Cairn India can grow faster if the government policies are more sensible
Cairn India has come a long way in 20 years, having started with 3,000 barrels of oil a day, in Ravaa fields, to a current output of 180,000 barrels, representing 25% of India's needs, which are growing by the hour! They could notch to 300,000 barrels, a thousand leaps forward from the tiny step they took two decades ago. And, when they do, which is within their reach, they would be able to meet 35% of India's oil requirements.
Cairn India, along with its joint venture partner ONGC (Government of India company), holds 70% with the balance 30% stake held by the latter. They operate in four basins and have made 40 discoveries so far. Around 95% of its production is oil and the balance is gas, in which they have shown serious interest in recent times.
It may be recalled that the Rajasthan block initially covered an area of 11,108 sq kms but the licence was given to explore only 10,558 sq kms, as 550 sq km being the unexplored area, which was surrendered, by Cairn India, to the Government, in line with the norms laid down in the Barmer block. Now, once surrendered, it looks like it makes it obligatory for the government to go for an auction once again! This is what Veerappa Moily has recently mentioned in a statement.
It appears that Cairn India has now sought reinstatement of the block to the government and the appeal made by them to the Cabinet, if accepted, would be the right step in the right direction, as this would eliminate new processing cost and loss of time. In any case, we may bear in mind that it is now Cairn India is taking the risk in taking up the exploration costs that may or may not bear any oil or gas for that matter! Why not give them the chance?
Another important issue that has come up is that the contract for the Rajasthan block is valid till May 2020, hardly seven years away from now, which is, practically small lead time in the oil industry. Cairn India have approached the government that the contract should be actually extended to the full life and economic potential of the block, which, they estimate may be for about 20 years or so. Such a move would enable them to plan their exploration work, investment plans and options which are likely to involve capital expenditure of millions of dollars.
It must be borne in mind that the Rajasthan block was awarded much before the establishment of the New Exploration Licensing Policy (NELP), which does not stipulate any "expiry" date as such. Since this is the case for new contracts, why not apply to all existing contracts the same rule?
While Cairn India investigates the prospects for oil and gas under the ground, they have, above on hand, clean cash reserves of over $3 billion! Thankfully, when the government permitted them to explore in existing, producing fields, Cairn India took expeditious action and have discovered oil and gas in Barmer basin in Rajasthan, and in Nagaylanka in Andhra Pradesh.
With these encouraging finds, Cairn India hope to invest a substantial portion of this cash reserves in Rajasthan initially, and with others to follow in due course.
Moneylife has carried stories on Cairn India on a regular basis. It may be recalled that Cairn India had sought government clearance to go in for a swap arrangement by which they may be permitted to export the crude oil and gas from Barmer to get a better price in the international market (currently Rajasthan oil is being sold at about 8% to 13% cheaper then Brent) and, in lieu, import cheaper crude that can be supplied to Indian refineries who are designed to handle them with ease. For this, Cairn India had suggested that they would use the service of Indian Oil (a Government of India company), so that everyone benefits. For, at the moment, India imports crude and does not permit its export. Such a move would benefit refineries like Mangalore Refinery, which has been largely dependent upon Iranian crude.
A look at the web site of Cairn India is educative. The capital expenditure plans are on the anvil and it is apparent that they are awaiting government clearances to take major steps in the right direction. From the Rajasthan block itself, they project a production of 200,000 to 250,000 barrels a day by 2013-14, just in the next few months.
In addition to their development and expansion plans in India, Cairn India has taken steps to explore in the neighbouring unexplored areas in Sri Lanka, which looks promising, and South Africa. The onshore discovery of oil and gas in Nagaylanka in Andhra Pradesh involves additional investment of about Rs500 crore in the next 2/3 years, details of which are expected.
On the whole, in the next few months, Cairn India, being an active member of the Vedanta family, may spring pleasant surprises for its share holders, considering its huge cash reserves, and the capex plans ahead for its future expansion and development.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
Revision of data, including inflation numbers, with such wide variation, does not augur well for a country like India known for leadership in technology and innovation
The Ministry of Commerce & Industry (MCI) periodically releases economic data relating to inflation, gross domestic product (GDP) growth, index of industrial production (IIP). But many times, these basic figures do not reflect the correct position, as MCI first publish provisional figures and thereafter, with a delay of one to two months, release the final figures which are generally found to be in variance with the provisional figures.
