Technical updates – Cairn India and Castrol

After crossing the $105 per barrel mark back in Jun ‘14, WTI Crude oil price fell off a cliff. It touched a low near $40 in Mar ‘15, but bounced up above $60 in May ‘15 – where it consolidated for the next 2 months. Oil’s price has started sliding again.

Lower oil price is good for India’s current account deficit. It is also good for oil marketing companies, and value-added producers like Castrol India. But it is not so good for oil drillers like ONGC and Cairn India.

A look at the 2 years closing charts of Cairn India and Castrol (below) clearly shows which company is benefitting and which one is getting affected by lower oil prices. Cairn India is further hampered by an impending amalgamation with Vedanta.

Cairn India

Cairn India’s stock price touched a 2 years closing high of 382.75 on Jun 10 ‘14 – coinciding with the high touched by WTI Crude oil. It has been in a down trend ever since – failing to match the brief recovery in oil’s price during Mar-Apr ‘15.

In Aug ‘14, the 50 day EMA crossed below the 200 day EMA – the ‘death cross’ (marked by light blue oval) technically confirming a bear market. Since then, all three EMAs have been moving down and Cairn’s stock price is trading below them.

The stock price touched a 2 years low of 165 on Jul 9 ‘15, but three of the four technical indicators – MACD, RSI, Slow stochastic – touched higher lows (marked by blue arrows). The positive divergences can lead to an upward bounce. Use it to exit - in case you are holding the stock.

Castrol

The stock price of Castrol India consolidated sideways with a downward bias from Jul ‘13 to May ‘14 before spiking up with good volumes in Jun ‘14 – about the time WTI Crude oil price started correcting.

The stock closed at a 2 years high price of 532.90 on Dec 5 ‘14, but has been in a down trend (marked by blue down trend line) since then. After slipping below all three EMAs into bear territory, the stock appears to have found a bottom at 427.

The three EMAs are in close proximity of each other – a condition often followed by a sharp price move. Since the stock is trading above its three EMAs in a bull market, the price move is likely to be upwards.

If the stock price breaks out above the down trend line with good volumes, it will be a buying opportunity. If volume is insufficient during the upward break out, expect the stock price to pullback towards the down trend line – which will be another buying opportunity. Keep a stop-loss at 414.

(Note: Castrol’s chart is an example of the benefits of a ‘buy and hold’ strategy for quality stocks. The positive price action happened during 6 months – from Jun to Nov ‘14. The balance 18 months during the 2 years period, the stock price consolidated with a downward bias.)

Stock Chart Pattern – Cairn India (an update)

Shortly after the previous update on the stock chart pattern of Cairn India was posted (on Sep 29 ‘11 – marked by grey vertical line on the extreme left of chart below), the stock price formed a small double-bottom and rallied above all three EMAs to touch an intra-day high of 325 on Nov 9 ‘11.

But it turned out to be a ‘reversal day’ (higher high, lower close), and the stock corrected below all three EMAs – only to touch a higher bottom before continuing upwards in a zig-zag move over the next 3 months that culminated with a new intra-day top at 401 on Feb 22 ‘12.

Again, it turned out to be a ‘reversal day’ (higher high, lower close), and the stock price has since been consolidating within a ‘pennant’ (narrow triangle) pattern. Will the stock price of Cairn India be able to break out of the ‘pennant’ pattern any time soon? In which direction?

My recommendation to readers in the previous update had been: “If you are holding the stock, use any rise to exit.” If you had heeded my advice and sold out on the first rally to 325 in Nov ‘11, you would have missed out on the rally to 401. So, it wasn’t such great advice – specially from the short-term point of view. But for long-term investors, the recommendation wasn’t so bad. The stock closed today’s trading at 323.45 – a bit lower than the level touched on Nov 9 ‘11.

Triangle patterns tend to be unreliable, because the direction of the eventual break out can be up or down. However, there is one ‘rule’ about triangles (rules generally don’t work in technical analysis) that seem to work most of the time. A break out usually occurs after the stock price touches each of the upper and lower boundaries twice.

On the Cairn India chart, note that the upper boundary was touched in Feb ‘12 and Sep ‘12, while the lower boundary was touched in Jun ‘12 and Dec ‘12. That means the stock price should be ready for a break out at any time. But in which direction?

Throughout the month of Jan ‘13, the stock price has been attempting to break out upwards. In fact, on Jan 22 ‘13, the stock price broke out upwards when it touched an intra-day high of 350. But it turned out to be another ‘reversal day’ (higher high, lower close), followed by a drop below all three EMAs.

