Cairn India (CAIIND) 232

Transcription

1 Result Update Rating matrix Rating : Hold Target : 245 Target Period : 12 months Potential Upside : 6% What s Changed? Target Changed from 209 to 245 EPS FY17E Changed from 6 to 12.7 EPS FY18E Changed from 4.9 to 12.4 Rating Unchanged Quarterly Performance Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) Revenue 2, ,242.1 (9.1) 1, EBITDA 1, EBITDA (%) bps bps PAT NA NA Key Financials Crore FY15 FY16 FY17E FY18E Net Sales 14, , , ,736.4 EBITDA 8, , , ,378.7 Net Profit 4,479.6 (9,431.9) 2, ,329.7 EPS ( ) 23.9 (50.3) Valuation summary FY15 FY16 FY17E FY18E P/E 9.8 (4.6) Target P/E 10.3 (4.9) EV / EBITDA P/BV RoNW (%) 7.6 (19.3) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 44,508.6 Total Debt (FY16) ( Crore) (0.0) Cash and Investments (FY16) ( Crore) 17,439.5 EV ( Crore) 27, week H/L 184 / 106 Equity capital ( Crore) 1,874.9 Face value ( ) 10.0 Price performance (%) Return % 1M 3M 6M 12M Cairn India ONGC Reliance Ind Oil India (5.6) Research Analyst Mayur Matani mayur.matani@icicisecurities.com Harshal Mehta harshal.mehta@icicisecurities.com October 24, 2016 Cairn India (CAIIND) 232 Bucks the trend on better opex management... Cairn India s Q1FY17 results were above our estimates. Revenues increased 8.1% QoQ to crore (I-direct estimate: crore) due to increase in Rajasthan crude oil realisation QoQ (lower discount of $4.3/bbl against $8.2/bbl to Brent prices) while PAT increased 1.2x QoQ to crore in Q2FY17 (I-direct estimate: crore) due to record reduction in operational expenses Cairn India's Rajasthan gross production remained flat QoQ at barrels per day (bpd) largely in line with our estimate of bpd. Gross production also remained flat at bpd vs. our estimate of bpd and net production remained flat QoQ at bpd vs. our estimate of bpd Flat production performance QoQ Cairn India, through its various initiatives such as EOR, reservoir management has continued to arrest the natural decline in wells and reported additional volumes this quarter. The polymer injection at Mangala EOR has led to additional production of 10 kboepd in Q2FY17, for Aishwariya EOR and Barmer EOR. The polymer injection is planned to begin in H1CY18 and Q1CY19, respectively. Ravva and Cambay block continued to show a natural decline in the well (down 3.9%, 4.2% QoQ, respectively). Various opportunities are being targeted to arrest the decline. In terms of production, Cairn s Q2FY17 production numbers QoQ came largely in line with the flat production guidance provided by the company from Rajasthan fields for FY17E. Rajasthan gross production remained flat QoQ at barrels per day (bpd) in line with our estimate of bpd. We expect production from the Rajasthan field at boepd and boepd in FY17E and FY18E, respectively. Record reduction in operational costs The waterflood and blended operating cost at Rajasthan has been reduced to $3.9/boe and $5.8/boe, respectively, in Q2FY17 vs. $4.4/boe and $6.4/boe, respectively, in Q1FY17. For Bhagyam EOR and Aishwariya EOR, the cost optimization has lowered development & operating costs to $15/bbl each (reduced 21%, 17% respectively), leading to better IRR projections. The company s focus remains on maintaining positive cash flows in the current scenario of lower crude oil prices. Vedanta stock price to continue to influence Cairn India s price The revised Cairn-Vedanta merger deal has been approved by the respective shareholders of Cairn India and Vedanta Ltd and is stated to effective by end of FY16, post approval of jurisdictional high courts and other regulatory entities. The revised deal for shareholders of Cairn India consists of equity swap ratio of 1:1 and additional four preference shares of 10 each carrying 7.5% coupon with 18 months tenure. The revised ratio gives incremental benefit of 30 per share for Cairn India s shareholders vs. the earlier ratio. We increased our Brent crude oil estimates to $50/bbl for both H2FY17E and FY18E, respectively. We have revised our estimates by factoring in reduced operational expenses and lower Rajasthan oil realisation discount to Brent oil prices (12.5% vs. 16% earlier). We estimate Cairn s fair value at 245/share (Rajasthan fields