Prospects of production ramp-up, likely end to the Vedanta deal impasse, and attractive valuations make the stock of oil and gas explorer Cairn India a good buying opportunity for investors with a long-term perspective. At its current price of Rs 270, the stock is down more than 25 per cent since April and discounts its trailing 12- month earnings by 5.8 times. At this level, the impact on profits due to royalty becoming cost-recoverable seems to be factored in.

Cairn India's poor show on the bourses, ironically in a period of buoyant crude oil prices, was the result of the unenviable position it found itself in. This followed pre-conditions set by ONGC (its partner in the prolific Rajasthan fields) and endorsed by the government, for approving Cairn Energy's sale of controlling stake in Cairn India to Vedanta.

Acceptance of these conditions (making royalty cost-recoverable and withdrawing arbitration on the cess dispute) was expected to take a toll on Cairn India's profits and valuation. Sticking to its guns, on the other hand, would have meant the risk of litigation with and consequent non-cooperation by ONGC in raising output levels from the current 125,000 barrels of oil per day (bopd). With Cairn Energy and Vedanta finally accepting the conditions set by ONGC to see the deal go through, the Cairn India stock has predictably lost a lot of ground. The company's September quarter financials are expected to be impacted due to the effect of provisioning for past royalty on the Rajasthan fields.

However, on the positive side, with ONGC having its way, the uncertainty regarding production growth in the Rajasthan fields may be over, and approvals for output increase are expected to come through without further ado. Cairn India has been indicating that it can increase production to 150,000 bopd immediately, subject to approvals. Also, Cairn India estimates that output from the Rajasthan fields can be increased to 175,000 bopd by the end of this calendar, and further to 240,000 bopd, going forward. This is almost twice the current production levels, and can boost earnings considerably.

Other positives include the recent discovery of gas by Cairn India in the Mannar basin in Sri Lanka. While it is early to comment on commerciality of this discovery and its earnings potential, tidings on this front (expected in 2012), if good, could provide a fillip to the stock.

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