What happened? Apparently, the market wasn’t particularly excited by Cairn India’s Q3 results though on a QoQ basis they have turned a loss to profit. It is a capital intensive company that needs to ramp up its production substantially. This is a stock meant for investors with high risk tolerance and a really long-term outlook.

Daily technical indicators are bearish and looking a little oversold. The stock price may try to bounce up, but may not be able to break out upwards. It may continue to consolidate within the ‘pennant’ and eventually pass through the apex of the ‘pennant’ and negate the triangle pattern.

Bottomline? The stock chart pattern of Cairn India has been consolidating within a narrow triangle (‘pennant’) for the past 11 months. Business has started improving, but there is still a long way to go. Small investors interested in the oil and gas space may be better off investing in the stocks of established players like RIL, ONGC or Oil India.

Stock Chart Pattern – Cairn India (an update)

In my previous post about the stock chart pattern of Cairn India a year back, the overseas promoters were trying to offload the company to the Vedanta group. A lot of water has flown down the Ganges since then, but the Vedanta group has still not been able to complete the Cairn acquisition. 30% owner ONGC raised objections regarding royalty payment, and the deal has been going around through various government departments. Every time it seems that the deal is nearing completion, some one throws a spanner in the works.

Recently, the shareholders voted for the proposal of royalty sharing with ONGC, followed by ONGC agreeing to provide a no-objection certificate subject to a binding legal agreement between the two owners on royalty sharing. Only a few minor procedures and approvals are left for the deal to finally conclude successfully.

A different problem has now cropped up. Several members of the top management at Cairn India, including the CFO, have left the organisation recently. Apparently, professional managers were apprehensive of working with Vedanta's Agarwal. In a specialised business like oil exploration, loss of top management staff may hamper future prospects.

How have the procedural delays regarding the acquisition and exit of top management staff affected the stock's price? The one year bar chart pattern of Cairn India shows that the damage has been substantial: 

The stock price had started correcting after touching a high of 368 in Aug '10. The correction continued till the stock price fell sharply to a low of 285 in Nov '10, well below the rising 200 day EMA. The recovery was equally sharp, but the price momentum slowed down and the stock price reached a lower top of 347 in Jan '11. Another bout of correction dropped the stock below its 200 day EMA once more, but to a higher bottom of 306 in Feb '11.

This time, the stock sailed past its previous top to a new high of 372 in Apr '11, but formed a 'diamond' reversal pattern that marked the end of the bull market. The 'diamond' can be thought of as a head-and-shoulders pattern with a bent neck line that has measuring implications. From the break out point - usually downwards - the stock price is expected to drop at least the same amount as the height of the 'diamond'. In this case, about 40 points.

Note that after breaking down below the 'diamond', the stock consolidated for more than a month between support from the 200 day EMA and resistance from a horizontal line drawn through the right apex of the 'diamond'. Eventually, the stock broke below the 200 day EMA on Jun 17 '11, and quickly reached its downside target over the next two trading sessions.

A recovery followed, and the stock managed to climb above the 200 day EMA on intra-day basis, only to face resistance from the horizontal line through the apex of the 'diamond'. Such 'coincidences' make technical analysis interesting. The bears decided enough was enough. Heavy selling dropped the stock deep inside a bear market, where it touched a low of 250 in Aug '11 - a 32.8% correction from the peak of 372.

A rally took the stock past its falling 20 day and 50 day EMAs, but fell short of the falling 200 day EMA. The stock is trading below all three EMAs and is in a bear market. The technical indicators are looking quite bearish. The MACD has crossed below its signal line into negative territory. The ROC has fallen steeply below its 10 day MA into negative territory. The RSI has dipped below the 50% level after reaching its overbought zone. The slow stochastic has descended from its overbought zone, and is below its 50% level.

Bottomline? The stock chart pattern of Cairn India is suffering due to technical and fundamental headwinds. If you are holding the stock, use any rise to exit. New entrants should await the acquisition deal to go through, and the stock to form a bottom. The Vedanta group has acquired a few companies in the metals and mining sector, but have no experience in the oil exploration business. Keep that in mind if you are contemplating an investment.

The implication of high oil price for investors – a guest post

With oil prices ruling above $100 per barrel, India’s trade deficit is widening and inflation remains a major concern. In this month’s guest post, Nishit looks at the implication of high oil prices for investors, and suggests how we can benefit from this adversity.

