Shares in Scottish Oil Company Defy Trend up Over 30% in 2016
Edinburgh based Cairn Energy is defying oil trend as share price rises over 30% in 3 months
Shares in Cairn Energy (LSE:CNE) are 31% higher since the start of 2016, following positive results from its appraisal well off the coast of Senegal. The company was delighted with the flow rates from its well, which demonstrates the scale of the economically recoverable potential from the Sangomar offshore block.
The company has great potential in the region, as the anticipated break-even costs are competitive even in today’s low cost oil environment. With a projected total cost of less than $40 per barrel, Sangomar is a highly attractive offshore oil play. On the downside, investors have a long wait before the project returns cash to the company — the first oil will not be produced from Senegal until 2021 at the earliest.
Cairn is in no rush though. Instead, it’s more concerned about building its asset base through an exploration led strategy. Its North Sea developments, Kraken and Catcher, are closer to generating cash, with both projects on schedule to deliver first oil in 2017. Moreover, the company is cash rich, with net cash of $603mn at the end of 2015, which management believes will be enough to cover its capital spending and exploration plans until at least 2017.
Quality assets and a strong balance sheet are clear positives for its stock. But, valuations are expensive relative to the rest of the oil & gas sector, with shares currently trading at a mere 19% discount to its book value. That’s substantially lower than its historical 2-year average discount of 36%, despite oil price benchmarks being significantly higher during much of that period too.
With oil prices today still barely above the projected break-even costs for a majority of its oil reserves, Cairn’s discount to its net asset value seems unappealing. So, unless investor sentiment towards the oil & gas sector begins to turnaround, valuations are likely to face downward pressure in the coming months.
The company was founded in 1981 by Sir Bill Gammell, the former international Rugby player, his father James (Jimmy), his brother Pete and others. Its initial operations were in the USA and, following its listing on the London Stock Exchange in 1988, it expanded into the UK North Sea and internationally (Papua New Guinea, Spain, Vietnam, China and Australia). Cairn acquired Conoco’s UK onshore acreage in 1988 and became one of the largest operators of UK onshore oil production with the Palmers Wood oil field just south of London, near Junction 6 of the M25, Humbly Grove (near Basingstoke) and others.
Cairn’s expansion started with a substantial (non-operated) gas discovery (East Cameron 331) in the Gulf of Mexico in 1993 followed by another large gas discovery at Sangu, offshore Bangladesh near Chittagong, in 1996. In parallel, Cairn launched a series of takeovers of public listed companies – Teredo Petroleum in 1994, Holland Sea Search NV in 1995[5] and Command Petroleum in 1996.
In 1996, Cairn farmed out a 25% interest in the Sangu field to Halliburton in return for Halliburton bearing a 50% share of the development costs. In 1997, it sold half of all its Bangladeshi interests to Royal Dutch Shell in return for Shell assuming a $330 million carry of Cairn’s exploration and development costs. This agreement gave Cairn an interest in Shell’s huge acreage position in Rajasthan onshore in North West India. Cairn drilled two unsuccessful exploration wells and Shell then sold its 50% share to Cairn for $7.5 million: Cairn’s third well, now 100% owned, found the Mangala oil field.
In December 2010, Cairn agreed to sell a stake of 58.5% of Cairn India, its India-focused subsidiary, to Vedanta Resources for $8.67 billion. Talks between the two companies started in August 2010. However, approval did not come from the Indian government until September 2011 and the deal had to be restructured.
The company sold an additional 3.5 per cent of its shares in its Cairn India for about USD 360 million in June 2012.
In March 2014, the company announced that Bill Gammell would step down as chairman after the annual general meeting on 15 May 201
