The Times: Tempus: Buy Cairn and you may strike oil in the long term

October 25, 2007
Robin Pagnamenta

There was a whiff of nostalgia in the air yesterday as Cairn Energy soared another 6 per cent to its highest share price for 17 months, amid continuing speculation of a possible bid by BP.

The jump means that shares in the oil and gas explorer have motored 15 per cent in just two days, rising 302p to £24.13 and valuing the group at £3.1 billion.

It all recalls the clamour for Cairn stock three years ago, when the little-known company transformed its fortunes by discovering the one billion barrel Mangala oilfield in Rajasthan, northwest India.

Cairn bought the exploration acreage from Shell for little more than $10 million and the company was run by Sir Bill Gammell, a former Scottish rugby union international and friend of both Tony Blair and George W. Bush.

From the depths of the oil sector’s lower leagues, Cairn Energy became a FTSE 100 stock.

Last year the glow began to fade as investors grew tired of the ongoing delays to a pipeline deal with the Indian Government that will allow Cairn to ship oil from its Rajasthan basin to market. The group fell back into the FTSE 250 in the summer.

Yet the takeover frenzy ignited by the recent approaches for the £1.5 billion-rated Burren Energy has led to a reappraisal of other likely targets in the sector and Cairn is one of the most suitable on the block.

Cairn remains confident that the final sign off on the “evacuation” pipeline in Rajasthan will come in a matter of months, enabling the first oil to flow by the end of 2009 or early 2010. The Indian Government last month signalled its intention to rubber-stamp the project by allowing the company to secure access to the land needed for the pipeline.

Once the first oil flows, Cairn is confident of pumping 150,000 barrels of crude a day. Given a possible oil price of $70 and Cairn’s share of the production through its Cairn India subsidiary, the company’s annual cash flow could be $3.5 billion, against just $300 million last year.

Then there is the management. Both Sir Bill and Mike Watts, his exploration director, are known to be amenable to a deal at the right price. They have made little secret of the fact that they want to try to repeat their success with the Capricorn vehicle they have set up to scour the likes of Greenland and Nepal.

BP’s rumoured interest in Cairn was laughed off in many quarters, but Tony Hayward, the BP chief executive, recently told an investor meeting arranged by Merrill Lynch that one of his key challenges was to establish a foothold in India.

BP is also, like its major rivals, Shell and Exxon, desperate to rebuild its reserves and knows that there are fewer big oil and gasfields left to be found around the world.

BP and Cairn refused to comment on this week’s speculation and the lack of an official stock market statement makes it unlikely that any talks have been held so far.

However, the rumours have forced investors to begin to value Cairn on a potential cashflow basis and on these terms some of the City’s more racy valuations, of up £28.50, seem more realistic. Buy for the long-term.

http://business.timesonline.co.uk/tol/business/columnists/article2734011.ece

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