«MANAGEMENT: MR. MAYANK ASHAR – MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER, CAIRN INDIA LIMITED MR. SUDHIR MATHUR – CHIEF FINANCIAL OFFICER, ...»
“Cairn India’s Guidance Call for FY-2016”
March 4, 2015
MANAGEMENT: MR. MAYANK ASHAR – MANAGING DIRECTOR &
CHIEF EXECUTIVE OFFICER, CAIRN INDIA LIMITED
MR. SUDHIR MATHUR – CHIEF FINANCIAL OFFICER,
CAIRN INDIA LIMITED
Page 1 of 15
March 4, 2015
Ladies and Gentlemen, Good Day and Welcome to Cairn India’s Guidance Call for FY-2016.
As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the management presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing ‘*’ then ‘0’ on your touchtone telephone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Mayank Ashar — Managing Director and CEO of Cairn India. Thank you. And over to you Mr. Ashar.
Mayank Ashar: Thank you, operator. Hello, Ladies and Gentlemen. Thank you for joining us. It is a pleasure to be speaking with you this evening. Today, Sudhir and I will be taking you through our capital allocation plan for the upcoming fiscal year 2016.
Before we begin I must add the mandatory disclaimers that some of the statements made in the call today would be forward-looking in nature. A detailed note in this regard has already been included in our ‘Presentation’ shared on our website cairnindia.com.
In our last call on 22nd January, we presented to you our Earnings Results for the 3rd Quarter of Fiscal 2015 and the five key strategic themes that would guide our decision making in the present oil price environment. Since then we have seen $60 oil prices sustain and believe that a $100 plus oil price is unlikely to emerge in the near future. It is time to take a proactive approach to capital allocation and shareholder returns. Keeping in mind the interest of all our stakeholders - customers, shareholders, government and vendors, we have adjusted our resources both human and capital. We have right-sized the organization and revisited our capital allocation plan.
Our strategy in the current price environment is based on a two-pronged approach; we will be undertaking projects that are economically viable at current oil prices while actively reengineering projects and renegotiating contracts to improve viability. First, our aggressive CAPEX spend till date has put us ahead of the cost curve and be more selective about projects going forward. We have invested over $4 billion in development CAPEX in Rajasthan till date laying the solid foundation of core infrastructure. This enables us to switch on growth projects with agility as we improve the economic viability in light of current prices.
Second, we are actively renegotiating contracts for various drilling equipment and services that are a large component of our projects; Such as drilling and work over rigs, well services, logging tools. These savings once realized will improve project economics and the optimized rates will define a new base line for project economics. Additionally, significant OPEX optimization efforts undertaken by our teams will lead to a 10% lower Rajasthan water flood OPEX of $5 per barrel targeted for fiscal 2016. This will be achieved despite an increase in the number of average wells on line from 465 in fiscal 2015 to 535 in fiscal 2016. We have reprioritized our 3-year $3 billion net CAPEX program announced at the beginning of this fiscal across core fields, growth projects and exploration. We will be focusing on core fields while taking a balanced approach to growth projects and exploration. This is reflected in 45%
And finally, our unique leverage comes from a combination of symbiotic factors. The geology of our asset has proved itself to be world-class. We are adopting the latest technology in our field and have a great set of talented people, strong partnerships with all stakeholders and astute financial discipline. We have demonstrated excellence consistently in our operational and financial performance. These strategic themes have been applied to optimize our capex plan for the next year.
Sudhir Mathur: Thank you, Mayank, for taking us through these strategic priorities. You have summarized the actions we are taking to not only tide this storm but also emerge as an even stronger oil and gas player in the global scenario, both operationally and financially.
our commitment to them. The MBA fields were buzzing with project activities throughout the year witnessing a maximum rig count of 18 rigs, highest ever in the history of Cairn. Of these 18 rigs, 12 were drilling rigs and 6 were completion rigs bringing online 110 wells year-todate.
We also laid emphasis in the year on exploration and appraisal drilling in Rajasthan having drilled over 30 E&A wells year till date. We have enhanced our discovered resource base by
1.5 billion barrels since resumption of exploration from 4.2 to 5.7 billion barrels. We have built a strong pipeline of 600 million of resource inventory to be appraised and tested for accrual of recoverable 2C. We continued our focus on monetizing the tight oil reservoirs of Barmer Hill through efficient deployment of fracc technologies and experiential learning this year. We have drilled in fact 8 horizontal wells in the year till date optimizing on well design along with our strategic partners. Initial flow rates have been encouraging and in line with expectations. We have also achieved 12% to 15% reduction in frac tender rates, key not only to Barmer Hill but also to Gas development. The work done in Barmer Hill this year paves way for a more extensive program in the near future basis FDP approval and further learning. In continuation of our communication on the Raag Deep gas project at the end of last quarter, we are happy to share that we have received management committee approval a marquee step in Cairn’s future growth plan. Also, we have completed front end engineering and are in advanced stages of tendering. In line with global peers, we are partially revising the capital expenditure for fiscal 2016 from $1.2 billion to around $500 million, by deferring the rest.
We have taken a balanced approach to capital allocation, and of the $500 million plan for CAPEX for fiscal 2016, around 45% has been allocated to core fields, around 40% to growth projects and remaining 15% to exploration. In the core fields, focus continues to be on completion of the polymer flood EOR project at Mangala, continued infill drilling at MBA and sustenance projects at MPT with a total net CAPEX outlay of around $220 million. Our rig count in fiscal 2016 will be 4 and the drilling efficiencies achieved this year will benefit us considerably in the coming year.
