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In Focus: Sticky Offer

Cairn India makes its way to Indian bourses riding a raft of controversies

There was much hype around the IPO of Cairn India, a subsidiary of the UK -based Cairn Energy, which is acknowledged as one of the most successful and aggressive oil exploration firms in India. However, participation in the IPO, positioned as one of the biggest Indian IPOs was dismal, with the retail and HNI option remaining undersubscribed. Participation at the institutional level also remained unimpressive, which was over subscribed 1.24 times.

Consequently, the scrip listed on January 9, 2007 at a discount of 7.5 per cent, touching an intra day low of Rs 128.65 compared to the issue price of Rs. 160.

The company is caught in a whirlpool of controversies with VK Sibal, Director General, Hydroc-arbons (DGH) , raising questions on the quality and quantity of the reserves claimed by Cairn. Further issues on the marketability of its largest reserves in Rajasthan remained unresolved which could potentially derail the future plans of the company hitting its cash flows and profitability. The dispute arose when the government nominated MRPL for the evacuation of Cairn India's reserves at Rajasthan in September 2005. MRPL has stated that the product sharing contract does not oblige it to build a pipeline to transfer the Rajasthan reserves to its refinery in Mangalore. The situation further deteriorated with ONGC (on behalf of its subsidiary MRPL) bargaining for a discount on the grounds that the Rajasthan reserves are heavy and waxy which will require heating for transportation making it uneconomical to transport at the given price.

Cairn is currently negotiating with the government and at the same time it is exploring the possibilities of becoming directly involved in the construction of the pipeline. However, the latter solution will translate into additional spending which in turn will put pressure on the cash flows of the company, increasing the gestation period of the investment.

Since the listing of the stock, there have been unconfirmed reports of Cairn and ONGC having reached an agreement to link the Rajasthan reserves to Indian Oil Corporation's terminal in Gujarat from where it can be sold to other refineries. The cost of such a shorter pipeline is likely to be shared by Cairn and MRPL in a 70:30 ratio. As a result, ONGC intends to de-nominate MRPL and is scouting for refiners to sell the crude at a slight discount. The stock of Cairn India has strengthened since then. Till going to print both ONGC and Cairn India denied any formal agreement on the issue.

It remains to be seen whether the company manages to meet its planned project deadlines, given the ambiguity in operations owing to the aforementioned issues. In spite of these factors that put a cloud over the robustness of the stock, one cannot deny the value that the company holds, given that it is slated to provide close to a fifth of India's domestic oil production once it begins pumping oil from its fields in Rajasthan.

On an optimistic note, a speedy resolution from the government is expected given the need for India to achieve self sufficiency in oil production.