Cairn India Profit Drops After Accounting for Royalty Payments

Cairn India Ltd. (CAIR), the energy explorer being acquired by Vedanta Resources Plc (VED), posted a worse-than-expected drop in fiscal second-quarter profit after accounting for royalty payments for the first time.

Net income, including that of units, fell 52 percent to 7.63 billion rupees ($154 million), or 4 rupees a share, in the three months ended Sept. 30, the explorer based in Gurgaon near New Delhi said in a statement yesterday. The median estimate of 23 analysts surveyed by Bloomberg was a profit of 8.5 billion rupees. Sales declined 1.5 percent to 26.5 billion rupees.

The government approved Vedanta’s $8.7 billion acquisition of Cairn India on condition that it pay its share of royalties from the Rajasthan block. Accounting for the royalty paid by partner Oil & Natural Gas Corp. on its behalf since production started in the block in August 2009 reduced revenue and profit in the quarter, Cairn India said.

“The royalty payment that they need to reimburse ONGC with has been the big drag,” said Deepak Darisi, a Mumbai-based analyst with LKP Shares & Securities Ltd. “That will continue to be a burden. From the next quarter on, there will be no pending payments and the burden would be much lower.”

Cairn India fell 2.1 percent to 293.55 rupees in Mumbai before the earnings announcement, the most since Sept. 26. The stock has fallen 12 percent this year, compared with a 17 percent drop in the benchmark Sensitive Index.

Royalty deductions will be at about 15 percent from future Rajasthan crude sales, R. Ranganath, head of finance at Cairn India, said on a conference call with analysts yesterday.

Vedanta’s Stake

Vedanta, a metals and mining company based in London with no experience in oil and gas, received approval for the takeover from India’s cabinet on June 30 on condition royalty is included in the field development cost, which can be recovered from sales. ONGC approved the acquisition last month after the conditions were accepted.

Vedanta and its units own 28.5 percent in Cairn India, while Edinburgh-based Cairn Energy Plc (CNE) holds 52 percent, Cairn Energy said in a July 12 statement. Vedanta will buy an additional 30 percent in the explorer from Cairn Energy. The deal was announced in August last year.

Crude output at the Mangala field in Rajasthan climbed 8 percent to 125,251 barrels a day, with Cairn India’s share at 87,676 barrels a day, according to yesterday’s statement. The share may reduce to about 60 percent from the current 70 percent because royalty payments would become recoverable, Ranganath said.

Net oil output, including other fields, rose 5.2 percent to 99,220 barrels of oil equivalent a day, Cairn India said.

The Rajasthan block has three fields that 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. Production may rise to 175,000 barrels a day by March 31.

Cairn India sells oil at market-linked rates, benchmarked to Brent crude oil prices. The company sold oil at $102.80 a barrel compared with $69.50 a year earlier.

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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