The Cairn India'sthird quarter Ebitda (+4.5% q-o-q) was in line with our estimates and we expect the company to achieve FY14 production exit guidance of 200kbpd.
Cairn’s net crude realisation for Rajasthan for the third quarter was $95.6/barrel, a discount of c12.5% to Dated Brent and in line with fuel oil cracks. We note the production ramp up over the last few quarters has been a result of more wells in existing producing areas of Mangala, Bhagyam and Aishwarya rather than new wells in other discoveries. This will, in our view, necessitate a faster implementation of enhanced oil recovery (EOR) methods for sustaining production.
The Rajasthan oil block, with several oil & gas discoveries, is the main driver of Cairn’s stock price in our view, contributing to more than c68% of its valuation and cash accounting for another c30%. With the government approval for additional exploration in place, Cairn is targeting several prospects identified but not yet drilled.
We maintain ‘overweight’ rating. The value of Cairn India is essentially the value of its reserves in Rajasthan and cash. We value these reserves on a DCF basis. We have assumed an oil price of $99/bbl and $95/bbl for FY15 & FY16, respectively, in line with HSBC forecasts and WACC of 11% to arrive at a target price of Rs 409.