While falling crude prices maybe good for India, they will weigh heavily on the financials of Indian oil and gas companies especially pure play crude producers like Cairn India. Cairn operates India’s largest, onshore hydrocarbons asset, the Barmer block in Rajasthan, which contributed nearly a quarter of India’s total crude production in 2013-14.
Not surprisingly, the Cairn stock has lost close to 25% of its market value since January 2014, while the Sensex has gained 30%.
With an oversupply of the commodity globally, crude prices have lost as much as 55% in the last six months and are hovering around $50 a barrel. Net realisations of oil producers will no doubt be hit. The impact will be lesser for those companies that have a more diversified business model, like Reliance Industries (RIL) and Oil and Natural Gas Corp. Ltd (ONGC).
The Bloomberg consensus of Cairn India’s earnings per share (EPS) over FY15-17 has come off by 14-17% and operating an net profits are also seen declining in the three years to FY17 . On the other hand, the estimated EPS for RIL and ONGC over the same period have been trimmed by a more moderate 3-4%.
There are also concerns owing to uncertainties surrounding the production sharing contract (PSC) it has with the government for operating the Barmer block. As reported by FE in May, the Director General of Hydrocarbons (DGH) has turned down the company’s request for a ten year extension of PSC for this block that expires in May 2020.
The regulator is of the view that the contract can be extended for another five years only since the block is primarily an oil producing asset and not a gas field. It has been reported that the government may bargain for a greater share of profit petroleum and a bigger stake for ONGC in the
Barmer block, in exchange for extending Cairn India’s PSC. ONGC, the original licensee of the block, holds a 30% stake at present.
Contractually, upon expiry of the PSC, a hydrocarbon block has to be returned to the original licencee.
Renegotiations of the fiscal terms and conditions of the PSC is also a key development experts seek clarity on as the government may raise its share of profit petroleum beyond the current contracted peak level of 30-40% for some fields.
Even as Cairn has guided for an annual growth rate of 7-10% in production, between fiscals 2015 and 2017, analysts feel that in the wake of this uncertainty the company may scale down its capex plan at Barmer.
According to IIFL, although Cairn India’s management is hopeful of an extension of the PSC, it is focusing on only short-term capex plans until it receives further clarity. The domestic brokerage has reduced production estimates for 2015-16 and 2016-17 by 2% and 6% respectively and sees the production peaking at 187,000 barrels per day in FY17. In fiscal 2014, Cairn India’s gross average production stood at 218,000 barrels of oil equivalent per day.
“It (Cairn India) is likely to scale down exploratory capex outside the Mangla-Bhagyam-Aishwarya (MBA) fields. This could affect its production profile in the medium-term,” IIFL said in a research note.
For the long-term Cairn India is planning to develop natural gas assets that it has discovered in Rajasthan and is proposing to invest around $700 million to bring these assets into production. This strategy may help Cairn India’s case as it seeks a 10-year extension for the Barmer block.
The company may share more on information on this development when it announces its earnings for the October-December quarter on January 22. Most analysts have factored an up to 50% decline in year-on-year net profit for the period.
In the first nine months of the current fiscal the Brent price of crude averaged $96 per barrel.
Analysts generally account for a 10% discount to this benchmark value while pegging a value to Cairn India’s net realisation by selling crude.
Not surprisingly, as the outlook for global prices worsen, the company’s realisations are set to be affected.