Having received the management committee approval, we will be stepping up CAPEX spend on the gas project in the next fiscal and it would account for approximately 30% of the net CAPEX outlay. We plan to commence construction of the terminal and undertake well pad modifications and procure long lead items. The project is a key area of focus for the firm with a production potential of 15,000 to 20,000 boepd.
In exploration, focus will be on prioritizing capital allocation for low risk high potential prospects. We will be undertaking appraisal drilling and testing to enhance the already discovered resource base. We plan to spend 15% of next year’s CAPEX on appraisal testing and seismic activity across assets, as we continue to be confident of the long-term untapped potential of our assets. By end of fiscal 2016, we would have invested $460 million in the exploration activities across the two fiscals of ’15 and ’16.
Despite the partial deferment of CAPEX the volumes will yet see growth in the coming fiscal.
The production will be driven by polymer flood Mangala, infill drilling across MBA fields, infrastructure de-bottlenecking and sustenance projects.
Moderator: Thank you. We will now begin the Question-and-Answer Session. The first question is from the line of Probal Sen of IDFC. Please go ahead.
Sudhir Mathur: Probal, let me start with the second one; our CAPEX guidance and what we were estimating earlier was 3 billion and over a period of 3-years, of that 2.1 billion has already been drilled and 1.5 billion has been discovered and the balance 600 million is under testing and that will be certainly complete in the next quarter or so in 3 to 4-months and we have provided a reasonable capital to continue to hit the 3 billion resource base over the next fiscal. So we are not deferring it. I think the focus will be a lot on seeing what we can do to convert this to 2C over the next 12 to 18-months. On the second question of Bhagyam Polymer and Aishwariya,
Sudhir Mathur: We are looking at a combination of two things, certainly a lot of the old forecast were based on $80 plus, but as we look at it today we have the opportunity to re-engineer, re-negotiate and try and make them economic anywhere from $65 to $70, but as the service companies are yet beginning to see change in the costs which are impacting us positively we do not believe that the cost curve of the service companies has fully played out; on the same basis, we would look to make them economic roughly in the region of about $70 give or take 5% to 10%.
Moderator: Thank you. The next question is from the line of Neil Gupte of JP Morgan. Please go ahead.
Neil Gupte: Would the lack of the upgrade on the Mangala processing terminal have any kind of impact on the trajectory of production growth?
Mayank Ashar: Because most of the production that we turned down were in satellite fields. So in the nearterm, no, but the whole system is obviously balanced, and the production from the fields and the processing terminal they both go hand-in-hand. So in the near term that is not the critical bottleneck.
Sanjay Mookim: First, a quick confirmation that your earlier guidance of the 7-10% CAGR on production is no longer valid, but are you able to give us a new guidance?
Sanjay Mookim: Second question was on the need to be free cash flow positive. Given your large cash balances, why is that a top criteria?
Sudhir Mathur: Because the economics have to work at current prices, Sanjay, so for shareholders we need to squeeze every dollar out of the business. So it is a key priority from a shareholder value creation. If we can make projects viable at 20% lower investment, we would certainly try and do that.
Sanjay Mookim: Since you have got the approval for the Raageshwari Deep Gas, can you formally share the CAPEX reserves and production target please?
Sudhir Mathur: It will be between 15,000 to 20,000 barrels of oil equivalent and we would be able to give you timing and everything once we have tendered rather than give it to you right now.
Sanjay Mookim: But can you share the 2P reserve base and the production approved in the MC approval?
Sudhir Mathur: 100 mmscf per day and the reserves are 300 to 400 Bcf in that region.
Raj Gandhi: Just as we stand today, when we are planning our CAPEX, of the two, what plays a more important role — the PSC extension policy or the oil price per se?
Mayank Ashar: Yes, primarily it is the oil price. As far as the PSC extension is concerned, there is an ongoing process with the government, that is unfolding, and clearly the gas project was a precursor to the PSC extension, and that has cleared all the hurdles. But, as far as capital is concerned it is not really that inconsistent with virtually all the oil companies that are modulating their exploration capital as well as development capital in light of both the decline in oil prices as well as some uncertainty on the oil prices on a go forward basis.
Raj Gandhi: If you get a PSC extension based on your establishment of gas reserves, as per the PSC signed, there can be no change in fiscal terms, right?
Mayank Ashar: I think as far as that is concerned there is just ongoing dialogue, discussion with the government and we will just have to wait until all the details are announced.
Raj Gandhi: What happens to our Nagayalanka KG-ONN project, where we are targeting about 10,000 barrels of oil production coming in?
Sudhir Mathur: We are working with ONGC, our partners on that, and we are waiting for them to work on the FDP and send it to us. So we should be able to guide you on that in the near future.
Sudhir Mathur: As I mentioned earlier the services cost has not fully played out, we are expecting further cuts to happen, we are waiting to look at what is the maximum we can cut the project cost out too, even though we may have cash, going back to what Sanjay asked, it still has to cross a certain threshold not only for us, for our partner ONGC besides the government.
Raj Gandhi: No sir, given when Cairn project was conceived, in rupee terms crude is similar to where we are today as in the whole Greenfield project itself was conceived, so in rupee terms oil was not much higher than where it is today. So as in why cannot Brownfield exploration viable if the Greenfield project itself was viable in rupee terms given where crude is?
Sudhir Mathur: I think that is what Mayank pointed out that the core of our business still is MBA where we have invested and that is what is making it viable and very profitable even at these oil prices, because the cost of services and engineering and more services is somewhat correlated to oil price movements. And if you see the correlation between the two it is quite significant. So as the rigs get out of sort of drilling activity in various parts of the world, it is then when the prices will actually start impacting the operators, and as mentioned earlier, you would certainly take advantage of that downturn in the service costs to enter back into our investment cycle.