Cairn Energy-BUY

Cairn Energy-BUY

Upgrading to Buy on revision of UBS crude oil prices

We upgrade our rating on Cairn India to Buy (from Sell) and price target to
Rs374 (from Rs246) on the back of the upward revision to UBS forecasts for crude
oil price. UBS revised the oil price forecasts for all years from CY08 and
including the long-term forecast. Given our new explicit oil price forecasts
till CY12, we believe the current price reflects a long-term oil price of only
$48/bbl.

UBS raises the oil price forecasts including long-term forecast

UBS has raised the oil price forecast to US$ 113.5/120/116/135/155 per barrel
in 2008/09/10/11/12 respectively primarily driven by the expectation of supplies
falling short of demand substantially pulling down spare capacities. UBS has
also raised its long-term oil forecast from $73/bbl to $95/bbl from 2013, on the
expectations of higher cost inflation in key upstream projects and GlobalOilCo.

Raising earnings estimates for Cairn India

Driven by the new higher forecasts for crude oil, we raise the earnings
estimates for Cairn India in CY08/09/10 by 209%/110%/73% to Rs 1.4/14.0/74.6
respectively. We do not revise any of our assumptions on productions costs in
doing so.

Valuation

We change our rating to Buy and raise our target price to Rs 374. Our price
target is based on our NAV estimate for Cairn India’s E&P assets. We use a DCF
to value CIL’s stake in Rajasthan, Ravva and Cambay blocks. For the remainder of
CIL’s assets, we use EV ($)/boe. We also factor in exploration upside by
assuming net unrisked reserves of 550 mmboe adjusted by a risk weight of 20%

Nothing in this article is, or should be construed as, investment advice.


Rohit
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