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From a low of about $33, Crude Oil has now spiralled up to a high of almost $110 a barrel. Crude Oil is the lubricant which runs the world, so let us investigate why the rise in price and what are its implications for India.

Most of the crude oil deposits lie in the Middle East. Middle East has been racked by turmoil and unrest. Supply of oil has been threatened in Libya and other parts like Saudi Arabia. The price rise has been mainly on the back of supply concerns.

India imports 70% of its oil, and if the price rises it implies that it would need to spend more dollars to buy the fuel. A country earns dollars by exports, inward remittances by Indians settled abroad and also foreign investments into India.

We spend the dollars on imports. The difference between exports and imports is known as Current Account Deficit. As we import more than we export, we are always in trade deficit.

If Oil is pricey, the deficit widens, and India’s credit worthiness declines making it less attractive for foreign investors. Petrol price rise gets passed on to the consumer, thereby leaving him with less income to spend.

Subsidy on Diesel of almost Rs 18 to a litre weakens government finances leaving it with less money to spend on infrastructure and developmental activities.

In 2008, crude oil price rose and peaked at around $145 per barrel. All the time, as oil price was rising the equity markets did not react too much to the price rise. A month after the prices peaked, the markets tanked. This was aided also by the Lehman Brothers meltdown.

Now how do we play this as small investors?

We have oil producers like ONGC and Cairn. Cairn is a major beneficiary but now caught up in legal tangle over its acquisition by Vedanta, and ONGC has to bear the subsidy burden.

The legal tangle has no effect on its daily operations and hence I would still prefer Cairn to ONGC. Portfolio allocation could be these two companies and Gold. Average gold price per ounce is 15 times a barrel of oil. This implies fair price for Gold now is $1650 per ounce.

This also means avoid the Auto sector, Banks and anything which is linked to rising Interest Rates. Rates will keep rising as government battles inflation and also seeks to raise more money to pay for oil.

Don’t like the petrochemicals sector? Long Gold and short Banks could be an interesting option.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Related Post

Cairn India: an oil story worth betting on – a guest post

Oil is on the boil – how can investors benefit? (A guest post)

Oil price is once again making headlines as it inches up towards the $100 mark. Food inflation shows no signs of cooling off, making another round of interest rate hikes by RBI almost inevitable. Rising price of oil will be an additional headache that will lead to rising import costs, worsening India’s trade deficit. Another rise in petrol and diesel prices – unless the government becomes proactive by reducing taxes – will further stoke the fire of inflation.

Is it all darkness and doom? In his guest post this month, Nishit looks at the silver lining. He discusses two stocks that are likely to benefit from higher oil price. Before we get to Nishit’s post, here is an announcement from Nishit’s friend Anuraag about an interesting Panel Discussion that readers in Mumbai may want to attend:

With the purpose of spreading awareness among Market Participants, in association with Eco Ashram, we are organising a Panel Discussion on the topic “Stock Markets or Rigged Casinos?” on 21st of January 2011 at "Y. B. Chavan Centre, Mumbai" from 5:00 P.M. to 7:00 P.M. The event is called "NATIONAL ECONOMIC DEBATE".

The Panelists are Dr. Ajit Ranade (Chief Economist, Aditya Birla Group), Shri. G. Anantharaman (Former Whole-Time Member, SEBI) & Dr. R. Vaidyanathan (Professor, Finance & Control – IIM, Bangalore).

The discussion will be followed by release of the book, “Sense, Sensex and Sentiments – The Failure of India’s Financial Sentinels” written by Shri. M.R. Venkatesh, Chartered Accountant.

For more details, contact:

Anuraag Gupta
Profound Consulting Pvt. Ltd.
502, A-Wing, Delphi, Hiranandani Business Park, Powai, Mumbai - 400076
Telefax: 022 25704357
Cell: +919892832789; anuraag@nedindia.com

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Crude prices have risen to 92 dollars a barrel. Now, the question is how do we benefit from this? One way is buying crude as a commodity on the MCX Exchange, which is beyond the reach of most retail investors. My sincere advice to retail investors is to stay away from Commodity Trading. So, how do we play it on the stock markets?

We could buy companies dealing in crude. The downstream players are HPCL, BPCL and IOC. Now these companies mainly refine crude and sell the products. They have to bear a subsidy burden on Diesel and Kerosene. The government has come with a formula of 1/3^rd burden by refiners, 1/3^rd by government and 1/3^rd by the upstream companies like ONGC, Gail and Oil India. Now, crude prices can go over the roof and the government has no defined mechanism to handle it.

