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Business News/ Market / Mark-to-market/  Cairn India: waiting for higher crude oil prices
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Cairn India: waiting for higher crude oil prices

News on the production front is not encouraging. Cairn India's average daily working interest (share in various fields) production declined 5% year-on-year last quarter

Cairn India took a massive impairment of goodwill worth `11,674 crore due to a significant fall in oil prices.Premium
Cairn India took a massive impairment of goodwill worth `11,674 crore due to a significant fall in oil prices.

The Cairn India Ltd stock has underperformed the S&P BSE Oil and Gas index in the past one year, although it has broadly mirrored the movement in crude oil prices.

Indeed, in recent months, the stock has outperformed Brent crude, although this can be attributed to relatively lower valuations and strengthening crude oil prices. This outperformance may not be sustained with the outlook for crude oil hardly improving.

As analysts from IDFC Securities Ltd point out, Brent crude prices of $45-50 a barrel do not provide any meaningful earnings upside, with muted production growth and the rising discount to benchmarks for crude oil from the company’s Rajasthan block.

Net realizations for crude oil at $27.8 per barrel for the March quarter imply a 20.6% discount to Brent crude, well above historical levels of 10-12%, added IDFC Securities in its post-results note. That also translates into 43% year-on-year and 21% quarter-on-quarter fall in realizations for the March quarter.

Cairn India took a massive impairment of goodwill worth 11,674 crore due to a significant fall in oil prices. While the company made an operating profit of 498 crore in the quarter, higher than some analysts’ expectations, performance at the net level has been disappointing.

News on the production front is not encouraging. Cairn India’s average daily working interest (share in various fields) production declined 5% year-on-year last quarter. For fiscal year 2016, the measure declined 3% over the previous year. As the economics of newer exploration and enhanced oil recovery activity has deteriorated, thanks to low oil prices, expectations of improvement in production run low. Accordingly, IDFC Securities has maintained its estimates of largely flat year-on-year production levels for FY16-18E for the Rajasthan block.

Little wonder then, the stock shed 4.13% on Monday. Cairn India’s March quarter results were announced on Friday after market hours. Apart from lower crude oil prices, the Cairn-Vedanta merger has been a big overhang on the stock. Developments on that front are, of course, crucial to track.

Even as Cairn India ended the year with robust cash and cash equivalents of 19,521 crore, concerns of cash utilization remain. In fact, many analysts value the company’s cash at a discount while computing valuation.

In short, unless crude oil prices improve materially, Cairn India shares will continue to underperform.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 26 Apr 2016, 12:24 AM IST
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