Oilfield contract extension to open taps for Cairn India
ET Intelligence Group: The stock of Cairn India, India's largest private oil producer, surged 2.6% on Thursday after the government granted extension for production from its Rajasthan field.
Earlier, under the production sharing contract (PSC) of Rajasthan block, Cairn India was permitted to produce from the field only till May 2020. The extension will put to rest the uncertainty over the future production of the company thereby removing a critical overhang on the stock. It will also help Cairn add more oil reserves, improving its asset base.
To reduce crude oil imports by 10% by 2022 by boosting domestic production, the government has given the nod to extend tenure of the production in blocks which were awarded under the pre-New Exploration Licensing Policy (NELP). According to the government estimates, the extension may lead to an incremental reserves of 426 million barrels of oil equivalent, or nearly 120 days of India's oil consumption.
The Rajasthan field accounts for 84% of Cairn India's production and 27% of the total domestic production. Apart from granting extension to the production from the field, another positive factor is that the government has increased the proportion of its share in the resulting profit -known as profit petroleum -by only 10%.
Cairn India paid `677 crore as profit petroleum to the government in the December 2016 quarter from the Rajasthan field. The increase in the government's share of profit petroleum is expected to be offset by the higher production from the new reserves.
An extension will also help the company add incremental reserves of 250 million barrels. Based on the company's November 2016 presentation, the Rajasthan field has 1.19 billion barrels of oil equivalent reserves. Higher reserves mean that the net asset value of the Rajasthan block will increase which should improve the fair value of Cairn India's equity stock.
According to Credit Suisse, extension of the PSC (at approved production plans) will likely add $1 billion to the company's valuation. On the basis of Thursday's closing stock price of `298.9, Cairn India's market value stood at around $8.5 billion.
Earlier, under the production sharing contract (PSC) of Rajasthan block, Cairn India was permitted to produce from the field only till May 2020. The extension will put to rest the uncertainty over the future production of the company thereby removing a critical overhang on the stock. It will also help Cairn add more oil reserves, improving its asset base.
To reduce crude oil imports by 10% by 2022 by boosting domestic production, the government has given the nod to extend tenure of the production in blocks which were awarded under the pre-New Exploration Licensing Policy (NELP). According to the government estimates, the extension may lead to an incremental reserves of 426 million barrels of oil equivalent, or nearly 120 days of India's oil consumption.
The Rajasthan field accounts for 84% of Cairn India's production and 27% of the total domestic production. Apart from granting extension to the production from the field, another positive factor is that the government has increased the proportion of its share in the resulting profit -known as profit petroleum -by only 10%.
Cairn India paid `677 crore as profit petroleum to the government in the December 2016 quarter from the Rajasthan field. The increase in the government's share of profit petroleum is expected to be offset by the higher production from the new reserves.
An extension will also help the company add incremental reserves of 250 million barrels. Based on the company's November 2016 presentation, the Rajasthan field has 1.19 billion barrels of oil equivalent reserves. Higher reserves mean that the net asset value of the Rajasthan block will increase which should improve the fair value of Cairn India's equity stock.
According to Credit Suisse, extension of the PSC (at approved production plans) will likely add $1 billion to the company's valuation. On the basis of Thursday's closing stock price of `298.9, Cairn India's market value stood at around $8.5 billion.