at 93/share) assuming $50/barrel FY19E onwards and assuming no discount to cash and cash equivalent. At the current price, Cairn India is currently trading at an implied Brent crude price of ~US$44/barrel. We have a HOLD recommendation on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY17 Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) Comments Total Revenues 2, , , , Revenues came in higher than our estimates due to higher than estimated Rajasthan crude realisation (lower discount of $4.3/bbl against $8.2/bbl to Brent prices) Operating Expenses , , , Lowered operating costs in comparison to our estimates Employees Cost Other Expenses Total Expenditure , , , EBITDA 1, EBITDA margins (%) bps bps Depreciation EBIT ,651.9 Interest Other Income Extra Ordinary Item NA Forex gain due to appreciation of the rupee vs the US dollar on a closing basis PBT NA Total Tax PAT Higher realsiations and lower costs led to strong performance Key Metrics Gross Production (bopd) Net Production (bopd) Rajasthan Prodtn.. (bopd) Production was in line with estimates and as per the flat production guidance provided by the company Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 7, , , , Estimates increased due to increased Brent crude oil estimates and lowered Rajasthan discount to Brent crude oil (12.5% vs. 16% earlier) EBITDA 2, , , , Substantial reduction in costs led to lowering of operating costs estimates and thereby increasing EBITDA numbers EBITDA Margin (%) bps bps PAT 1, , , EPS ( ) Assumptions FY15 FY16 FY17E FY18E FY17E FY18E Comments Gross Production (bopd) 211, , , , , ,294 Net Production (bopd) 132, , , , , ,861 The company has guided for flat oil production in FY17E Rajasthan Prodtn.. (bopd) 175, , , , , ,834 Realisation ($/bbl) Lower discount of Rajasthan oil to Brent crude (12.5% vs. 16% earlier) and 37.5 increased oil price estimates led to increase in realisation Brent Prices ($/bbl) Revised crude oil estimates upwards US$/ Current Earlier ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Production largely in line with guidance Cairn India, through its various initiatives such as EOR, reservoir management has continued to arrest the natural decline in the wells and reported additional volumes this quarter. Cairn India s Q2FY17 production numbers on a QoQ basis came in largely in line with the flat production guidance provided by the company from the Rajasthan fields for FY17E. The Rajasthan gross production remained flat QoQ at barrels per day (bpd) in line with our estimate of bpd. We expect production from the Rajasthan field at boepd and boepd in FY17E and FY18E, respectively. Exhibit 1: Gross oil & gas production from Rajasthan fields (boepd) boepd FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 Q2FY17 FY17E FY18E The company plans to increase its gas production from RDG through the existing pipeline by installing additional compressors. It holds significant potential of 1-3 tscf of GIIP. The estimated recovery has increased by ~25% while the recovery estimate till 2030 has increased to 86 mmboe. Growth in production in existing fields will be achieved through the EOR programme in MBA field, further development of Barmer Hill and development of the Rageshwari field. Exhibit 2: Net crude oil & gas production (boepd) trend boepd FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 Q2FY17 FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 3

4 Record reduction in operational costs The waterflood and blended operating cost at Rajasthan has been reduced to $3.9/boe and $5.8/boe, respectively, in Q2FY17 against $4.4/boe and $6.4/boe, respectively, in Q1FY17. For Bhagyam EOR and Aishwariya EOR, the cost optimisation has lowered the development and operating costs to $15/bbl each (reduced by 21% and 17% respectively), leading to better IRR projections. The company focus remains on maintaining positive cash flows in the current scenario of lower crude oil prices. Cairn India has maintained its planned capex at $100 million for FY17E, with majority of capex (80%) allocated to development programs which includes RDG gas and Mangala EOR completion and 20% in exploration activities. Exhibit 3: Capex strategy