Cairn India Ltd., which pumps crude oil from the nation’s biggest deposit on land, started its first commercial sales of natural gas from the area and activated a new oil field to revive lower-than-expected output.
The explorer will sell as much as 5 million standard cubic feet a day of gas from its blocks in Rajasthan initially, according to a statement issued today. Cairn India also started Aishwariya, an oil field in the western state, with a capacity to produce 10,000 barrels a day, or 6 percent of its output from the region.
Cairn India, acquired by billionaire Anil Agarwal’s Vedanta Resources Plc (VED) for $8.67 billion in December 2011, is starting new fields and seeking oil deposits to raise output by 71 percent to 300,000 barrels a day from the area. A slower-than- expected production ramp up has driven down Cairn India 13 percent this year, making it the worst performer among the 10 companies in the S&P BSE India Oil & Gas Index. (BSEOIL)
“The new production will help add to profit a bit,” said Bhavesh Chauhan, a Mumbai-based analyst with Angel broking Ltd., who advises investors to “accumulate” the company’s shares. “To revive the share price, Cairn will have to boost production a lot more.”
Cairn India fell 0.1 percent to 277.30 rupees in Mumbai trading on March 22, compared with a 0.3 percent decrease in the benchmark S&P BSE India Sensex (SENSEX) index.
“Cairn India’s under-performance over the last six months is likely to have been mainly on account of production ramp-up concerns,” Arya Sen, a Mumbai-based analyst at Jefferies India Pvt., said in a March 19 note.
In January, Cairn India confirmed lower well productivity at the Bhagyam field and cut output guidance to as low as 200,000 barrels a day by March 31, 2014 from almost 240,000 barrels a day by Dec. 31, 2013, he said.
Cairn is producing about 175,000 barrels of crude a day from Rajasthan, according to a March 18 presentation on its website. The Mangala field in the state is producing about 150,000 barrels a day and Bhagyam as much as 25,000 barrels daily.
Sen upgraded the stock to buy from hold on March 19 because the decline was overdone, according to the report. Production of 200,000 barrels a day and an oil price of $100 a barrel value the company at 307 rupees a share, Sen said.
Forty seven of the 61 analysts who rate Cairn India’s stock recommend buying the shares and three selling them, according to data compiled by Bloomberg.
Cairn India start drilling its first new well in four years to discover new oil pools in Rajasthan block, the company said in a Feb. 25 stock exchange filing. The company reported a 48 percent increase in profit to 33.4 billion rupees, or 16.5 rupees a share, in the quarter ended Dec. 31 after it increased production from the Rajasthan block.
Vedanta Resources and unit Sesa Goa Ltd. (SESA) completed buying a 59 percent stake in Cairn India from Cairn Energy Plc and other shareholders in December 2011. India’s cabinet approved the takeover on the condition the cost of developing the Rajasthan field would include royalty, which could be recovered from sales. Oil & Natural Gas Corp. (ONGC), Cairn India’s partner with a 30 percent stake in the Rajasthan block, paid the entire royalty since production started in August 2009.
Cairn currently produces 30 million cubic feet of gas daily from the field, and uses much of that to produce power for the Rajasthan project, according to the statement. The company said it plans to spend 60 billion rupees ($1 billion) in the state in its fiscal 2014 year.
Cairn India’s earnings are helping cut losses for iron-ore miner Sesa Goa after a court-ordered extraction ban last year.
In January, the government approved Cairn India’s plan to raise production from the block in Barmer in Rajasthan state to 300,000 barrels a day, equivalent to about 40 percent of India’s current output. To reach that target, the company will need to find more oil in the area, Chief Executive Officer P. Elango said last month. The block has proved reserves of 1 billion barrels.
Cairn India’s operating expenses in the Rajasthan block, including the cost of transporting crude to the coast for sale to refineries, is about $3 a barrel, Elango said. The company plans to start a project that will pump chemicals into producing oil wells to help flush out hard-to-extract crude from the reservoir in the year starting April 1, 2014. The operating cost to produce the additional crude will be in a range of $8 to $12 a barrel, he said.
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