Cairn Energy PLC (LON: CNE) – Proposed Acquisition of Shell Western Desert Assets in Egypt.

Cairn Energy PLC is an FTSE 250 listed company engaged in the exploration and production of Oil & Gas. The Company has an enriched experience of more than 20 years in producing and exploring Oil & Gas all around the world. Moreover, CNE operates across three broad geographic division – UK & Norway, Senegal and International. The exploration activity of CNE is in frontier and emerging basins. The Company has been listed on the London Stock Exchange for more than 30 years. Furthermore, CNE had delivered various flagship projects across South Asia in India, Bangladesh, and Sri Lanka during the twenty-year investment platform. The Company has operations in the UK, Mexico, Egypt, Suriname, and Israel.

(Source: Company presentation) 

Growth Prospects and Risk Assessment

The Company had announced the proposed acquisition of oil and gas production, development and exploration interests from Shell Egypt NV and Shell Austria Gmbh. Moreover, CNE had decided to sell a 20.0% stake in the Cather field, and a 29.5% stake in the Kraken field and the transaction is anticipated to be completed by the second half of 2021. Meanwhile, Cairn had planned drilling activity in Mexico and the UK during 2021. CNE had paid a special dividend of 32 pence per ordinary share on 25 January 2021, totalling approximately USD 250 million to its shareholders. The special dividend was paid post completion of the sale of the Senegal operations.

(Source: Company presentation)

CNE had taken a strategic decision to reduce its planned capital programme to preserve liquidity to tackle business challenges presented by the changing market dynamics. The flexibility of the exploration portfolio allowed CNE to defer several capital projects.

However, there are certain potential risks that can impact the business, such as financial risk, lack of exploration success, failure to grab new venture opportunities, lack of health and security policies, Climate-change policy, underperformance on Kraken and Catcher assets, etc. Moreover, CNE’s business may get affected by volatility in the commodity prices and uncertainty in demand. There can be a danger to the health & safety of people considering the nature of operations.

The crude oil prices may plunge, pressured by an increase in US Dollar index amid elevated concerns over lockdown in Europe.

Industry Outlook Dynamics

With reference to the report from Grand View Research, the global LPG (Liquified Petroleum Gas) market size was USD 116.41 billion during 2019. The industry is anticipated to grow at a CAGR of 4.4% from 2020 to 2027. Moreover, the rising population and a growth in demand for LPG as vehicle emission gas would boost the industry. Meanwhile, the Oil prices had shown a surge since November 2020, driven by Covid-19 vaccination drives and US stimulus package to bolster economic activity.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Cairn Energy Plc.

Recent Developments

On 9 March 2021: The Company announced that Cairn had sold its entire 29.5% interest in the Kraken field and 20% interest in the Catcher field, for a cash consideration of USD 460 million plus additional uncapped contingent consideration dependent on oil prices and production performance from 2021 to the end of 2025.

On 9 March 2021: CNE and Cheiron (its consortium partner) announced the proposed acquisition of upstream oil and gas production, development and exploration interests in the Western Desert from Shell Egypt NV and Shell Austria GmbH for a purchase price of USD 646 million plus additional contingent consideration of around USD 280 million.

Financial and Operational Highlights (for the year ended 31 December 2020 (FY20), as on 9 March 2021)

(Source: Company Website)

• The 2020 net oil production was over 21,000 bopd and was in line with guidance.
• During the year, Oil and gas sales revenue stood at USD 324 million, and the average production cost was around USD 20/boe.
• 2020 oil sales realised at USD 42.56/bbl as compared with an average Brent price of USD 41.96/bbl for the year, reflecting strong pricing of both Kraken and Catcher crudes. 
• The total revenue stood at USD 394.7 million, with royalty income in Mongolia of USD 0.4 million and the release of deferred revenue of USD 13.9 million.
• The Company completed the sale of Norway and Senegal assets and generated net cash inflows of around USD 525 million.
• At the year-end, Group cash stood at USD 570 million, with no drawn debt.
• The Board also decided that USD 250 million be returned to shareholders by way of special dividend per share.
• In 2020, the capital expenditure from continuing operations was USD 125 million, which was in line with guidance.
• In December 2020, Cairn achieved a significant milestone with a unanimous award in favour of the Company in its arbitration with the Government of India (GOI) under the UK-India Bilateral Trade Investment Treaty.
• In Egypt, the Company has a strong production base, with good growth potential.
• Overall, the Company seems to be well-positioned to capitalize on the opportunities through diversification and expansion of its production base as it has a strong balance sheet, limited capital requirement and low breakeven production.
• For 2021, the full-year oil production, net to Cairn, is expected to be 16,000-19,000 bopd.
• The 2021 capital expenditure is expected to be USD 100 million (excluding Egypt).

Financial Ratios (FY2020)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 24 March 2021, at the time of writing (before the market close, at 10:25 AM GMT), Cairn Energy PLC shares were trading at GBX 181.10, down by 0.55% against the previous day closing price. Stock 52-week High was GBX 239.70, and Low was GBX 69.01, respectively.

From a technical standpoint, 200-day SMA (GBX 156.00), 200-day EMA (GBX 165.50) support an upside potential and 14-day RSI (40.54) is currently in an oversold position. 

In the last one year, Cairn Energy PLC’s stock price has delivered a return of ~141.55% as compared to ~50.73% return of FTSE 250, which shows that the stock has outperformed the benchmark index. Over the last one year, Cairn Energy PLC’s stock price had generated slightly more returns than the Brent Crude future. CNE had generated around 141.55% return, and Brent Crude had produced a return of approximately 127.92%.

Business Outlook Scenario

Cairn Energy had started FY21 with a solid financial position illustrated by its balance sheet. The Company is well-positioned to capitalize on the opportunities through diversification and expansion of its production base as it has a strong balance sheet, limited capital requirement and low breakeven production. Moreover, CNE would further strengthen its balance sheet by completing the proposed sale of UK Catcher and Kraken fields for total consideration of approximately USD 460 million during H1 FY21. Furthermore, it would also complete the acquisition of Shell’s Western Desert assets in Egypt for USD 323 million. CNE had forecasted exploration and appraisal capital expenditure of USD 90 million, considering the exploration wells in the UK North Sea and Mexico. However, the oil prices may witness a correction due to the strengthening of the US dollar and prolonged economic recovery.

Meanwhile, the Company had collaborated with the Government of India regarding an arbitration award of USD 1.2 billion. CNE would take all required steps to ensure access of award to shareholders. Overall, the Company is well-positioned to accelerate the growth trajectory for the longer term.

(Source: Company presentation)

Considering the strong production base, decent operating & financial performance, high level of cash generation capabilities, no drawn debt, higher liquidity ratio, lower leverage, strong cash flow generation, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Cairn Energy at the current price of GBX 181.10 (as on 24 March 2021, before the market close at 10:25 AM GMT), with lower-double digit upside potential based on 7.92x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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