Keeping that in mind the downstream companies are strictly off the buy list. Coming to ONGC, the price which ONGC gets is strictly capped due to the subsidy burden. ONGC is supposed to come out with a FPO in mid-March 2011. The stock is getting split along with a bonus issue for which the record date is yet to be announced. So at the closing price of Rs 1205 (Jan 7 ’11), you would be getting 4 shares for every 1 share you buy now.

Arguments in favor of buying ONGC:

1. Government Company - so a very safe buy
2. EPS of 74 and P/E of 16 - so not very expensive. Safe play on crude oil. A multi-bagger over past 10 years. Can buy and hold
3. If the Government wants the FPO to go through, they will clear the air on subsidy burden, thus making it an attractive offering

Argument against ONGC:

1. The subsidy sword keeps dangling over ONGC. Until clarity comes nothing can be done to enhance profitability
2. FPO in March ’11. Experience over past 1 year is stock prices of government companies which come for FPO are usually kept depressed before the FPO, so folks get a good rate

Cairn India is a good company, which I like and had written about in a post in August ‘10. Here is the link:

http://investmentsfordummieslikeme.blogspot.com/2010/08/cairn-india-oil-story-worth-betting-on.html

To update the story, Vedanta has to get approvals from the government, which are expected in the middle of February ‘11. If this goes through, the Open offer will be at Rs 355 for a 20% stake. The promoters of Cairn have been paid Rs 50 as non-compete fee. There is speculation that the open offer could well be at Rs 405.

Now taking crude oil prices to be around 96 dollars, the fair value of Cairn is already around Rs 350. Vedanta has the muscle to pump in funds to make acquisitions and companies taken over by Vedanta in the past have sizzled post acquisition. Sesa Goa and Hindustan Zinc are prime examples.

Government approvals should be in place, ONGC will negotiate to get rid of their royalty burden on joint oilfields with Cairn in return for giving a NOC.

How do we play all this?

In Cairn, the downside looks limited, so should be bought now. One can buy ONGC during the FPO. The reason for this is FPOs are always at a discount to market price, plus the retail fraternity gets additional 5% discount to the offer price. By buying Cairn now, we are getting a crude oil exposure. Crude going up means the fair value of Gold is 1380 dollars. Normally 1 ounce of Gold should buy 15 barrels of Crude Oil. Time to add Gold along with the Crude.

Cairn India’s market cap is 1/4^th of ONGC’s. ONGC is the old giant whereas Cairn India is the new kid on the block.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Stock Chart Pattern – Cairn India

Nishit had written a guest post about Cairn India where he highlighted the macro-fundamentals, and recommended a price band of 275-300 for an entry. I thought of checking out the stock chart pattern and found that Nishit’s ‘buy’ zone appears spot-on.

But a look at the micro-fundamentals raises the question whether small investors should consider the stock as a part of their portfolio or not. It seems to be a high-risk choice with possible high returns in the future.

Cairn India raised more than Rs 8000/- Crores through an IPO four years ago. The response wasn’t all that great and the IPO price was fixed at Rs 160/- (Rs 10 face-value). Much more than that money has been sunk already in drilling for oil and gas.

The ‘burn rate’ is coming down as the company has started to locate oil and gas reserves at both on-shore and off-shore locations, but Cairn is far away from turning promise into profits. Till date, the company is a loss-making one with almost zero earnings. Now interest costs are beginning to affect the bottom line even further.

The nature of the oil and gas business is that you need to pour a lot of money into surveying and drilling without any guarantees of finding anything at all – in which case, the entire investment has to be written off. It is to Cairn’s and to an extent, the Indian government’s credit that the areas allocated for drilling actually contained sufficient reserves of oil and gas for the venture to be a viable one.

So, why is the promoter – Cairn Energy PLC, which owns more than 60% of the equity capital – planning to off-load its stake to the Vedanta Group? Are they satisfied that their initial investment has more than doubled in less than 4 years? Or, could it be that they don’t want to go through the hassles of setting up a huge administrative infrastructure? May be, they are fed-up with the layers of bureaucracy and corruption at each layer?

Whatever be the reason, the one year bar chart pattern of Cairn India seems to be in a corrective mood:

The stock price reached a peak of 342 in May ‘08 – bang in the middle of a raging bear market. It then dropped 74% to 88 in Oct ‘08, underperforming the Sensex, but bounced up immediately, and handsomely outperformed the Sensex by making a series of higher tops and bottoms.

