Oilco willing to put another $920 million in India ops
Given the shape of the economy, not too many investors want to commit serious money right now, but after Unilever (R19,200 crore), GlaxoSmithKline Consumer (R4,800 crore) and Crisil (R1,290 crore), Cairn India has just announced its willingness to put in $920 million (R5,725 crore) on top of the $3 billion it has already committed to investing over the next 3 years. While the first two were FMCG firms and so more driven by the demographic/income change than the state of current business, Cairn operates in a fairly challenging regulatory and policy environment—how do you explain the company wanting to spend over $900 million to buyback 9%of its outstanding shares? Part of it could be a pre-commitment to Cairn Energy, but given that other shareholders have the option to participate in the buyback—Cairn Energy still owns 10.3% in Cairn India—more than anything else, it demonstrates the Anil Agarwal-owned Cairn India’s bullishness on India.
And not surprising since, after it drilled 13 dry holes in its Rajasthan field, Cairn India has never looked back. What was given up as a dry area by Shell managed to produce 1.25 lakh barrels a day a few years ago, this went up to 1.75 lakh barrels last year and Cairn’s end-of-fiscal target is 2.25 lakh barrels. After 3 years, during which time Cairn plans to invest another $3 billion, the Rajasthan oil field will produce 3 lakh barrels of oil a day—to put this in perspective, India’s largest oil firm ONGC produces 4.6 lakh barrels a day. Which is why, of the ‘profit petroleum’ the government collects from various oil/gas fields, Cairn’s share is slightly higher than three-fourths—in the September quarter, Cairn’s contribution was $1 billion. At around $3.5 per barrel, thanks partly to the Rajasthan block being onshore, Cairn’s operating costs are between a third and a fourth those of ONGC. Which is why, even after giving roughly 80% of its turnover to the central/Rajasthan government and ONGC, Cairn’s cash flows are large enough to finance the share buyback without crimping its ability to finance the investment ramp-up planned.
Cairn’s buyback also says a lot about the manner in which the government is trying to get its policy right for oil exploration. Unlike in the case of gas, oil producers have always got market-prices—a step in that direction has been taken for gas—but there were big delays in getting even routine clearances from the petroleum regulator and there were many restrictions put on ‘continuous’ exploration. A year ago, the policy on ‘continuous’ exploration was eased—of the 8 discoveries since, one is by Cairn—and some months ago, the procedure for getting routine clearances was eased. Cairn’s plea for extending its lease is also being considered since, as the company has just found new oil deposits, it won’t be able to take out all of this before the lease runs out. The company is so confident of finding more oil, it has even asked the government to return to it, on the same terms of 80% effective government share, the 8,600 sq km of acreage it had earlier given up as part of the current policy—that’s the kind of confidence that does wonders for the company as well as the country.