Part 218 Oct 2014 16:36
During the coming 12 months the company has one of the busiest drilling programmes in its history. Nine new wells will be drilled this year, with five in frontier regions and four in the North Sea, up from only five wells last year.
Investors don’t have long to wait for the first results. Drilling is already under way at Cap Juby Maritime III, offshore Morocco, in which Cairn owns a 38pc interest, and results are expected by early March. Oil has already been found here 20 years ago by Esso, but it was heavy oil. Cairn is using new technology to go deeper and hopefully find higher-quality and more valuable light sweet crude.
The more exciting prospects are offshore Senegal and drilling is expected by March or early April, and, finally, some wells offshore Ireland that will be drilled in May. All of these projects, when combined and if successful, could add up to 390p to the shares, according to estimates from house broker JP Morgan Cazenove.
Frontier drilling is high risk, though. The odds of discovery are as low as about 1 in 8, says JP Morgan Cazenove. The costs of drilling offshore are also higher, with each well costing up to $80m, compared with about $20m for onshore, according to Cairn.
The jewel in the crown could be Greenland. A discovery in the massive Pitu block, offshore north west Greenland, could add anything up to 800p to the shares; however, progress has been slow as Cairn’s drilling partner, Total, is yet to fully back a new well.
The attraction of Cairn is that investors have some protection if no oil discoveries are made. The company still has a 10pc stake in Cairn India worth $1bn, and cash on the balance sheet worth $1.25bn. Oil fields in the North Sea bring the total to $2.5bn in assets, or about 256p per share. Another way of looking at it is that investors get all the potential discoveries for free at the moment.
Shares in Cairn Energy represent a high-risk option for investors. During the next 12 months it will undoubtedly be a bumpy ride. On balance, though, the risk reward looks favourable from the current price.
Cairn has an excellent track record of being one of the best frontier exploration companies in the world. The City is also resolutely positive on Cairn; 18 analysts believe it is a buy, 12 think the shares a hold and there is only one sell recommendation, according to a Bloomberg poll of 31 City analysts. The target price for the shares is also more than 30pc higher, at about 350p. Questor likes these odds. Buy.
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