The stock hit a new high of 368 on Aug 16 ‘10. But the day’s trade formed a ‘reversal day’ pattern on very high volumes. Coming at the culmination of a long bull rally, such a pattern could lead to a change of trend.

A test of the new high (on Aug 24 ‘10) on decent volumes failed, opening up possibilities of a ‘double top’ bearish pattern with a downward target of 300 – which is just below the 200 day EMA. The stock got some support at the 50 day EMA, bounced up above the 20 day EMA, and is heading down again. Today’s close of 329.55 is exactly on the 50 day EMA.

The technical indicators have turned bearish. The slow stochastic and the RSI are both below their 50% levels and slipping further. The MACD is positive, but below the signal line and falling fast. There is support in the 310-320 band, which is the next downside target. Thereafter, the stock may drop to the 200 day EMA, or even below it.

Should investors use the opportunity to buy? That will depend a lot on how confident one is about the Vedanta acquisition going through without a hitch. The recent bauxite mining fiasco in Orissa may queer the pitch. Not to forget that the Vedanta Group has zero experience in the highly complex oil and gas industry.

Bottomline? The stock chart pattern of Cairn India is undergoing a correction after a two years long bull market. Nothing unusual so far. Prudence suggests that the acquisition deal should play out before one enters the stock. Existing holders from lower levels can book part-profits.

Cairn India: an oil story worth betting on – a guest post

Nishit’s previous guest post about Bharti Airtel received good reader response that motivated him to write about the stock-of-the-moment in the oil and gas sector. Here are Nishit’s views.

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Oil is also known as Black Gold. The lust for oil has led to many wars. Empires have been built on oil and lost due to oil. Oil prices in the next decade may very easily rule above 100 dollars a barrel. Do not believe it?

As recently as 2002, oil was in a band of 15-30 dollars. Now we are in the 60-80 dollars band. Triggers for oil prices going north are:

• War
• Demand and Supply mismatch. Look at the Hubbert curve which states that post 2020, the oil production will start falling. Demand keeps rising about 2 % every year.

Over the last few years, hardly any new oil fields have been discovered. Also, alternative fuels like wind, solar energy have not really taken off to make a dent in the demand for oil.

Our aim as investors is to make money in Indian companies. In India, we have very few pure oil plays. ONGC and Oil India are crippled by the government’s subsidy policies. RIL has other businesses and is not a pure oil play.

Cairn India is a standalone player in oil production. It has operations in Rajasthan, Cambay offshore basin on the west coast and Ravva on the Krishna-Godavari basin on the east coast. It has stakes ranging from 20% to 70% in these fields and is also the operator for these fields.

Cairn India produces what is known as the Barmer crude which trades at a discount of 10-12% to the Brent crude. There are different types of crude based on the ‘sweetness’ of the crude. By ‘sweetness’, we mean how much of it can be refined and the sulphur content.

For FY 2010, Cairn India produced around 69000 barrels per day. Peak production is expected at 250,000 barrels per day from 2012 - 2015.

The current market valuations are done by factoring in crude prices at around 80 dollars a barrel. Cairn India has ready buyers for its crude from clients like IOC, HPCL and MRPL. The current fair value of Cairn India comes to around Rs 250 - 265 per share taking into consideration all the oil fields it has, the current price of crude oil.

The transportation from the oil fields would be done by trains which are already in place. So the company has oil reserves, transportation facilities and buyers. Thus, crude prices are the only key factors to watch.

One should buy Cairn India if:

• one believes crude oil prices will shoot up to 100 dollars plus a barrel
• one has faith in Cairn’s oil exploration expertise; Cairn is a renowned oil exploration company which uses EOR technology over water flood technology which would extract 45% more oil

I believe the EPS would go to about Rs 40 for FY12 and factoring a P/E of 10-12 would give a target price of around Rs 500.

[Just as I finished writing the post, I heard that the Vedanta group and Sesa Goa may jointly take a 51% - 60% stake in Cairn India. Sesa Goa’s earlier acquisition by the Vedanta group has done no great harm to the former’s share price, so Cairn India’s stock should not be negatively impacted by the takeover news. Sesa Goa’s stock rallied from a low of Rs 68 after the meltdown to a high of Rs 470 about 2 months back.

One should never buy on news based events as all is factored in the price. The prudent course would be to wait for the Cairn India stock to come back to Rs 275 - Rs 300 levels for an entry.]

(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)