the second quarter of FY16, the average Brent prices fell 18% quarter on quarter to $50.5 a barrel, driving Cairn India’s average oil realisation down by 22% quarter-on-quarter to $43.7 a barrel.
Cairn India said that it expects to spend $500 million as capital expenditure in FY17. At the same time, it retains the flexibility to invest $1.6 billion as oil prices improve and costs bottom out, the presentation said.
The London-based Anil Agarwal-promoted Vedanta Group firm is confident that the crude oil output would not see a fall in the current financial year. “A large part of capex for the key development projects, which are Mangala EOR and Aishwariya Infill has already been incurred and we have planned for their balance capex requirement in our overall capex spend for the year. We believe additional production from these projects in the second half of current fiscal year will help us meet our target for the full year,” Mayank Ashar, managing director and CEO of Cairn India, told FE.
Much below street expectations, the cash-rich Vedanta Group company saw its net profit during July-September quarter of FY16 plunging 70.45% to meagre Rs 673 crore against Rs 2,278 crore in the same months previous year. Barclays Capital termed it 14% below estimates.