Cairn Energy PLC – Operating with an Extensive Experience; Find Decent After Mexico Drilling

Cairn Energy Plc (LON: CNE) is a FTSE 250 listed independent oil and gas production and exploration company based out of the United Kingdom.

On 8^th September 2020, the company will announce its half-yearly results.

Recent News
On 9^th June 2020, Alison Wood (non-executive director of Cairn Energy) will be appointed as a non-executive director of Oxford Instruments Plc, which will come in effect from 8^th September 2020.

On 7^th May 2020, the oil and gas company said that Ian Tyler, as a Chairman, has informed the company of his intension to retire.

Drilling Update (as on 5^th May 2020)
Cairn Energy released an update on the drilling activities at Mexico.The operations at Block 7 based Ehecatl-1 exploration well has been completed in Sureste Basin Offshore in the Mexican region. The Group has 30 per cent working interest through Capricorn Energy Mexico, a wholly-owned subsidiary. The well has been abandoned and plugged on a permanent basis and does not have any reservoir hydrocarbons.

Share Price Performance

1-Year Chart as at June-12-2020, after the market close (Source: Refinitiv, Thomson Reuters)

On 12^th June 2020, Cairn Energy PLC’s shares closed at GBX 116.40 and were down by 3.08 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 216.80/GBX 57.35.

From the technical standpoint, its shares were trading well above its short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

*Peers: Lundin Energy AB, Aker BP ASA, Kosmos Energy Ltd, and Genel Energy Plc.

*1 USD = 0.797132 GBP.

Valuation Metrics

(Source: London Stock Exchange)

As on 29^th May 2020 2020, the Price/Earnings, EV/EBITDA, and Price/Book multiples of the CNE were 10.1x, 3.7x and 0.7x, respectively, which were lower as compared with the Oil & Gas Producers industry multiple of 11.2x, 3.7x and 0.7x, respectively, reflecting that the company is trading at a lower multiple as compared to its peers.

Growth Catalysts
It is expanding its operations to Senegal, Norway, and Mexico, which is expected to generate good production volumes for the company. Further, the company has entered various strategic alliances with the government to expand its operations.

Conclusion
In the latest operational update, Cairn showed a good increase in production.During the well operations, the logging, sampling and data collection will help the joint venture to develop an enhanced understanding of the Lower Miocene target and calibrate the seismic data, and the information gathered will be integrated to inform the second well decision and improve the understanding of the Block. The Group remained discipline while investing in the new projects, as the recent macro-economic factors are making the environment more challenging. Due to the outbreak of coronavirus (COVID-19), the oil prices have fallen substantially in the first quarter of 2020. CNE has shown good top-line and the bottom-line performance for the period. Moreover, the company’s balance sheet remains strong, and management is proactively reviewing options for further capital expenditure savings and deferrals while retaining the financial flexibility to add value on an ongoing basis.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 116.40 (as on 12^th June 2020) with lower double-digit upside potential based on 4.60x NTM Price/Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

Pharos Energy PLC – Expecting Lower Guidance, Acted Promptly and Preserving the Resilience of Business
Pharos Energy PLC (LON: PHAR) is a FTSE All-Share listed independent Oil & Gas exploration and production company. It has exploration, production, and development interests in the region of Egypt, Israel, and Vietnam.

On 19^th August 2020, the company will announce its interim results.

Trading Update
On 12^th May 2020, the Group reported its latest operational update. The company has slashed capital expenditure by deferring a few discretionary investments in Egypt, to preserve liquidity. The Group completed the two-well TGT drilling campaign, under budget and on time. Led by the benefit of Q1 hedges of USD 5.8 million, the total revenue for Q1 FY20 stood at around USD 35.0 million, while a further hedging revenue of USD 6.3 million has been booked in April 2020. The cash operating expenses for Q1 FY20 was under USD 12/bbl. As at 30th April 2020, the Group reported a cash balance of approximately USD 54.5 million with net debt of nearly USD 41.7 million. Given the continued uncertainly in the macro-environment, the company has withdrawn its dividend payments for 2020.

Share Price Performance
 
1-Year Chart as at June-12-2020, after the market close (Source: Refinitiv, Thomson Reuters)

On 12^th June 2020, Pharos Energy PLC’s shares closed at GBX 17.82 and were down by 8.62 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 70.64/GBX 10.00.

From the technical standpoint, its shares were trading well below its short-term support level of 200-day simple moving average prices, which reflects a downtrend in the stock. The RSI (14) is moving downwards from the top.

Valuation Metrics

(Source: LSE)

As on 29^th May 2020, Price/Sales multiple of the PHAR was 0.4x, which was higher as compared with the Oil & Gas Producers industry. Hence, it is reflecting that the company is trading at a higher multiple as compared to its peers.

Key Risks
The company operates in a challenging environment, which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors.

Conclusion
The Group has adopted several cost-cutting measures and suspended the dividend payments for 2020. The Group is expecting an overall decrease in its cost base of approximately 25 per cent across the business. The production guidance for 2020 has been updated to 5,000- 6,000 bopd in Egypt and 5,500-6,500 boepd net in Vietnam. The reduced guidance for Egypt is driven by scaling back of drilling activity, with one cold stacked at zero rates and two drilling rigs released. Other than two wells, the Group said that there would be no drilling activity for the rest of the year until the environment improves. The board has also postponed the dividend payment until the crisis gets subside. For the medium to long term, the Company is positioning to survive in the low oil price environment for the benefit of all the stakeholders.

Based on the above rationale, we have given a “Watch” recommendation at the closing price of GBX 17.82 (as on 12th June 2020), while we look for any upcoming catalysts in the near term.
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
* The “Buy” recommendation is also valid for the current price as covered in the report as on 15th June 2020.

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