Cairn Energy will see rapid production growth in the coming years - Buy says Gary Newman

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A brief look at Cairn Energy (CNE) would leave many wondering how on earth the company can be worth its current market cap of more than £1.15 billion. Especially when you consider that although it is an oil producer, in H1 2018 it only averaged 14,400boepd, and there are many others on the market producing those sort of quantities with much lower market valuations. What you would be missing though is the fact that this company has huge future growth potential, both from increased production from its existing Kracken and Catcher operations in the North Sea, but far more importantly from the future development of the SNE field in Senegal and Nova in Norway.

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In the first half of the year gross production at the company's 20% owned Catcher field was just 27,000boepd, but that was ramped up to 60,000boepd in August, so 12,000boepd net to Cairn. It is a similar story at its 29.5% Kracken field, with 30,700boepd gross averaged during H1, largely as a result of production downtime, but now that is back on track and producing at 35,000 to 40,000boepd. Overall this will give Cairn a more respectable overall net production of up to 22,000boepd for the second half of this year. But even that amount doesn’t look all that exciting given the valuation, and that is where Senegal (40%) really comes in, as that could see net production of as much as 40,000bopd at its peak once it is in production. To a lesser extent the Nova field will also have a significant impact as that will peak at around 10,000bopd net to Cairn, and when combined with Senegal will make the company a very different prospect to where it currently sits, in terms of its output. You will need a bit of patience for all of this to come to fruition though, as first oil for both projects is expected around 2021-22 and so far things are going to plan in terms of reaching that stage.

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Senegal in particular has the potential to be huge, with 240 million barrels being targeted in phase one alone, and a further 250 million barrels to follow from phases two and three, which should follow within four years of first oil being achieved. Obviously, this sort of development isn’t cheap, with phase one expected to come in at up to $3 billion in total, and financing for the joint venture on this field is being worked out. Nova is a fair bit cheaper, but will still cost $1.2 billion to develop, so it is a good thing for Cairn that it has reached this stage at a time when oil is still looking fairly bullish. The company isn’t just sitting back and waiting for these projects to come online though, as it is continuing its drilling of exploration plays in a number of locations around the world, including Mexico, in a bid to line up more fields for future development.

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On paper it doesn’t look anything special at the moment either, especially with some adjustments resulting in a large loss for the first half of the year, but relative to its peers in general it doesn’t have crippling amounts of debt on its books, and also has plenty of headroom from its reserve based lending facility. Those adjustments relate to the ongoing case surrounding Cairn India, with the write-downs being a result of the sale of shares and seizure of the proceeds. Arbitration proceedings are currently ongoing, so the eventual outcome of those, and any financial award, remains unclear. It also has net assets of just under $2 billion currently, so on that basis alone you could argue that it is cheap and no future growth potential is being factored in, only risk associated with the assets which make up that value. The shares have rallied slightly, but I can still see plenty of value at the current price of 195p, especially if the company is able to grow in the way that it is planning, as that would put it in a very strong position as long as oil prices remain at a decent level in the coming years, which seems likely.

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Filed under: Cairn Energy, Ascent Resources, MySquar fraud, Victoria plc, Concepta, TomWinnifrith.com

2018-10-30 12:06:24

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