Cairn Energy PLC (LON: CNE) - Sale of Senegal Asset to be Completed in Q4 2020

Cairn Energy is a UK based company that is engaged in the exploration, development and production of oil and gas. It is Europe’s leading independent energy company, and it has assets throughout the world. The Company is engaged in all stages of the oil and gas lifecycle, and it has energy assets onshore and offshore, in shallow and deepwater locations. Cairn Energy has delivered flagship projects in India, Bangladesh and Sri Lanka. In 2012, the Company sold its Indian business and moved forward to rebuild a portfolio of assets. Cairn Energy has operations in the UK, Mexico, Senegal, Cote d’Ivoire, Suriname and Israel. The Company has long-term value investors that provide funds for new ventures, and it is also focussed on net-zero carbon emission by 2050. Kraken and Catcher are two important field areas of the Company in the UK. Cairn Energy is listed on the FTSE-250 index.

Cairn Energy will release the market update on 20 Januaxry 2021.

Value Creation Strategy of Cairn Energy

(Source: Company website)

Growth Prospects and Risk Assessment

Cairn Energy is a global oil & gas company that is focussed on generating growth and return for shareholders. The Company has a balanced portfolio that helps in creating and realizing value with a self-funding business model. The Company has been very flexible with its decision, and it believes it should be in-line with the market conditions. Cairn Energy has re-aligned its capital programme for 2020, and it has deferred the satellite development of Catcher North and Laverda, exploration wells in Mexico and UK, and 3D seismic in Suriname. The decisions were taken due to low oil prices.  The Company is currently focussed on Kraken and Catcher area fields, and these areas are expected to have immense production potential, which can underpin the growth.

The sale decision of Senegal has positioned the Company for growth and portfolio expansion as post the completion of the project it would receive USD 300 million and reimbursement of the capital expenditure for 2020. Cairn Energy hedges a significant portion of its oil production that helps in mitigating the risks. All these steps help in saving money, which is used for the growth purpose. The key performance indicators of Cairn Energy that include drilling and evaluation of wells, discovering potentially commercial hydrocarbons, achieving key milestones on projects and ensuring production from Kraken and Catcher field areas are on track.

The key risks of the Company include large impairments in the value of assets. The global energy transition is also classified as a principal risk, the Company is engaged in the business of exploration and development of energy projects, which have an environmental impact and strict climate change policies can affect the operations of the Company. The other key risks are misalignment with JV partners, limited access to debt markets, political and economic uncertainty, the underperformance of Kraken and Catcher assets. Lack of adherence to health and safety measures at the site can lead to accidents. 

Industry Outlook Dynamics

The energy sector has been very volatile so far in 2020. The health crisis has impacted the energy demand, and as per the IEA report, the global energy demand is expected to fall by 5% in 2020. Based on 1-year performance, the Brent Crude Oil was down by around 29.69%, and it was trading at USD 44.77 per barrel (as on 11 November 2020 at 9:00 AM GMT). The second covid-19 wave and recent lockdown are expected to weigh down on the energy demand, and it can affect the prices. The uncertainty throughout the pandemic continues to prevail, and its social and economic impact opens a wide range of possible future for the energy sector. The energy sector is currently focussed on bringing down the emission released on the production. The World Bank has started a global initiative to zero routine flaring by 2030. The UK government has a target of net-zero carbon emission by 2050.

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

A Glimpse of Business Segments (H1 FY20)

(Source: Company Website)

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

Financial Ratios (H1 FY2020)

Share Price Performance Analysis

On 11 November 2020, at the time of writing (before the market close, at 8:37 AM GMT), Cairn Energy Plc shares were trading at GBX 145.30, up by 0.20% against the previous day closing price. Stock 52-week High was GBX 210.00 and Low of GBX 57.35, respectively.

From a technical standpoint, we could see a positive movement in the share price based on the 90-day SMA (GBX 137.3). Shares were also trading above the short-term support level of 200-day (approximately GBX 127) simple moving average price. Also, the MACD line is placed above the central line, indicating a bullish setup.

Based on 6-months performance, CNE has outperformed the FTSE All-Share Oil & Gas Producers Index and FTSE-250 Index. CNE generated a return of around 30.3%, whereas the FTSE-250 Index return was close to 16.6% and FTSE All-Share Oil & Gas Producers Index return was about -14.9%.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook Scenario

Cairn Energy’s net oil production was 22,000 barrels of oil per day (bopd), and it has provided a full-year net oil production guidance of 21,000 to 23,000 bopd. The Company is targeting an average production cost of USD 18 per barrel of oil. The full-year capital expenditure is expected to be around USD 135 million, of which Cairn Energy would spend USD 95 million on exploration & appraisal and USD 40 million on development and production excluding the Senegal project. The Company has planned a special dividend payment of USD 250 million as the proposed sale of the Senegal project would strengthen the balance sheet. The Arbitration Tribunal expects to issue ruling on India tax case after the end of summer 2020. The Company is seeking full restitution of more than USD 1.4 billion for losses in India.

The Company would explore the opportunity in the commodity and industry cycle as the sale of ownership in assets in Norway, and Senegal has provided financial flexibility. The sale of the Senegal asset is likely to complete in Q4 2020 and expects to incur a loss more than the impairment charged till now as certain other elements would also be included.

(Source: Company website)

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 145.30 (as on 11 November 2020, before the market close at 8:37 AM GMT), with lower-double digit upside potential based on 5.54x EV/NTM EBITDA (approx.) on FY20E EBITDA (approx.).

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

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