Mer 22 Juin 2011 12:42
suite du 22/06 à la mi journée
“Unless and until the government reduces loses in the sector and provides a transparent and reliable subsidy sharing mechanism, investor interest is going to be hard to come by,” he says. As for Cairn India, it's poised for growth and Mirae has a price target of Rs 420 for the stock. "If royalties were to become cost recoverable, Cairn India can rise about 20% just on crude prices alone," he says.
Below is the verbatim transcript. Also watch the accompanying video
Q: First a word on the follow on from ONGC. What is your sense of what kind of appetite or interest there is on that stock right now?
A: I think at this point probably not, because there is very low clarity about what ONGC's future realizations is going to look like. Unless and until the government reduces loses in the sector and provides a transparent and reliable subsidy sharing mechanism, from ONGC’s perspective, a crude pricing formula, I think investor appetite might be a little bit hard to come by. There is also that uncertainty about how that Cairn-Vedanta deal is going to pass through.
From ONGC's perspective, there can be a surprise on the upside because the higher royalties have been baked into the price for a long time already. So if ONGC has to share only 30% of the royalties going forward, we estimate about a 12% increase in its next series EPS.
Q: What is baked into the price already? Is it 33% subsidy sharing or 38% subsidy sharing and do you think a 38% uncertainty is build into the price after the recent under performance?
A: If you do a discounted cash flow (DCF) valuation of ONGC's reserves, you will see that current valuations reflect about USD 50 per bbl for the long term, which is less than our long term evaluation of USD 63 per bbl. Of course, our forecasts are still baking in a 33% sharing in long term Brent oil at a USD 100. If you assume 39%, our forecast drops to 55, which is still higher than what the current market is baking in. So I would think it is priced in, but to expect near to a out performance, it will be a little bit difficult in the absence of some concrete action on policy and just how the subsidy is going to be shared going forward.
Also read: Oil prices threaten to derail growth in India, China
Q: What about Cairn that has not been able to capture the upside in crude because of the overhang of clarity on royalty issues, do you think it can bounce back?
A: Yes, Cairn-India is our top pick in the energy sector in India. We have a target price of Rs 420. We think the royalty issue is overdone and we calculated a rock bottom valuation of cairn at about Rs 340 and that is assuming Brent at a conservative USD 100 per barrel and royalties becoming cost recoverable. So I think at current a valuation, that’s sufficiently reflecting in the stock price.
Going forward if you were to mark-to-market the Brent oil price, even the rock bottom valuation would rise to Rs 390. So I think even if royalties were to become cost recoverable, Cairn India can rise about 20% just on crude prices alone. Long term trends for Cairn look favourable; it's one of the world's fastest growing companies in terms of production and elite profitability. EBITDA margins are well north of 80% and the long term exploration prospects also look bright now that cairn is going to start drilling in KG and Sri Lanka. So, I would take the weakness as a buying opportunity in Cairn.
Q: What is Mirae’s call on crude and where do you see it this year?
A: We think the energy sector is on a super cycle and we expect crude Brent crude prices to stabilize around USD 100 per barrel in the long run. That is because on one side you have countries like China, India and other EMs growing their oil demand, while on the same time, many OPEC countries are insisting on holding back supplies. Many non-OPEC suppliers are falling due to maturing production in the fields such as the North Sea. So I think USD 100 per barrel for a long term target will be sufficient to bring the markets into equilibrium. That is so as to destroy demand and encourage supplies from the more expensive sources such as the ultra deep water seas, the arctic oil sands and so on
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USD 100 per barrel will also be a sustainable crude price target for the OPEC member countries that are now facing higher social spending. That will be enough for them to balance their budget. However, for 2011, we see upside risks to our oil price target because of the expanding geopolitical premium and the structural loss in Libyan production.
moneycontrol
Cairn India est encore une bonne affaire.....