Cairn Energy PLC (LON: CNE)

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.

On 07 September 2021, CNE will release interim results for the six months ending 30 June 2021.

Growth Prospects and Risk Assessment

• Robust Exploration Pipeline – The exploration portfolio of the Company illustrates high-return opportunities and attractive frontier positions.
• Acquisition of Shell’s Western Desert Assets in Egypt – The Company remained on track to deliver the next stage of accelerated growth with this lucrative acquisition. Moreover, it would expand and diversify the production base with low-cost, sustainable gas-weighted production close to growing markets. CNE expects to complete the acquisition by H2 FY21 in collaboration with Cheiron (joint venture partner).
• Divestment in the UK North Sea - CNE will complete the sale of a 20.0% stake in the Catcher field and a 29.5% stake in the Kraken field by the second half of 2021. It will enable the Company to pursue strategic goals. Furthermore, the transaction would be expected to get completed by H2 FY21.
• Low-Cost exploration potential in Egypt – CNE has a low-cost exploration potential of around eight hundred million barrels in the operating licences in a proven hydrocarbon basin.
• Accelerated Global Economic Recovery – The increasing Covid-19 vaccination programmes and stimulus package announced by several nations would fuel up the global economic recovery. Moreover, the boost in economic activity would result in the increasing demand for Oil & Gas.

(Source: Company Presentation)

Key Risks

• Fluctuation in Oil Price – The oil price may witness a correction due to the strengthening of the US dollar and prolonged economic recovery.
• Acquisition risk – CNE may fail to achieve desired synergies from the acquisition of Shell’s Western Desert Assets in Egypt.
• Cyber Security Risk – The cybersecurity risk has been identified as an emerging risk as breaching of data might hamper operations of the Company to a certain extent.
• Diminished access to Debt Markets – Failure to obtain funding from financial markets may result in the delay of exploration activities and development programmes.

Now, we will analyse the Key Fundamental Statistics & Key Shareholders Statistics of Cairn Energy PLC. 

MFS Investment Management is the most significant shareholder as it holds nearly 72.02 million shares as of 31 March 2021.             

FY20 Financial and Operational Highlights (for the year ended 31 December 2020, as on 09 March 2021)

(Source: Company result)

• CNE had delivered an Oil and gas revenue of USD 324 million, and the average realised oil price remained USD 42.56 per barrel during FY20.
• 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 capital expenditure from continuing operations remained USD 125 million during FY20, which was in line with guidance.
• Moreover, CNE had completed the sale of Norway and Senegal assets and generated net cash inflows of around USD 525 million. Thus, it had returned USD 250 million in the form of a special dividend to the shareholders. 

Financial Ratios (FY20)

Share Price Performance Analysis

(Analysis done by Kalkine Group)

On 02 June 2021, at 11:07 AM GMT, CNE’s shares were trading at GBX 168.00, up by around 0.18% from the previous day closing price. Stock 52-week High and Low were GBX 239.70 and GBX 108.94, respectively.

On a daily chart, the stock price is trading above an upward sloping trend line for the past ten months and currently trading around the trend support level of GBX 162.00, indicating the probability of an upside reversal. The momentum indicator RSI (14-period) is trading in positive territory at ~51 levels. The MACD line is trading below the centreline with a positive crossover.

Over the last one year, CNE’s stock price had delivered a positive return of ~35.51%, while the FTSE All-Share Energy index (benchmark sector) had produced a return of about 0.48%, and FTSE 250 (benchmark index) had generated a return of around 31.46%. 

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/NTM Cash Flow) 

Business Outlook Scenario

Cairn Energy has kickstarted FY21 on a bright note illustrated by its balance sheet. Moreover, CNE would further strengthen the balance sheet by completing the proposed sale of UK Catcher and Kraken fields during the second half of 2021. CNE had forecasted exploration and appraisal capital expenditure of USD 90 million during FY21, considering the exploration wells in the UK North Sea and Mexico. Meanwhile, the Company had forecasted net oil production ranging from 16,000 bopd to 19,000 bopd for FY21. CNE remained confident regarding the proceeding against the Government of India. However, the Indian Government had challenged the set-aside proceedings in the Dutch courts. The Company had made significant progress on the UN Sustainable Development Goals, and it aims to achieve net-zero commitments at or before 2050. Overall, the Company has a robust balance sheet, financial flexibility, and capital discipline to achieve sustainable growth for the shareholders from the long-term perspective.

Considering the robust exploration & development pipeline, lucrative acquisitions, strong balance sheet, good liquidity profile, high crude oil price, decent financial performance, 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 168.00 (as on 02 June 2021 at 11:07 AM GMT), with lower-double digit upside potential based on 9.31x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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