Last week, on 14th of November, data relating to wholesale price index (WPI) for ‘all commodities’ for October 2013 was released. The annual rate of inflation based on WPI rose to 7% (provisional) as compared to 6.46% (provisional) for September 2013.
Meanwhile, on the same day, the annual rate of inflation based on final WPI for August 2013 has been revised upwards to 6.99% from a provisional figure of 6.10% reported on 16 September 2013. Obviously, the provisional figures for August 2013 released by the MCI on 16th September were faulty and the final improved figures have now been released after a gap of two months. The variation between these two figures is as high as 15%, which is not a happy situation in the present environment. Is there no tolerance limit for such variations?
Similarly, the IIP for August this year has been revised to 0.43% from the provisional estimate of 0.60% announced earlier. These revisions in economic data have been going on for long without any rhyme or reason, and the Ministry appears to be immune to these aberrations.
It is a well-known fact that the stock market, securities market, commodities market and even the foreign exchange markets react to these economic data sometimes violently and speculative activity in all these markets get heightened by the faulty or inaccurate data published by the MCI, causing upheaval in the economy.
It does not stand to reason as to why the officials cannot collate accurate market information in the first instance itself, as revision of data, with such wide variation, does not augur well for a country like ours known for leadership in technology and innovation.
RBI governor had questioned the reliability of economic data
As early as in July 2011, the then Reserve Bank of India (RBI) governor, D Subbarao had questioned the reliability and frequent revisions of some of these basic data which are vital for all policy decisions of the central bank and the government. “The RBI’s policy formulation is handicapped by frequent revisions to data. We make policies in real time and if the provisional data that these are based on are inaccurate, the resultant policies can turn out to be sub-optimal choices,” Subbarao had said.
As per media reports, he was even critical of estimates of GDP growth. For FY2009-10, the advance estimate of GDP growth rate at market prices from the expenditure side that came out in February 2010 was 6.8%. That was changed to 7.7% in the revised estimate in May 2010 and further to 9.1% in the quick estimate in February 2011. “The policy that perforce had to use information on advance estimate of GDP was fraught with the risk of underestimating the growth momentum,” Subbarao had said.
Despite all the criticism by the RBI, there appears to be no effort on the part of the department concerned of the government to improve the position by ensuring that the difference between the provisional figures and the final figures is as little as possible, if such the practice cannot be totally avoided. But to ensure credibility of this vital information about the state of the economy it is necessary for the government to find a way to perfect the system and totally avoid these aberrations and thus help the policy makers in achieving the desired objectives.
Lies, damned lies, and statistics" so goes the adage.
In the context of the wide variations in the figures, especially inflation data, published, whether the economic data periodically released by the government fall into any one of these categories, it is for you to decide. You be the judge!
(The author is a banking analyst and he writes for Moneylife under the pen name ‘Gurpur’ )
Investors depend on financial data but there are distortions of information throughout the financial world. Numbers, like anything else, can lie
Any investor invariably becomes a ravenous consumer of financial information. Much of that information comes in the form of numbers. Hundreds of acronyms forming a massive alphabet soup! Besides the numbers, there are also analysts, economists and even humble financial writers, who attempt to explain, or torture, the numbers into a construction that fits their thesis. But there is a major problem with this process. You have to ask yourself an extremely important question. Are the numbers really accurate? Do they provide a complete and timely description of what they are trying to measure?
Investors have to have information. Markets especially react, often with breathtaking speed, to this information, but one of the main reasons why markets are so volatile is that the information is subject to major revisions. We should not be surprised. There are enormous economic and political incentives for spinning the data. Bad information does not come with an expiration date. If undiscovered the fraud can easily continue for years.
Even presumably honest government agencies in developed countries produce data with major gaps. The monthly circus in the United States surrounding ‘jobs Friday’ is often a meaningless charade. The US government produces the jobs and unemployment report the first Friday of the month (assuming it is not shut down). But the report also revises, sometime by large amounts, its prior reports.
The central governments may make good faith efforts to get accurate statistics, but their work can be stymied by local interests. When a team from the EU’s statistical office, Eurostat, tried to force the Greek government’s statistical agency to produce more accurate numbers, the local personnel staged a revolt against the new management. Beijing has a constant struggle to get provincial governments to provide good information that at a very minimum do not contradict what the central government issues.