FY16 FY17E Segment Value (mn $) % Allocation Value (mn $) % Allocation Development Exploration Total Conference call highlights Sustained polymer injection at Mangala EOR led to increase in the average production at boepd for Q2FY17 from boepd in Q1FY17. Cairn India has maintained its planned capex at US$100 million in FY17E Discount to Brent for Rajasthan crude declined to US$4.3/bbl from earlier US$8.2/bbl. Eight new wells have been brought online in Q2FY17 post completion of 15 well hydro-frac campaign at RDG field, to further increase gas production. The development will take place in 2 phases. Reduction in the Rajasthan s waterflood and blended cost by 11.4% and 9.4% QoQ to $ 3.9/bbl and $ 5.8/bbl respectively. For Aishwariya EOR, the cost optimisation efforts brought down the total of development and operating cost further by ~21% to US$15/bbl from US$ 19/bbl during the quarter. For Bhagyam EOR, the cost optimisation efforts brought down the total of development and operating cost further by ~17% to US$ 15/bbl from US$ 18/bbl during the quarter. On the Barmer Hill front, Aishwariya Barmer Hill costs savings on the overall drilling and completion activity is being planned till 2030 and for Mangala Barmer Hill water flood pilot project is initiated to increase field pressure and oil recovery. On the exploration front, focus is on seismic data processing and interpretation for Rajasthan block. Also, 3 well exploratory drilling program is being advanced to Q4FY17 from FY18. ONGC, the development operator of KG Onshore block, has submitted the Field Development Plan (FDP) to the Management Committee (MC). The FDP is being reviewed by the MC. ICICI Securities Ltd Retail Equity Research Page 4

5 Highlights of revised merger deal between Cairn and Vedanta Cairn India s minority shareholders will receive for each equity share held: o One equity share in Vedanta Ltd o Four 7.5% redeemable preference share in Vedanta Ltd with a face value of 10 each Implies a premium of 20% to Cairn India s one month VWAP. Vedanta Ltd shareholders will hold 29.7% and Cairn India shareholders 20.2% of the merged entity Vedanta plc pro-forma ownership of 50.1% in Vedanta Ltd Effected by way of a scheme of arrangement Conditional on shareholder approval at each of Vedanta plc, Vedanta Ltd and Cairn India, as well as regulatory approvals Transaction governance in line with India, UK regulations and best practices Merger expected to complete in Q1 CY17 Sensitivity to change in Brent crude prices Our target price will change by ~ 7/share for every $5/barrel change in crude oil price. We have assumed an exchange rate of 66 per US dollar and Brent crude price of $50/barrel in perpetuity. Exhibit 4: Sensitivity of target price to exchange rate & crude oil prices Exchange Rate ( /US$) Source: ICICIdirect.com Research Brent Crude Oil Prices (US$/barrel) ICICI Securities Ltd Retail Equity Research Page 5

6 Annual report key takeaways The year witnessed the most challenging scenario for E&P companies like Cairn India due to low oil & gas prices. Mangala s polymer flood projects continued to yield positive results. The enhanced oil recovery (EOR) contributed an average of 14,000 boepd in The company was successful in implementing hydro-frac technology and better characterisation of reservoirs, which led to the upgradation of expected recovery from Raageshwari Deep Gas Field by 25% as well as efficient monetization of tight resources at current oil prices On the commercial front, the company undertook various price renegotiations of existing contracts which led to cost savings of ~20% on polymer. Also, the company hedged power costs by implementation of open access to purchase power through the energy exchange. Even though the company reduced its capex significantly from $1.1 billion in to $248 million due to low crude oil prices, it has plans to invest $100 million with 20% for exploration and 80% for development activities which include the RDG project and Mangala EOR completion activities. The investments shall also include predevelopment activities for key projects in the core MBA fields, Barmer Hills and the Satellite Fields for readiness. The company commissioned