|Shares Out. (in M):||1,408||P/E||0.0x||0.0x|
|Market Cap (in M):||3,600||P/FCF||0.0x||0.0x|
|Net Debt (in M):||-3,000||EBIT||0||0|
Special dividend in January that further highlights the substantial discount to cash and investments
Farm out agreement in Greenland
|Entry||01/19/2012 01:14 PM|
Utah - You raise fair questions, the biggest of which is where they deploy their M&A dollars. My answer to all of that is it's in the price and then some. The NAV of the stock right now is P3.50/share assuming Greenland has no value (so cash plus Cairn India). So you're getting Greenland and their remaining $1.2 billion in cash (after the special dividend) for free. When the stock gets back to P3.50/share we can revisit how much (if any) value we should assign to Greenland.
In terms of the future:
- Greenland farm-out: they haven't had success but the play isn't dead. If you look at the last licensing round (early 2011), virtually every big deepwater player (Exxon, Shell, Statoil, etc) took down acreage all around them. If any of these guys are looking to drill wells (which they have said they are), you would place value on Cairn's data (the only 8 wellbores drilled, seismic, etc). As you know these frontier exploration plays can take a way to figure out - look at early success rates in offshore GoM or West Africa.
- M&A: they have said they will deploy their remaining $1.2 billion in cash toward M&A. That does leave the risk that they overpay for something but i think that's well discounted in the price (you're getting the cash for free! so the market has already priced in full value destruction). I would argue this management team has been one of the best capital allocators in the sector over time - this is the second special dividend they've paid (their internal goal is to create value in frontier exploration, harvest the value, distribute cash to shrink the company down to something that can always double in 3-5 years). Look at the long-term stock chart - these guys have been good capital allocators.
- Cairn India: you still have most of your NAV leveraged to this asset which has a great future - big net cash position, doubling production over the next 2 years, trading at 7x P/E, realizes Brent and has $3/bbl lifting costs, highly prospective/underexplored region, etc. I think CAIR IN has been held back by the uncertainty in getting this deal done and now that its done you've seen how the stock has reacted, and this morning it was announced that they received government approval (finally) to start the production ramp (showing that the government and ONGC are on board).
|Subject||Couple of updates|
|Entry||01/24/2012 08:55 PM|
1) Strong earnings out of Cairn India - Net cash balance is now $1.2 billion; they will double production over the next 2 years while generating ~$1.5 billion of FCF in 2012 on a ~$13 billion market cap (so ~12-13% FCF yield ex-cash); they are going to initiate a dividend this year (discussed on the call). They are realizing 8% less than Brent (~$100/bbl in CYQ4) and lifting costs were $2.50/bbl - very strong economics.
2) They announced their first Greenland farm-out - Statoil took 31% of one of their blocks in return for a cash payment, reimbursement of prior costs (lease and seismic costs), and a promote on any future wells. Value was undisclosed (b/c they are in discussions with other operators about similar deals on the other blocks) however the important point is that one of the largest North Sea deep water operators is committing capital to the play which in my mind is a validation of the optionality that still exists there.
|Entry||01/26/2012 11:08 AM|
One thing I forgot to highlight in the write-up was the impact of index selling. CNE is going to be removed from the MSCI (announced at the beginning of this week, triggered huge volume). This technical pressure is also working to hold down the stock and we think that alleviates a the end of next week.
Cairn is also in the FTSE 100 and will likely be kicked out and moved into the FTSE 250. However this won't happen until March/April and net selling is minimal.
|Subject||RE: Index selling|
|Entry||01/26/2012 05:03 PM|
Thanks for the update, helpful detail. Was there an official statement re: the MSCI index deletion? I see an Exane research report mentioning it, but nothing else - mind sharing a link if you have it?
How many shares do you think have to be sold as a result of the index change?
|Subject||RE: RE: Index selling|
|Entry||02/02/2012 04:14 PM|
The MSCI ejection triggered an estimated 50-100mm shares of selling - a huge number relative to daily volume of ~8mm normally (across all exchanges). We think the market has been absorbing this over the last week and a half since it was announced (volume has been very heavy - it spiked to 43mm on Tuesday last week when it was announced and has run ~15-25mm/day since then). I think this has been a major drag on the stock. The good news is that this pressure alleviates next week. The MSCI ejection happens tomorrow evening and completes at the close on Monday (2/6).
There has also been tax selling in advance of the dividend. That obviously goes away as well next week.
|Entry||02/06/2012 03:10 PM|
Special dividend happened today and stock executed the reverse split. So the forced selling associated with the dividend (tax considerations) and the index ejection (MSCI) are now (finally) behind us.
Pro forma, the company has $1.2b in net cash (135p/share), $3.0b stake in Cairn India at market (345p/share) = 480p/share. The stock closed at 345p/share, implying +40% upside to net cash and assigning no value to their exploration assets.
The $1.3b (150p/share) they invested in Greenland is gravy - large optionality if the play works out and no downside if it doesn't. As I mentioned earlier, Statoil farmed into one of their blocks two weeks ago. Also the CEO of Shell was out last week (Dow Jones article) saying that they are very focused on the Arctic offshore play and are concentrating their efforts on Alaska and Greenland. So clearly there are strategics who place value on Greenland.