It is earnings season in the US. A company’s stock, and the CEO’s compensation, can go up substantially if the company ‘beats’ analyst’s estimates. Of course one reason that companies ‘beat’ estimates is that CEOs spend a great deal of time lowering analyst’s expectation. On average 63% of the companies beat estimates. Since analysts get it right only 37% of time, far less than flipping a coin, one wonders why they bother.
Analysts did a little better this earning season. Despite the quantitative easing (QE) distortions in the US markets, earnings were really bad. According to Zacks Investment Research, in May analysts were forecasting 5.1% growth. Many CEOs managed to massage expectations down to 2.1% and the companies could not even beat that. Compared with the second quarter of this year, earnings per share may be flat.
But those numbers are even inaccurate. Thanks to widespread use of debt fuelled share buybacks designed to spread meagre earnings among fewer shares, the earnings look better than they are. If you use the actual dollars amounts, the profits of S&P 500 companies are set to fall, according to Zacks, from $260.3 billion in the second quarter to $255.2 billion in the third. The final dollar amount is probably lower. Despite all of the accounting gimmickry according to Bespoke Investment Group: “Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates. Since the bull market began in March 2009, this is the second worst earnings beat rate we've seen. Only Q1 of this year was worse.”
Despite analysis of the apparent next chairperson of the US Federal Reserve, Janet Yellen, the frothiest part of the American stock market are social media stocks. Normally, companies are judged by certain simple metrics like profit. Some even pay dividends. But old fashion concepts like earnings per share are not necessary for these stocks. In the days of the dot com stocks, investors used the number of “eyeballs” a site received. Now it is price per user, which explains the astronomical valuations for Facebook and Twitter. But there is one question. Who is a “user”?
Facebook and Twitter use the concept of ‘monthly active user’, but even Twitter estimates that approximately 13% of its users are fake. Other social media stocks use different measures. On the other hand, LinkedIn uses “registered users”. LinkedIn has been operating for 11 years and includes every profile ever created whether they are active or not, sort of like selling advertising based on the number of profiles on MySpace.
It is not only wonky metrics. The tech companies have a nasty habit of releasing profit and revenue numbers without expense deductions required by standard accounting rules. The most obvious practice is to strip out options. For example, Twitter’s adjusted EBITA of $31 million would have been negative if they included $79 million of stock compensation expense. But it is not just stock compensation expenses. These accounted for only a quarter of the expenses added back to profits. Tech firms also added back things like charges related to acquisitions, restructuring costs, amortisation of intangibles, asset impairments, fines and legal judgments. For tech companies listed in the S&P 500 these added up to a whopping $40.7 billion in 2012. The practice is increasing. In 2012, 36% of accounting expenses were added back to profits above the 20% added in 2011. There are real numbers required under GAAP (US accounting standards) available, but investors have to dig for them.
Dr Janet Yellen’s assertion that there are no bubbles is based on the fact that earnings are 15 times forward PE. Without mentioning the distortions of QE and share buy backs, it should be pointed out that when the market topped in 2007, the forward PE was also 15 time forward earnings. There are other measures like the cyclically adjusted price earnings ratio (CAPE) which is at levels reached in 1929, 2000 and 2008. More ominous is price to sales, which is at the highest level over the past 30 years.
Information in the US, though distorted often by spin, is usually available. In China it might not exist at all since the government controls information. The real GDP growth has an interesting habit of always matching analyst’s estimates. Other measure of GDP put it at below 5% rather than the official 7.8%.
Companies are infinitely worse. For example, Zoomlion is one of the largest heavy equipment manufacturers in China. It is also partially owned by the province of Hunan. It has long had a reputation for rather interesting sales and financing practices. Last January, Zoomlion was accused, at last. At that time a letter was sent to Hong Kong market regulator from a “a concerned international investor” which accused Zoomlion of “suspected fraud” and “disclosure of false information”. In May, newspapers in Hong Kong again received information purportedly showing inflated sales. Finally, in October a Chinese journalist, Chen Yongzhou, working for the Chinese paper New Express was arrested for a story about fraud at Zoomlion. Conveniently, he was arrested and then confessed on television. Zoomlion has never been investigated by anyone.
These are just some examples of distortions of information throughout the financial world. Some are far greater than other, but it is important for investors to understand that numbers, like anything else, can lie.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)