Cairn Energy PLC

Cairn Energy PLC is an FTSE 250 listed company engaged in the exploration and production of Oil & Gas.

Investment Highlights - Cairn Energy PLC – Buy at GBX 171.30

• The Company had achieved net production of just over 21,000 bopd (barrels of oil per day) during FY20, in line with the full-year guidance.
• Since FY18, the EBITDA margin had remained above the industry median of 26.9%
• The EV to EBITDA and Price to Book multiples of CNE is lower than the corresponding multiples of the Oil, Gas and Coal Industry
• From the technical standpoint, shares were trading well above the 20-day simple moving average price (GBX 166.89), which reflects an uptrend in the stock.

Key Risks

• CNE’s business might get affected by volatility in the commodity prices and uncertainty in demand.
• The failure to grab new venture opportunities might impact the business.
• The Company is exposed to health-related risks, and it is putting strenuous efforts through its strategy to reduce the health impact on the business.

Recent Developments

On 30 March 2021, CNE updated that it had received notice that the Indian government had petitioned the Dutch court pursuant to the UK-India Bilateral Investment Treaty, which was granted unanimously in favour of Cairn. 

On 09 March 2021, CNE announced that it had sold the entire 29.5% interest in the Kraken field and 20% interest in the Catcher field for a total cash consideration of USD 460 million.

Financial Highlights (for FY20 ended on 31 December 2020 as of 09 March 2021)

 (Source: Company result)

• 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 324.50 million, and the average production cost was around USD 20/boe.
• The average realised oil price was 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 during FY20, with royalty income in Mongolia of USD 0.4 million and the release of deferred revenue of USD 13.9 million.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

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

Conclusion

CNE had further strengthened its balance sheet by completing the proposed sale of UK Catcher and Kraken fields for the 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. The Company had anticipated forecasted exploration and appraisal capital expenditure of USD 90 million during FY21, considering the exploration wells in the UK North Sea and Mexico. 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. The stock made a 52-week high and low of GBX 239.70 and GBX 99.33, respectively.

Based on its proposed acquisition of Shell’s Western Desert assets and the valuation method discussed above, we have given a "BUY" stance on Cairn Energy PLC at the current market price of GBX 171.30 (as of 29 April 2021 at 11:37 AM GMT), with lower double-digit upside potential based on 8.02x 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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