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India success makes Cairn a worthy hold

FROM OUR ARCHIVES…

Combined with an oil price higher than ever, Cairn looks to be sitting very pretty. Much to the embarrassment of Shell, of course, which sold the Rajasthan field to Cairn two years ago for just £4m.

18 May 2004

The oilfields of India are proving to be more like gold to Cairn Energy, which yesterday announced yet more success in its Rajasthan site.

The second stage of drilling following its original find has not only confirmed initial expectations but led to an upgrade in its estimated reserves. The lowest hope had been for 50 million barrels from the site; now it is for 100 million barrels.

Combined with an oil price higher than ever, Cairn looks to be sitting very pretty. Much to the embarrassment of Shell, of course, which sold the Rajasthan field to Cairn two years ago for just £4m.

The question, then, is with the Cairn share price already more than double where it was at the start of the year, are the shares are now over-hyped?

At 996p, they are trading at a mighty 28 times forward earnings. This premium has been justified, given the apparent abundance of reserves, but it will be some time before any of the oil currently being discovered is actually put in a barrel and sold. The tap will not turn on, in fact, until the second half of 2007.

And while news of further successful drilling on its 5,000 sq km site is all but guaranteed, there may be less of a gush in the shares on further announcements.

The shares moved only marginally yesterday, as most investors have already priced in expectations of more finds, and the fields that are still to go through the second-stage drilling are much smaller in size. There is still some upside to go, however, making it a very worthy hold.

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