India’s per capita energy consumption currently stands at 0.6 tonnes of oil equivalent per year as compared to a global average of 1.9 tonnes of oil equivalent per year. I started this article with the above data to underscore the point that oil consumption will increase significantly in India in the coming years as GDP growth moves to a higher trajectory. In such a scenario, it makes sense to consider exposure to some oil and gas companies in India that have a well established track record and an excellent asset base. This article will discuss Cairn India Ltd (CAIRN, Financial) that has the potential to be a long-term value creator.
Cairn India is one of the largest independent oil and gas exploration and production companies in India and Cairn India operates 28% of India's domestic crude oil production. As of December 2014, Cairn India has a portfolio of 9 blocks. This includes one block in Rajasthan, which contains multiple assets, two on the west coast and four on the east coast of India and one each in Sri Lanka and South Africa. Further, as of December 2014, Cairn India had an HIIP of 6.1 billion boe and 2P+2C resources of 1.4 billion boe. Therefore, the company has a huge asset base that will potentially deliver strong growth in the coming years.
Since this is an oil and gas company, I would like to discuss the balance sheet. Previously, companies with high leverage have struggled due to a slump in oil prices; therefore, investors need to consider exposure to companies that have low leverage and can easily see through the current crisis. Cairn India is placed in an excellent position from this perspective with zero debt and a cash position of $3.8 billion as of FY14. In other words, the company’s balance sheet is clean and there is no debt servicing burden. Further, with a cash position of $3.8 billion, Cairn India is comfortably positioned to make big investments when oil prices recover.
I must add here that Cairn India reduced its FY15 capital expenditure recently to $500 million from an earlier planned capital expenditure of $1.1 billion. I believe this is a positive step because the company is being conservative, even with high financial flexibility. When oil prices recover, strong production growth will be an advantage than increasing production growth at this point of time.
Cairn India anticipates a capital expenditure of $3 billion for FY15 to FY17. With FY15 capital expenditure reduced, I believe that future capital expenditure will depend on how soon oil prices recover. The important point to note here is that a capital expenditure of $3 billion over the next three years can be fulfilled through the existing cash position. This is an indication of the strong financial flexibility that Cairn India possesses.
I believe that this strong financial position will allow Cairn India to acquire more assets in India and abroad in the foreseeable future. With oil prices at low levels and with energy stocks sliding, I believe there can potentially be value in many assets. We will see if Cairn India pushes for inorganic growth in the coming quarters.
Overall, the company has quality cash flow generating asserts, zero debt and a robust capital expenditure plan. This makes the stock worth considering at a time when sentiments are depressed for the stock due to lower oil prices and the recent revision in capital expenditure. If investors consider Cairn India with a 3-5 year time horizon, returns can be robust.
