Capex cut may hit Cairn India’s profit and production growth

As crude oil price softened, Cairn India management chose to slash its investments plans for next year to preserve cash and maintain dividends.

This could stagnate the company’s production growth as well as profit growth in the medium term. Investors may not view this kindly. Cairn India made its highest-ever annual capital expenditure of $1.1 billion in FY15 on existing assets as well as on new explorations as part of its $3-billion capex programme for the FY15 – FY17 period. This was projected to rise to $1.2 billion in FY16. However, with crude crashing from $115 a barrel to $60 now, its capex plan has been slashed nearly 60% to $500 million. Although the firm’s management maintained that the output in FY16 will remain higher than FY15, its earlier guidance of achieving 7-10% production volume growth over next 3 years is no longer valid.

Nearly 45% of the next year’s capex will be spent on core fields in Rajasthan, Ravva and Cambay, which contribute over 90% to the company’s current production. About 40% of the capex will go towards growth, mainly the Raageshwari gas field, for which it received management committee’s approval. The balance 15% of the capex will be spent on exploration work, informed the company’s MD & CEO Mayank Ashar in ateleconference call with analysts.

While the firm will be progressing ahead with polymer flooding of Mangala field under its enhanced oil recovery programme, similar programme for Bhagyam and Aishwarya now stands deferred. Similarly, development of satellite fields and upgrade of Mangala processing terminal too will not be undertaken in next fiscal.

Cairn India remains a cash-rich company, which generated over Rs 11,000 crore of operating cash flows each year in FY13 and FY14, and held Rs 1,643 crore in cash balance at end-Sept 2014 without any debt. This was after taking care of all its capex, paying over Rs 5,500 crore of dividends over last two years and a controversial Rs 7,500-crore loan to a promoter group company. Thus, the management’s reaction to alter capex plan on lower crude price may not go down well with investors. After all, in the petroleum E&P industry, investments are essential to ensure future production growth. On the other hand, conserving cash will raise doubts over its utilisation.