Cairn India's September-quarter operating performance was stable. The second-quarter production rate of 194,508 barrels of oil equivalent, or boe, per day was largely in line with our estimates and with the company's flat volume guidance for fiscal 2015. Crude price weakness sent price realization down 5% to $92.1 per boe. Net profit fell 33% compared with the same period last year, to Rs 22.8 billion. This was 1.8% below our estimates, largely reflecting higher tax expense, reflecting increased taxation on fixed-income investments and higher deferred tax owing to new depreciation accounting guidelines this year. Accordingly, we have increased our average five-year tax rate to 12% from 8%.
Valuation
Our fair value estimate remains Rs 400 per share. Cairn's shares remain undervalued, even as it commands one of the highest 2016 net profit per barrel (at $40) of Asian peers we cover. We're convinced the 25% sell-off in Cairn's shares is overdone. Even assuming a $80 Brent price for 2015 and 2016, the decline in Cairn's fair value shouldn't exceed 10%. Cairn's capital outlay plans are on track, and we expect volume growth to pick up from the March quarter as the company's drilling and well
sustenance program start to yield results. We recently downgraded our stewardship rating to Poor from Standard as a result of the related party transaction with the parent company's subsidiary, which had compromised our confidence regarding capital allocation. Payment of dividends or a buyback would be fairer to all Cairn shareholders, and would be a welcome step for management to start to repair trust with shareholders.
Cairn's long reserves and resource life are key differentiators, and support future growth. Cairn's narrow economic moat is underpinned by the onshore Rajasthan block, which is its dominant revenue source, with rock-bottom operating costs of about $4 per barrel. Cairn's high fair value uncertainty rating reflects its crude exposure--a globally traded commodity.
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