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The Upstart that’s Startled All Others

The over reliance on its Rajasthan field & huge cash reserves is a matter of concern for Cairn India…

In a list compiled by energy consultant Platts for its top-250 Global Energy Company Rankings; Cairn India topped the list of the world’s fastest growing energy companies with a three year compounded growth rate of 119.8 per cent. Cairn has been one of the domestic oil and gas sector’s surprise stories in recent years. No one, especially none of the state-run oil exploration majors expected the Rajasthan block to pay off as huge as it turned out to be. Not only is the Rajasthan field doing well but it is also giving Cairn an IRR of 40 per cent at present.

The Rajasthan block, which take the lions share of 87 per cent of the company’s proved and probable reserves and produces 95 per cent of its oil and gas output, besides the company’s three producing and seven exploration blocks. Cairn’s good run may continue for some more years. The company is expected to report around 15 per cent volume growth in the next two years and has $2 billion cash in its disposal. Interestingly, the company has announced a $2 billion capex investment over the next two years, a period in which the company will not run out of its current cash balance. Annual cash flow from operations are estimated to be around $2-2.2 billion, which should keep the company in good stead.

Cairn’s biggest strength – a single asset play – is also its Achilles’ heel. The company in the long-term will need to diversify into other assets to keep the cash flow active. Cairn has prospects in its KG onshore block – estimated at 0.55 billion boe from two discoveries, besides the Sri Lanka offshore, which is yet to be valued. Recent moves to South Africa has seen the company acquire a 60 per cent stake in the Orange Basin with the South African state-owned oil firm PetroSA. However, despite the strong prospects, Cairn India’s stock did not rewarded shareholders as much. The stock underperformed the Sensex by 10 per cent points in the past one year.

A reason attributed to the underperformance is the stock offloading by promoter Cairn Plc following the Indian Government’s decision to increase cess. Another concern hanging on the stock in the past year was the way in which the $2 billion cash in its books would be utilised, especially when other cash-rich exploration companies like RIL are yet to optimally exploit its cash balances despite forays into new ventures like retail and broadband.

Worry signs
Vedanta, the majority shareholder in the company lacks in experience, which is also a cause of worry and could shadow the stock performance. Moreover, the exit of senior management including erstwhile CEO Rahul Dhir, could impact market perception, which could go against the company. Moreover, if Cairn gets bunched as part of the Anil Agarwal promoted Vedanta conglomerate, it would get discounted being part of a big group. At the moment Cairn has a very profitable asset and how it plays beyond the Rajasthan block will determine the company’s very existence and future. Buy.