Retain ‘neutral’ rating on Cairn India with a target price of Rs 235 per share. Our NAV for Mangala, Bhagyam, Aishwariya, Rageshwari, and Saraswati and 20 other key discoveries is R129 per share. We value prospective resources of 2 billion barrels of oil equivalent or bboe at $4 per boe. We assign a value of $4 per boe to exploration upside. Conservatively, we do not ascribe any value to the $1.25 billion of inter-corporate loan facility given by Cairn to its parent entity. We continue to value net cash at a 20% discount.
On market expectations of weak results, Cairn has corrected by nearly 10% in the past week. With the company reporting losses for Q4, we think the stock is likely to see further weakness. We continue to remain least positive on Cairn India among our India oil & gas coverage.
With oil prices remaining low, and significantly scaled down capex, the company is now guiding for flat production in RJ block (versus last year’s guidance of 7-10% over FY14-17f). Compared to earlier flat production guidance in FY15, RJ production declined 4% to 1.75 lakh barrels per day (bpd). With scaled down production guidance and likely reduced reserve accretion, we think the risk is to the downside in production. Despite assuming higher 1.85 lakh bpd production, our current FY16f EPS of R19.4 per share implies 44% y-o-y decline. A 10,000 bpd lower production will further reduce our EPS by nearly 15%.
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