The Independent (United Kingdom): THE INVESTMENT COLUMN: Cairn to reward long-term investors: “Cairn has had an extraordinary few years, buying a block of land in north- western India from Shell and then discovering it was sitting on at least a billion barrels.” (ShellNews.net) 25 March 05
Edited by Stephen Foley
Mar 25, 2005
THE PRICE of crude oil will remain above $38-a-barrel for the rest of the decade, according to CSFB, the latest broker to adjust its forecasts yesterday. With demand from industrialising and industrialised nations set to stay high, and with slowing production in Russia and tight controls within Opec, that seems a pretty fair bet now.
And yet even CSFB cannot bring itself to recommend buying Cairn Energy shares.
Cairn has had an extraordinary few years, buying a block of land in north- western India from Shell and then discovering it was sitting on at least a billion barrels. The shares soared, inevitably beyond levels that could be entirely justified by the drilling progress to date. Equally inevitably, a disappointing drilling result in December sent the stock down by a fifth. Its six-month sojourn in the FTSE 100 is now over, but the company is still valued at pounds 1.88bn.
That seems a much fairer price, although it is predicated on some further extension of Cairn's proven reserves. Appraisal drilling of the Mangala and N-A fields is complete and production is targeted for the tail end of 2007. Work on the area's other three finds, codenamed N-C, N-V and N-R, has become the focus of investor interest now, and there was good news yesterday from N-V where the latest appraisal is that this is a significant oil field. Investors need to remember that estimates of recoverable oil can go down as well as up; the share price tumble in December was the result of a downgrade to estimates of the size of the N-C reserves. Cairn, despite its size, is a speculative investment, not one for the pension fund.
The established oil and gas business has also had its troubles, with production declining as expected, and the Indian government demanding higher taxes, as not expected. Profits will be depressed by the capital expenditure commitments in the new Indian fields for most of the rest of the decade.
After the correction, stagnation is likely in the share price for some time, but existing shareholders should hold on for the long term.
http://news.independent.co.uk/business/analysis_and_features/story.jsp?story=623449
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