The Wall Street Journal: Breaking Views: Cairn India

EXTRACT: Even after the fall, Cairn India is worth nearly $5.5 billion. Cairn Energy bought out Royal Dutch Shell’s 50% share in the Rajasthan project for $7.25 million in 2002.

THE ARTICLE 

Wednesday 10 January 2007

Initial public offerings are generally priced around a 15% discount to fair value. So when a new issue tanks 14%, as Cairn India has, it’s hard to escape the conclusion that the seller, Cairn Energy, was simply too greedy.

True, market conditions haven’t helped. The oil price has fallen about 18% since Dec. 15, when Cairn India’s price was set. Shares in parent Cairn Energy, the bulk of whose value is tied up in its 69.5% stake, have also suffered.

But the oil price isn’t solely to blame. The IPO’s price was already at the bottom of the range and it was barely subscribed in December, when Brent crude was nearer $65. The fact that the Indian market plunged in mid-December also gave investors cold feet. But even then, investors grumbled that Cairn India looked pricey compared to ONGC, the Indian state-controlled oil company. Cairn India’s biggest problem is that it is stuck in a dispute with the Indian government over who is going to construct a pipeline to transport oil from the Rajasthan fields for delivery to the Indian government. The dispute could theoretically delay crude-oil sales when the fields come onstream in 2009.

So was Cairn Energy wrong to plow ahead with the Bombay IPO, given all the uncertainty? The sale hasn’t helped Cairn Energy’s share price in London, which has dropped farther on the back of the Cairn India flop to below £17 ($32.95) from £19.15, where it was trading before the IPO was priced. But strategically, the IPO makes sense. Having Indian investors in the company may help negotiations with the Indian government. What’s more, flying the Indian flag may make it easier to win more exploration licenses. And while Indian investors might be miffed, Cairn Energy may not be too bothered. Even after the fall, Cairn India is worth nearly $5.5 billion. Cairn Energy bought out Royal Dutch Shell’s 50% share in the Rajasthan project for $7.25 million in 2002.

John Foley, Martin Hutchinson and Fiona Maharg-Bravo

For a complete set of BreakingViews comments, see www.breakingviews.com.

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