Cairn Energy PLC (LON: CNE) – Strengthened strategic and financial flexibility while reducing the risk profile.

Cairn Energy PLC is a FTSE-250 listed Oil and Gas Exploration, Development and Production Company. It operates with three business divisions, namely Senegal, UK & Norway, and International. The Senegal operation focuses on appraising the offshore discoveries and explore prospects for further drilling. The UK & Norway division is engaged into exploration activities in the Norwegian Sea, North Sea, and the Barents Sea. It also manages the asset development in the UK. The International operation comprises interest in all other regions where the Company holds exploration licenses, including Mauritania, Ireland, Morocco, Greenland, Western Sahara, and the Mediterranean. The exploration activity of the Group is principally located in frontier and emerging basins. The Company has been listed on the London Stock Exchange for over 30 years.

CNE expects to report results for FY21 on 9 March 2021.

 (Source: Company Website)

Growth Prospects and Risk Assessment

CNE aims to access opportunities to grow and diversify business offerings and reinforce production base. It has substantial financial resources to pursue accretive growth opportunities and maximize shareholder returns. Cairn has acted as an operator and partner in all stages of oil and gas lifecycle. It has demonstrated the ability to overcome any operating challenges across offshore and onshore, in frontier and remote areas, in deep water and shallow locations. Moreover, it is expanding operations to Senegal, Norway, and Mexico, which is expected to generate good production volumes for the Company. During H1 FY20, average net oil production fell at the top end of the full-year guidance at ~22,400 bopd (barrels of oil per day) while the strong cash position was maintained without drawing any debt.

 (Source: Refinitiv, chart created by Kalkine Group)

 (Source: Refinitiv, chart created by Kalkine Group) 

However, there are certain risks and uncertainties to business growth. The fluctuation in oil prices can impact the financial position. Also, the lack of exploration and appraisal success can lead to failure of the balanced business model. Moreover, insufficient capital to pursue business opportunities and manage operations can create funding issues. Furthermore, the failure to secure new venture opportunities can affect the ability to sustain production levels. Also, the lack of adherence to safety, environment, and health policies can lead to regulatory penalties and clean-up costs. It is also exposed to oil & gas prices fluctuation and political & fiscal instabilities. 

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

On 7 September 2020: The Company agreed to sell the entire interest in RSSD (Rufisque Offshore, Sangomar Offshore and Sangomar Deep Offshore) to Woodside. The new deal replaces the US$400 million transaction agreed with Lukoil.

A Glimpse of Business Segments

(Source: Company Website)

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 29 September 2020)

(Source: Company Website)

• In Catcher and Kraken, the production levels have continued to be strong in H1 FY20, with a combined production for H1 FY20 of average ~22,900 boepd (before adjusting for FlowStream entitlement).
• Revenue from hydrocarbon sales decreased to US$172.1 million against the same period last year, driven by the decrease in the oil price during the period. The fall in oil price was mainly due to oversupply from the “OPEC plus” group of producers combined with demand destruction resulting from the COVID-19 pandemic.
• The Company witnessed a strong production from the UK assets, with cash inflows from oil and gas production of US$132 million.
• Cairn has also shown a strong net cash position and limited capital commitments, with no drawn debt and Group’s cash of US$84 million stood at 30 June 2020.
• The Company saw an impairment charge of ~US$240 million, with US$33 million against UK producing assets and US$207 million against Senegal assets.
• It is continuously expanding the product portfolio and penetrating new markets.
• The Company is planning to declare a special dividend of US$250 million to shareholders following the sale of Senegal Interests.

Financial Ratios – Reported Strong Liquidity Position

EBITDA margin for the first half of 2020 was higher against the industry median, reflecting decent revenue generated and better control over the expenses as compared to the industry. On the liquidity front, the current ratio stood in line as compared to the industry median of 1.39x, reflecting sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the challenging market dynamics. On leverage front, the debt-equity ratio was 0.22x, which was lower as compared to the industry median of 0.49x, reflecting that the Company is less leveraged as compared to the industry.

Share Price Performance Analysis 

 (Source: Refinitiv, chart created by Kalkine Group)

On 14 October 2020, at the time of writing (before the market close, at 8:00 AM GMT+1), Cairn Energy Plc shares were trading at GBX 139.00, down by 2.11% against the previous day closing price. Stock 52-week High was GBX 210.00 and Low of GBX 57.35, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 50 (GBX 130.01), 100 (GBX 132.06) and 200-day (GBX 132.76) simple moving average price. Also, the 14-day RSI (46.50 level) is supporting the upside movement. MACD line is placed above the central line, indicating a bullish setup. The Company’s stock has delivered a positive return of around 10.89% in the last three months. Also, it has delivered a positive return in the last month of around 4.97%.

 (Source: Refinitiv, chart created by Kalkine Group)

In the last six months, Cairn Energy share price has delivered 37.91% return as compared to the 11.81% return of FTSE 250 index, which shows that the stock has outperformed the index during the last six months.

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

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

Industry Outlook Dynamics

The oil industry is the most vital branch of the world economy as more than four metric tons of oil is produced globally on an annual basis. Nearly one-third is contributed by the Middle East Region. According to the Grand View Research, the market size for global energy as a service is expected to reach US$172.9 billion by 2027, representing a CAGR of 14.6% from 2019 to 2027. The future demand for energy consumption is likely to be influenced by several factors, including change in climate policies and adoption of alternate source of energy. Moreover, 65% of total oil consumption is contributed by transport; hence, it can be impacted by the usage of electric vehicles as well. Contrarily, the rising population and increasing urbanization can boost the energy demand for economic activities.

Business Outlook Scenario

In the year ahead, CNE looks forward to exploring opportunities in a drilling programme in offshore Mexico, while progressing well in offshore Senegal operations. The Company expects Senegal based Sangomar field to target first oil in the year 2023 with 100,000 bopd of gross production. Moreover, it has a low breakeven production, strong balance sheet, and limited capital commitments, which provides enhanced financial flexibility to invest in and grow the business, while it is committed to returning excess cash to shareholders. For example, from the disposal proceeds of Senegal interests, it intends to return at least US$250 million to shareholders.

In FY20, the CNE expects to produce 21,000 - 23,000 bopd at an average production cost of ~US$18/boe. Further, US$135 million of capital expenditure is planned for FY20, which includes US$95 million for Exploration & Appraisal and US$40 million for Development & Production (excluding Senegal). In a nutshell, Cairn Energy is well-positioned to capture further growth opportunities and return attractive value to shareholders.

(Source: Company Report) 

Considering the decent operating & financial performance, high level of cash generation capabilities, no drawn debt 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 139.00 (as on 14 October 2020, before the market close at 8:00 AM GMT+1), with lower-double digit upside potential based on 6.45x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.).

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

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