Cairn Energy Plc (LON: CNE): Robust balance sheet and well-positioned to grab new market opportunities.

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. 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 from more than 30 years.

CNE will provide its full-year FY20 results on 09 March 2021.

(Source: Company Website) 

Growth Prospects and Risk Assessment

CNE had completed the sale of Senegal assets in December 2020 for USD 525 million. Subsequently, it had paid a special dividend of 32 pence per ordinary share on 25 January 2021 totalling approximately USD 250 million to its shareholders. The Company had planned a drilling program in the UK and Mexico for 2021. Moreover, CNE is expanding its operations in Senegal, Norway, and Mexico, which would increase the production volume of the Company. The global oil prices had shown a robust recovery since the start of Covid-19 vaccination drives and the stimulus package announcement.

However, the performance can be significantly impacted by the principal risks of 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, limited access to debt markets and political & financial uncertainties. The Group is also exposed to the risk of Fraud, Bribery and Corruption and Covid-19 related risks.

Industry Outlook Dynamics

With reference to the report from Grand View Research, the Global energy ESO (electricity system operator) market size was valued at USD 194.10 billion in 2019. It is expected to grow at a CAGR of 18.80% from 2020 to 2027. Significant market growth is driven by rising digitalization in the energy sector. The rising urbanization and increasing population would fuel up the demand for energy for various economic activities. The Energy sector had witnessed an unprecedented global slowdown adversely impacted by Covid-19 pandemic in the last few months. However, 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 11 January 2021: The Company stated that the New Ordinary Shares in the Company (following Shareholder approval of the Return of Cash on 8 January 2021) was admitted to the Official List and maintained by the Financial Conduct Authority. It commenced trading on the Main Market of the LSE (London Stock Exchange) on the above same date. Therefore, the total number of issued shares and voting rights is 499,075,775, with no treasury shares.

Pre-Close Update (as on 20 January 2021)

• The Combined 2020 net production was over 21,000 bopd and was in line with guidance.
• The Company completed the sale of Senegal assets to Woodside, with cash received of USD 525 million. The Board also decided that USD 250 million be returned to shareholders by way of special dividend per share of 32 pence.
• At the year-end, Group cash stood at USD 570 million, with no drawn debt.
• During the year, Oil and gas sales revenue stood at USD 324 million, and the average production cost was USD 20/boe.
• In 2020, the capital expenditure from continuing operations was approximately USD 135 million, which was in line with guidance.
• In respect of the capital activity, the cash flow was USD 160 million.
• 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.
• 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 85 million, with Kraken and Catcher expenditure of around USD 10 million and Exploration and appraisal expenditure of approximately USD 75 million.

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.
• In H1 FY20, the average gross production from Kraken area fields was ~ 39,000 bopd.
• Catcher remains on the plateau, and cumulative production to 30 June was over 47 mmbbls, with an average gross production of approximately 54,500 bopd.
• 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.
• In Mexico, the Company completed its 2020 drilling programme.
• It is continuously expanding the product portfolio and penetrating new markets.

Financial Ratios

Share Price Performance Analysis

  (Source: Refinitiv, chart created by Kalkine Group)

On 10 February 2021, at the time of writing (before the market close, at 8:40 AM GMT), Cairn Energy Plc shares were trading at GBX 184.00, down by 0.54% against the previous day closing price. Stock 52-week High was GBX 239.70, and Low was GBX 57.28, respectively.

From the technical standpoint, 100-day SMA (163.80) and 100-day EMA (168.20) support the upside potential.

In the last one year, Cairn Energy Plc’s stock price has delivered a return of ~35.20% as compared to a negative ~1.21% return of FTSE 250 Index and a negative ~36.52% return of FTSE All-Share Oil & Gas index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

In the last six months, Cairn Energy share price has delivered around 32.76% return as compared to the approximately 19.59% return of FTSE 250 index, which shows that the stock has outperformed the index during the last six months.

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

Business Outlook Scenario

Cairn had started FY21 with strong financial position reflecting 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. The Company had proven its strategic excellence by the sale of its assets in Senegal and created substantial returns for its shareholders. It had anticipated full year FY21 production ranging from 16,000 bopd to 19,000 bopd. The Company had plans to initiate a drilling program in the UK and Mexico during 2021. CNE had expected its Senegal-based Sangomar field to target first oil in 2023, with gross production of approximately 100,000 bopd.

Cairn had forecasted FY21 capital expenditure to be around USD 85 million. The Company had revised its FY20 production guidance ranging from 21,000 bopd to 23,000 bopd driven by a strong performance from Kraken partially offset the constrained production from Catcher during Q4 FY20.

(Source: Company Presentation)

Considering the strong performance in Kraken, decent operating & financial performance, high level of cash generation capabilities, no drawn debt, liquidity ratio was in line with the industry, 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 184.00 (as on 10 February 2021, before the market close at 8:40 AM GMT), with lower-double digit upside potential based on 5.77x EV/NTM EBITDA (approx.) on FY21E EBITDA (approx.).

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

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