Overview
Cairn Energy Plc is a UK based independent oil and gas production and exploration company. The company has conducted activities related to exploration, discovery, development and production of oil and gas in multiple locations worldwide. The company holds an experience of over 20 years as an operator and as a partner in oil and gas lifecycle stages.

The company is headquartered at Edinburgh with offices located in the region of Norway, Mexico, Senegal and London. The company entered into strategic partnerships with the Government and Joint Venture to expand its operations globally and gained production experience. The company had worked with major global players, national oil companies, independent listed oil companies. The company also trains professionals in business skills and had trained over 3,000 people. The company had launched the project Hunger under which the company is working in Senegal with 10 centres to serve over 200 villages. The company had operated over 200 wells in India from the year 1996-2011. In the year 2013-14 the company operated 2 wells in Morocco. The company presently holds licenses to operate in UK & Norway, Ireland, Mexico and Senegal.

The current Chief Executive Officer is Simon Thomson. James Smith holds the responsibilities of the Chief Financial Officer.

Key Statistics



Top Shareholders

 
Production Guidance For 2019

In the financial year 2019, the company is expecting its net production to be in between 19,000 bopd to 22,000 bopd with an estimated average cost of production of US$20/bbl. The company’s forecasted capital expenditure stood at US$300 million for the financial year 2019. At Senegal, the company’s SNE field first phase development is on schedule. The company is targeting first oil production in the year 2022 with gross production of 100,000 bopd. At Norway, the company’s development at Nova field is as per schedule. The company is targeting first oil production in the year 2021 with gross production of 50,000 bopd. At UK & Norway, the company had planned 4 exploration wells out which 3 are operated by the Cairn. The company is targeting production of 500 mmboe (Million Barrels of Oil Equivalent). The first well under the plan was dug up on 1^st March. At Mexico, the company had planned 3 exploration wells out which 2 are operated by the Cairn. The company is targeting production of 500 mmboe (Million Barrels of Oil Equivalent).

Segments

The company divided its operations into 3 reportable segments being Senegal, International and UK & Norway. In the financial year 2018, company conducted all its exploration activities in the region of Senegal and production and development activities were conducted in the region of UK & Norway. In the financial year ending 31^st December 2018, the company’s UK & Norway business had shown growth in revenue and gross profit against the last year data for the same period.

Financial Highlights – Financial Year 2018 (US$, million)


(Source: Annual Report, Company Website)

In the financial year ending 31^st December 2018, the company’s reported revenue increased by $377 million to $410.3 million against $33.3 million in the financial year 2017. The increase in the revenue was driven by an increase in the sales of oil and gas in the current financial year. The company’s maximum sales came from the UK & Norway business in the financial year 2018.

In the financial year 2018, the company’s reported gross profit stood at $107.7 million as against the $6.6 million in the FY2017. The company’s reported operating loss stood at $182.1 million in FY2018 versus a loss of $105.2 million in the FY2017. The operating loss for the period was driven by an increase in Administrative expenses and Impairment expenses in the current financial year.

The company reported a loss before tax of $1,266 million in the financial year 2018 against a profit before tax of $272.8 million in the financial year 2017. The company received a tax rebate of $130.5 million in the FY2018 against a tax expense of $55 million in the FY2017.

The company reported a loss for the year attributable to the shareholders of $1,135.5 million in the financial year 2018 against a profit of $217.8 million in the financial year 2017.
The company reported a basic loss per share of 195.59 cents in the FY2018 versus earnings per share of 37.72 cents in FY2017. The company reported a diluted loss per share of 195.59 cents in the FY2018 against earnings per share of 36.84 cents in FY2017.

The company’s total capital expenditure of the financial year 2018 stood at $ 284.2 million. A payment of $32.6 million was made to the government in the FY2018. The company’s production in the FY2018 stood at 17,533 boepd.

Financial Ratios
 

 
The reported gross margin in FY2018 increased by 57.5 per cent to 28.1 per cent against negative 29.4 per cent reported last year for the same period. The reported EBITDA margin of 47.3 per cent for the FY2018 stood higher than the industry median of 32.6 per cent. Net margin reported was negative 58.5 per cent for the financial year 2018. Return on equity for the current financial year stood at negative 58.5 per cent which was significantly lower than the industry median of 12.9 per cent. On the liquidity front, Cairn Energy Plc’s current ratio was lower than the industry median of 1.44, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Cairn Energy Plc’s was 0.19x which was lower as compared to the industry median of 0.40x, reflecting that the company is less leveraged as compared to its peers.  
 
Share Price Performance


Daily Chart as at June-26-19, before the market close (Source: Thomson Reuters)

On June 26, 2019, at the time of writing (before the market close, at 12:44 PM GMT), Cairn Energy Plc shares were trading at GBX 168.90, up by 1.19 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 261.10/GBX 138.00. At the time of writing, the share was trading 35.31 per cent lower than the 52w High and 22.39 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 1,944,541.00; 30 days – 1,605,678.67 and 90 days – 1,850,387.16. The average traded volume for 5 days was up by 21.10 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.65, reflecting significantly higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £987.16 million.

Valuation Methodology
Method 1: Price to Book Value Approach (NTM)
 

To compare Cairn Energy Plc with its peers, Price/Book multiple has been used. The peers are SOCO international Plc (NTM Price/Book was 0.58), Subsea 7 SA (NTM Price/Book was 0.65), President Energy Plc (NTM Price/Book was 0.66), SDX Energy Plc (NTM Price/Book was 0.49) and Galp Energia SGPS SA (NTM Price/Book was 2.35). The Average of Price/Book (NTM) of the company’s peers was 0.94x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare Cairn Energy Plc with its peers, Price/Cash Flow multiple has been used. The peers are Premier Oil Plc (NTM Price/Cash Flow was 1.45), International Petroleum Corp (NTM Price/Cash Flow was 2.43), OMV AG (NTM Price/Cash Flow was 2.89), EnQuest Plc (NTM Price/Cash Flow was 0.56) and Gulf Keystone Petroleum Ltd (NTM Price/Cash Flow was 20.8). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.6x (approx.)

Growth and Risk Assessments

The company was awarded the 5 licenses in the Offshore Exploration Licence Round in the UK. The company is not relying on one geographic area. It is expanding its operations to Senegal, Norway and Mexico which is expected to generate good production volumes for the company. The company had entered into various strategic alliances with the government to expand its operations. The ongoing trade tensions between the US and China will affect the oil prices in the international markets.

Conclusion

The company has shown good top-line performance in the current financial year. There had been a significant increase in the revenue by 1,132.13 per cent due to an increase in the demand for the oil and gas, as it remains the primary source of energy. The increase in the revenue led to the drastic surge in the gross profit growth by 1,531.82 per cent.

The company’s operating performance had declined because of the increase in the expenses related to impairment which is one-time charge with no significant effect on the company’s future financial performance and the long term prospects looks favourable.

But coming to bottom-line performance company’s profit went down significantly. The company currently holds licences to operate in multiple geographic regions globally, which will help them to achieve the set production targets.

The company has 6 independent exploration prospects as a part of a joint venture in the period of 2020-21. The company’s SNE Field and Nova Field are under development and expected to deliver production capacity of 100,000 bopd and 50,000 bopd respectively.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 166.90 (as on 25th June 2019) with high single-digit upside potential based on 0.94x NTM Price/Book Value (approx.) on FY19E book value per share (approx.) and 5.60x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).

 
*The buy recommendation is valid for the current price as covered in the report (as on 26th June 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.78887 GBP.

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