HP this week said it would give up nine oil and gas blocks in India because it can't explore them. While India's notorious red tape has tied up other natural resource investments, BHP didn't say what's stopping its exploration.
Yet New Delhi knows it needs local energy production to fix a yawning trade deficit. In February, the government relaxed rules that used to stymie oil companies from exploring areas where they had already started production.
This benefits Cairn India Ltd., the country's largest nongovernment oil explorer and producer. The rule changes let it forge ahead with expansion in a rich oil block in northern India. Cairn said this week it's drilled six new exploration wells and found one commercially viable so far. The company says regulators are streamlining approvals that could halve the time it takes to monetize a discovery.
According to the company, the north Indian fields potentially contain about four billion barrels of oil equivalent, though reserves so far are only about a billion.
The problem is valuation—investors must pay a lot now for those potential barrels down the line.
Cairn currently trades at an enterprise value, adjusted for net cash, of about $26 for every barrel of proven and probable reserves it owns. That's roughly double what Thailand's PTT Exploration & Production PCL or London-listed Premier Oil PLC command by this metric.
Cairn's rich valuation reflects expectations it will soon find and recover more oil. But since it's hard to know exactly how much, investors should stay wary until the oil flows.
