Cairn to get desi identity via mega IPO
Cairn Energy’s mega IPO is the first step towards acquiring an Indian identity.
By Dinesh Narayanan & Charles Assisi, TNN |
MUMBAI: When a chief executive of a growing oil driller turns up wearing a horseshoe motif tie and an oversized Tissot, it certainly belies a wish for dame luck and a flaring ambition. So, when Rahul Dhir, barely four months in the CEO hot seat at Cairn Energy India, says that the Scottish explorer’s new strategy is basically an application for Indian citizenship, you know he requires both in equal measure.
The first step in the $6.5 billion Cairn’s strategy to become Indian is an initial public offer that is likely to open sometime late this year or early next. “Essentially we want to become an Indian company,’’ Dhir says. “Since 90% of our assets are in this country, it only made sense that the Indian public had a share in it.’’ Cairn, which has its largest block acreage of nearly 8,000 sq km in Rajasthan, made India’s biggest oil discovery in 22 years there. Named Mangala, the wells in the field are expected to pump 1-1 .1 lakh barrels of oil per day when production begins .
The company found recoverable oil reserves in 17 different locations in the desert. The fields are estimated to contain a total of 3.5 billion barrels of crude oil and are expected to yield 1.5 lakh barrels of oil per day for at least 25 years. Cairn is producing oil from its Ravva fields and gas in the Krishna-Godavari basin, both off the Andhra Pradesh coast and Cambay basin on the western coast of Gujarat.
The Indian assets have burnished the company’s blue-chip status in the FTSE 100 in London. Dhir did not reveal how much of the company’s equity will be offered to investors here. Investment banking sources say that the equity offer could be one of the largest ever in India—something upwards of Rs 15,000 crore or $3.5 billion. Cairn, however, did not confirm the figure. Neither did it deny. “Honestly , we are yet to work out all those details,’’ said David Nisbet, director of communications at Cairn, who has shifted base to New Delhi before the action hots up.
The company also does not share how the money raised would be used. “We recently tied up a $1 billion credit from a group of banks in London. Besides, the cash flows from our fields are strong. But if equity money is available, we would not draw down from the credit lines,’’ Dhir, an advisor to oil companies in his previous role as investment banker with Merrill Lynch, said.
The first step in the $6.5 billion Cairn’s strategy to become Indian is an initial public offer that is likely to open sometime late this year or early next. “Essentially we want to become an Indian company,’’ Dhir says. “Since 90% of our assets are in this country, it only made sense that the Indian public had a share in it.’’ Cairn, which has its largest block acreage of nearly 8,000 sq km in Rajasthan, made India’s biggest oil discovery in 22 years there. Named Mangala, the wells in the field are expected to pump 1-1 .1 lakh barrels of oil per day when production begins .
The company found recoverable oil reserves in 17 different locations in the desert. The fields are estimated to contain a total of 3.5 billion barrels of crude oil and are expected to yield 1.5 lakh barrels of oil per day for at least 25 years. Cairn is producing oil from its Ravva fields and gas in the Krishna-Godavari basin, both off the Andhra Pradesh coast and Cambay basin on the western coast of Gujarat.
The Indian assets have burnished the company’s blue-chip status in the FTSE 100 in London. Dhir did not reveal how much of the company’s equity will be offered to investors here. Investment banking sources say that the equity offer could be one of the largest ever in India—something upwards of Rs 15,000 crore or $3.5 billion. Cairn, however, did not confirm the figure. Neither did it deny. “Honestly , we are yet to work out all those details,’’ said David Nisbet, director of communications at Cairn, who has shifted base to New Delhi before the action hots up.
The company also does not share how the money raised would be used. “We recently tied up a $1 billion credit from a group of banks in London. Besides, the cash flows from our fields are strong. But if equity money is available, we would not draw down from the credit lines,’’ Dhir, an advisor to oil companies in his previous role as investment banker with Merrill Lynch, said.
Cairn, however, may have some reason to worry about its Rajasthan fields. India’s biggest oil explorer, state-owned ONGC, has shelved plans for a well-head refinery, with a likely equity participation of Cairn, in Rajasthan after the government discouraged it from going into downstream oil businesses of refining and retailing. It has also reportedly shelved plans for a refinery in Kakinada in Andhra Pradesh. ONGC chairman RS Sharma, however, denied that the plans have been dropped. “We have not yet taken a decision. The feasibility studies are still on. A decision is possible only after that,’’ Sharma told ToI.
Talk within the company, however, is that the decision to not set up the refineries was taken at a mid-July business planning meeting. The other option that the oil producer has is to pipe the oil to its refinery at Mangalore. Even that is now seen as unviable unless Cairn too participates in building the pipeline or sells oil at a discount. The low-grade , waxy crude in the Rajasthan fields does not flow easily and the pipelines have to be jacketed with special material to raise the temperature. That would, however, increase the cost substantially.
Nisbet says the company is continuing to hold talks on various issues and is optimistic everything will be sorted out by the time it is ready for production in a couple of years. “India needs oil. Ultimately , it is beneficial to the state and the people,’’ he said, dodging a question whether the company could face problems in selling the oil.
An industry insider says Cairn could be selling equity to build its own refinery in Rajasthan. He said the company had told the government of its intent of setting up one. Nisbet declined to confirm it. “It is an option. I cannot say anything beyond that,’’ he said. He, however , added that Cairn’s job was producing oil. “It is up to the state and others to decide what to do with it,’’ he added.
While India today has more refining capacity than it requires, the business is on an upswing with refining margins going through the roof. Reliance’s Jamnagar refinery, for instance, had reported margins of over $13 in the first quarter. Globally, refineries capable of cracking low-grade crude are relatively few in number and the requirement is increasing as most new finds have oil deposits that have a high sulphur content.
The scenario presents a good business opportunity for Cairn Energy if it were to build a complex refinery at its wellhead in Rajasthan, given that it has large reserves there.
“We have enough oil to take us through at least until the middle of the next decade. Besides, we are drilling in several other places that could potentially yield oil,’’ says Dhir, who started his career as an oil and gas reservoir engineer at ONGC. Dhir’s engineering and finance background are ideal for a company like Cairn, which depends on technological prowess and financial discipline for growth. But his horse-shoe tie may have a larger role to play as Cairn begins life as a local company in the Indian economic and political milieu.
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