Cairn India Advances as Higher Output Boosts Profit 10-Fold

Cairn India Ltd. (CAIR), the energy explorer that’s the target of a takeover by Vedanta Resources Plc (VED), advanced in Mumbai trading after higher output and prices boosted quarterly profit 10-fold.

Net income at Cairn India and its units rose to a record 27.3 billion rupees ($618 million) in the three months ended June 30 from 2.8 billion rupees a year earlier, the company based in Gurgaon near New Delhi said in an e-mailed statement yesterday. The median estimate of 18 analysts compiled by Bloomberg was a profit of 26.3 billion rupees. Shares rose as much as 1.7 percent.

Profit at the unit of U.K.-based Cairn Energy Plc (CNE) has surged since the explorer started producing oil from India’s biggest onshore oil deposit in 2009. London-based Vedanta’s proposed $8.7 billion acquisition was approved by Prime Minister Manmohan Singh’s cabinet on June 30 on the condition it pays royalties on output from the field in western Rajasthan state.

“Higher production from here on will depend on how soon everything with the stake sale and various approvals fall into place,” said Sandeep Randery, an analyst with Brics Securities Ltd. in Mumbai. “The additional royalty they may have to pay would be a burden.”

Average daily production at Cairn’s Rajasthan block almost tripled to 125,127 barrels from a year earlier, the company said. The oil was sold at $105.90 a barrel compared with $71.80 a year earlier.

Production Plateau

Output at the Mangala field in the block is about half the area’s potential and has plateaued at about 125,000 barrels a day since August. Production may get a boost following approval of the deal between Vedanta and Cairn Energy.

Cairn India has declined 2.6 percent this year compared with a 9.8 percent drop in the benchmark Sensitive Index. The stock climbed 0.4 percent to 324 rupees as of 10:42 a.m. local time on the Bombay Stock Exchange.

Vedanta won cabinet approval to take control of Cairn Energy’s local unit on condition it bears part of the royalty payments now covered by state-run Oil & Natural Gas Corp., a partner with a 30 percent interest in the Rajasthan block.

Vedanta and Cairn Energy need to agree that royalty payments by ONGC will be deducted from the project’s revenue, Oil Minister S. Jaipal Reddy said June 30 after a cabinet meeting. Cairn India also needs to withdraw arbitration against the government over tax on crude oil sales.

Shareholder Approval

Cairn India plans to seek shareholder approval through a postal ballot for the conditions set by the government, according to the statement. Revenue and profit after tax would have declined by 12.9 billion rupees in the first quarter if royalties were made cost recoverable, Cairn India said.

The government wants Cairn India to “comply” with the cabinet’s decision within a month, Chief Executive Officer Rahul Dhir told analysts on an earnings conference call yesterday. “That may be difficult because the postal ballot itself will take more than a month,” Dhir said.

Approval for the Vedanta-Cairn deal came 10 months after the transaction was announced.

‘Optimal’ Development

Cairn India is awaiting approval from a panel, which includes representatives from the regulator and the government, to increase production from the Mangala field in Rajasthan to 150,000 barrels a day. Output from Mangala, which started in August 2009, is sold to customers including Indian Oil Corp. and Reliance Industries Ltd. (RIL)

“The optimal development of this resource will only be possible with the active support of our joint venture partner, ONGC, and the government of India,” Dhir said on the conference call.

The three fields in Rajasthan may produce a combined 240,000 barrels a day, which is about 30 percent of India’s current crude output, according to the company’s annual report for the year ended March 31.

Cairn India sells oil at market-linked rates. Crude oil in New York rose 31 percent to an average of $102.34 a barrel in the three months ended June 30 from a year earlier, according to data compiled by Bloomberg.

The Vedanta Group held 28.5 percent of the fully diluted share capital of Cairn India as of July 12, after purchasing a 10 percent stake from Cairn India. Vedanta earlier acquired an 8.1 percent holding from Cairn India’s minority shareholders and 10.4 percent from Malaysia’s Petroliam Nasional Bhd.

Vedanta agreed June 27 to buy an additional 30 percent stake in Cairn India from the parent after getting approvals from the Indian government.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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