its Salaya Bhogat Pipeline (SBPL) storage terminal & marine export facilities at Bhogat, which shall give it an access to larger market for crude oil from Rajasthan Block On the operational front, the company witnessed a decline in gross average production by 3.7% YoY from boepd in to boepd in with Rajasthan block producing boepd, Ravva producing boepd, and Cambay producing boepd. Also, during the year, Mangala EOR injection was ramped up to target level with EOR facilities marking completion of drilling and demobilization of rigs. The production performance of Aishwariya was also found to be in line. The company in future intends to target sweet spots first in case of Bhagyam and Aishwariya blocks Revenues reported a sharp decline of 41% YoY from crore in to crore in The decline was mainly on account low crude oil prices and fall in production. The company incurred significant impairment costs in year due to changes in the method of depreciation for some oil and gas assets. It also incurred non-cash impairment of 11,390 crore on the carrying value of goodwill and of 284 crore on some of non producing oil and gas assets. On account of this, it recorded a net loss of 9,432 crore in vs. a net profit of 4,480 crore in In spite of crude oil prices at multi-year lows, the company generated free cash flows of 2485 crore in FY16 ( 3946 crore in FY15), which led to strong cash and cash equivalents of crore. The Board of Directors of the company recommended a final dividend of 3 per equity share of face value of 10 per share ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation The revised Cairn-Vedanta merger deal has been approved by the respective shareholders of Cairn India and Vedanta and is said to be effective by end of FY16, post approval of jurisdictional High Courts and other regulatory entities. The revised deal for shareholders of Cairn India, consists of equity swap ratio of 1:1 and additional four preference shares of 10 each carrying 7.5% coupon with 18 months tenure. The revised ratio gives incremental benefit of 30 per share for Cairn India s shareholders vs. the earlier ratio. We have revised upwards our Brent crude oil estimates to $50/bbl for both H2FY17E and FY18E. We have revised our estimates by factoring in reduced operational expenses and lower Rajasthan oil realisation discount to Brent oil prices (12.5% vs. 16% earlier). We estimate Cairn s fair value at 245/share (Rajasthan fields at 93/share) assuming $50/barrel FY19E onwards and assuming no discount to cash and cash equivalent. At the current price, Cairn India is currently trading at an implied Brent crude price of ~US$44/barrel. We have a HOLD recommendation on the stock. Exhibit 5: Valuation Crore (share) Rajasthan fields 17, Ravva Cambay Total Less: Net Debt -27, Equity Value Source: ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Recommendation history vs. Company snapshot ( ) (%) 0 Oct-14 Dec-14 Mar-15 May-15 Aug-15 Oct-15 Dec-15 Mar-16 May-16 Aug-16 Oct Price Idirect target Consensus Target Mean % Consensus with HOLD Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jun-09 Cairn may delay production from Rajasthan fields due to tax concerns (VAT of 4% may imply from oil production from Rajasthan fields) Aug-09 Cairn starts production from Mangala field of the Rajasthan block Jan-10 Management guides that oil production in the MBA fields would lag the capacity build-up in these fields. Hence, ramp-up in the production would take longer than earlier estimated Aug-10 Cairn Energy Plc announces plans to sell a maximum of 51% of its shareholding in Cairn India to Vedanta Resources. Open offer at 355 Jul-11 Government approves Cairn-Vedanta deal subject to new buyer (Vedanta) agreeing to pay increased cess and royalty on complete production from Rajasthan fields Apr-12 Rajasthan revises its recoverable risked prospective resource that has increased from 250 mmboe to 530 mmboe and also peak gross production level in Rajasthan from 240,000 bopd to 300,000 bopd Jan-13 The production ramp up from Rajasthan MBA fields happens at a slower pace, thereby reducing production estimates for the year Nov-13 Cairn India announces a proposal for buyback from the open market at a price not exceeding 335/share, with an indicative maximum shares of 17.1 crore with the quantum of the buyback not exceeding 5725 crore Jul-14 Cairn India gives $800 million loan for two years to Vedanta group out of the total commitment of $1.25 billion at the rate of Libor bps Jun-15 The Vedanta Group announces a merger between its flagship Indian firm Vedanta Ltd and its oil subsidiary Cairn India. Sep-16 Cairn-Vedanta merger gets approval from shareholders of both the respective companies. Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Vedanta Resources PLC 30/Sep/ Cairn UK Holdings, Ltd. 30/Sep/ Life Insurance Corporation of India 30/Sep/ Dimensional Fund Advisors, L.P. 31/Jul/ Eastspring Investments (Singapore) Limited 31/Aug/ BlackRock Institutional Trust Company, N.A. 30-Sep HSBC Global Asset Management (Hong Kong) Limited 30/Nov/ Birla Sun Life Asset Management Company Ltd. 30-Sep Mondrian Investment Partners Ltd. 31/Aug/ Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Promoter FII DII Others Recent Activity Investor name Investor name Investor name Value (m) Shares Investor name Value (m) Shares Birla Sun Life Asset Management Company Ltd Invesco Hong Kong Limited Research Affiliates, LLC Templeton Asset Management Ltd Reliance Nippon Life Asset Management Limited Nordea Funds Oy Northern Trust Investments, Inc Aberdeen Asset Investments Limited BlackRock Institutional Trust Company, N.A Franklin Templeton Asset Management (India) Pvt. Ltd Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Revenue 14, , , ,736.4 Growth (%) Operating expense Employee Cost Administration Cost Exploration Cost Total Expenditure EBITDA 8, , , ,378.7 Growth (%) Depreciation EBIT Interest Other Income PBT Growth (%) Tax Reported PAT 4, , , ,329.7 Growth (%) EPS Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax 4, , , ,329.7 Less: Dividend Paid 1, Add: Depreciation 2, , , ,330.1 Add: Others Cash Profit 5, , , ,851.8 Increase/(Decrease) in CL (Increase)/Decrease in CA -9, , , ,267.4 CF from Operating Activities Purchase of Fixed Assets 1, , ,040.0 (Inc)/Dec in Investments 6, Others CF from Investing Activities 4, , , ,540.0 Inc/(Dec) in Loan Funds Inc/(Dec) in Sh. Cap. & Res Others -1, CF from financing activities -1, Change in cash Eq , , ,202.0 Op. Cash and cash Eq. 1, , ,962.7 Cl. Cash and cash Eq , , ,164.7 Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Source of Funds Equity Capital 1, , , ,874.9 Stock Options Reserves & Surplus 56, , , ,028.2 Shareholder's Fund 58, , , ,903.0 Loan Funds Deferred Tax Liability 1, , Minority Interest Source of Funds 60, , , ,705.8 Application of Funds Gross Block 28, , , ,197.6 Less: Acc. Depreciation 6, , , ,161.9 Net Block 21, , , ,035.7 Producing Properties 2, , , Capital WIP 5, , , ,687.8 Investments 15, , , ,054.1 Inventories Debtor 1, Cash , , ,164.7 Loan & Advance, Other CA 19, , , ,444.8 Total Current assets 22, , , ,806.2 Current Liabilities 4, , , ,069.0 Provisions 2, , , ,521.6 Total CL and Provisions 6, , , ,590.6 Net Working Capital 15, , , ,215.7 Miscellaneous expense Application of Funds 60, , , ,705.8 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) Book Value Cash per share EPS Cash EPS DPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Fixed Asset Turnover (x) Inventory Turnover (Days) Debtor (Days) Current Liabilities (Days) Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) PE Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) NA NA NA NA Debt to EBITDA (x) Current Ratio Quick ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Oil & Gas) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Bharat Petroleum (BHAPET) Buy 49, Cairn India (CAIIND) Hold 44, Castrol India (CASIND) Buy 24, GAIL (India) (GAIL) Buy 56, Gujarat Gas (GUJGAS) Hold 8, Gujarat State Petronet (GSPL) Buy 9, Gulf Oil Lubricants (GULO) Hold 3, NA NA NA NA NA 41.4 Hindustan Petroleum (HINPET) Hold 15, Indian Oil Corporation (INDOIL) Buy 79, Indraprastha Gas (INDGAS) Buy 12, Mangalore Refinery (MRPL) Buy 15, ONGC (ONGC) Hold 222, Petronet LNG (PETLNG) Buy 29, ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

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