Don't ignore sub-plots in Cairn Energy results

It's had its problems, but there is still plenty of potential at Cairn, writes Graeme Evans. Here's the rundown on half-year numbers.

As shown in the Cairn Energy share price over recent months, the long-running tax dispute with the Indian government continues to hang over the Edinburgh-based oil and gas explorer.

Today's half-year results didn’t help matters, with the company forced deep into the red by India-related impairments, including a hit of $231 million from the forced sale of shares in Vedanta Resources by Indian tax authorities.

Further sales of 1.1% were instructed after the half-year in August and September, reducing Cairn's shareholding in the listed equity to 2.1%. 

Cairn remains hopeful that the dispute will be settled in the coming months when the result of arbitration hearings held in the Hague in August are known. The case stems from the sale of Cairn India to Vedanta in 2012, which prompted the Indian government to make a retrospective tax claim in 2014.

Should arbitration go in Cairn's favour, it's more than likely that the company will return cash to shareholders. Cairn is seeking full restitution for losses totalling more than $1.4 billion resulting from the expropriation of its investments in India, among other claims.

With the result of the arbitration hearing the main catalyst for shareholders, it's easy to overlook other sub-plots in today's half-year results.

Revenues were sharply higher after Cairn's North Sea assets Kraken and Catcher, in which it has stakes of 29.5% and 20% respectively, entered into production during 2017. Catcher is now producing up to 60,000 barrels of oil a day, compared with an average of 27,000 in the first half of the year.

But unplanned production downtime meant Kraken managed 30,700 barrels in the half year, rising to as much as 40,000 in August.  

Jefferies analyst Mark Wilson noted a "soft downgrade" in Cairn's production guidance on the back of Kraken.

In his note - "Stuck between a rock and a hard place" - Wilson has a price target of 265p, compared with the current 222p. Shares were down over 7% at one stage Tuesday, keeping Cairn in the narrow price range seen all year.

Cairn has a loyal following among interactive investor clients, having been listed on the London Stock Exchange for 30 years. Its discovery of oil in Rajasthan was that country's biggest onshore find for more than 25 years, leading to it returning $4.5 billion to shareholders between 2006 and 2012.

It then set about rebuilding the portfolio following the sale of the Indian business. This has included the largest global offshore discovery of 2014 in Senegal, as well as involvement in the two UK North Sea projects.

Cairn said today that cash flow from the North Sea was now established, with development projects in Senegal and Norway well advanced to support the production base over the long term.

It has also enhanced its exploration portfolio, which includes projects in Mexico, Suriname and Ireland.

Chief executive Simon Thomson said the company's strategic delivery and strong balance sheet meant it was well-positioned for "material value growth potential".