Cairn Energy plc./Cairn India CRNCF/CAIRIN
November 26, 2007 - 8:33pm EST by
dadande929
2007 2008
Price: 46.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 47 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Cairn is an oil and gas exploration company headquartered in Scotland and listed on the London Stock Exchange. The company was founded by Bill Gammell, who has been its chief executive since the company's initial listing in 1989. Cairn Energy was formed in 1980 and initially invested in several unsuccessful oilfields in the U.S. before making a modest strike in the Pennsylvania oilfield.


In the mid-1990s Gammell led the company in a radical reallocation of its assets, moving outside of the U.S. and the North Sea oil and gas concerns and into neglected fields in South Asia. The company's fortunes soared when a field it had bought (for 7 million pounds) from Shell in the Indian province of Rajasthan turned out to be the largest find of the year.

The company holds a 69% stake in Cairn India Limited, which is listed on the Bombay Stock Exchange and National Stock Exchange of India. Cairn India traces its roots to 2004 when Cairn Energy entered India. Cairn India Limited was established in August 2006 to own and operate all of Cairn Energy's oil and gas development and production assets in India, and the majority of Cairn Energy's exploration assets in that country.

At the time, the company estimated probable reserves of 30 million to 500 million barrels, with six wells and three oil discoveries. Today with 130 wells, 18 discoveries and 21 separate oil and gas accumulations, it has a discovered 3.6 billion barrels of oil equivalent in place, with an additional reserve potential of around 1 billion barrels of oil equivalents as they still have wells to drill.

 

Cairn India owns an oil field on the eastern shores of India, the Ravva field, which currently produces about 62,000 BOE per day. A second field, the Gujarat field, is located on the west coast and produces roughly 22,000 BOE per day. However, by far its largest asset, its Rajasthan oil field located in the northwestern region of the country, has an estimated 3.6 billion barrels of oil on a total resource basis (2.2 billion barrels of proved and probable reserves, with an estimated additional 1.4 billion barrels of potential reserve).


In total, Cairn India currently has exploration and production sites in four different parts of India and other neighboring countries including 1) Rajasthan and Cambay Basins, Gujarat (Western India); 2) KG Basin, Andhra Pradesh (Southern India); 3) Bengal Basin (Bangladesh); and 4) Himalayan Foreland Basin (Northern India and Nepal). It operates 11 offshore platforms, approximately 200 kilometers of sub-sea pipelines and two processing plants.

The Rajasthan and Cambay Basin has reserves of more than 2.6 billion barrels of oil equivalents. The area is dominated by Cairn, with more than 4,000 wells and approximately 100 oil fields. Cairn also has strategic alliances in this region, including a long-term contract with the government of India through its nominee, ONGC, to ensure fast production with maximum volume and lowest prices.


With this asset, Cairn India is exceedingly discounted on a resource basis when compared with oil and gas production companies. However, production from this oil field is not expected to begin until mid- to late 2009. But when that happens, the company anticipates that production in or by the end of 2009 will quintuple.

So Cairn India is a classic case of the equity yield curve at work--a deep discount for a value that is roughly twice the standard investment horizon. In addition, although parent Cairn Energy owns a relatively small amount of reserves (exclusive of its investment in Cairn India), the Cairn Energy stub, which represents the parent company assets (196 million BOE) exclusive of Cairn India, is also deeply discounted based on these reserves.


On a total resource basis, there are 2.55 barrels of oil resident in each Cairn India share. At the current share price, that amounts to $2.05 per barrel of oil with each share. On a total resource basis, that makes Cairn much more attractive to investors than three pure upstream companies: Apache, Talisman Energy and Newfield Exploration. (See table below.)


Cairn Energy completed an initial public offering for its oil and natural gas properties in India in January 2007. The company raised $1.9 billion in the IPO, a record for India. Prior to the public offering, Cairn India raised $880 million in a private placement by selling 209.7 million shares at $4.20, representing about 12% of the company.

Malaysian state oil firm Petronas purchased approximately 176.5 million shares, or about 10% of the company, making it the largest private investor. Much of the IPO proceeds remained with Cairn India, while a fair amount went to the parent to develop the remaining resources. Following the private placement of shares, 328.8 million shares were issued to the public at a price of $3.80 by means of an IPO in December 2006. The company was then listed on both the Bombay Stock Exchange and National Stock Exchange of India on Jan. 9, 2007.


 

Apache

Talisman Energy

Newfield Exploration

Cairn India Ltd.

Cairn Energy "Stub"

 

$84.20

$18.31

$49.31

$5.30

$3.56

Shares outstanding

331

1,018

131

1,778

 

Market capitalization

$33,514

$18,649

$

$9,433

($456) 

Reserves (millions of barrels)

1,937

1,488

295

4,594

196



Barrels/share

5.85

1.42

2.27

2.55

 1.50

Price per barrel

$17.30

$12.55

$21.89

$2.05

$2.33

 

Company

Share Price 

Shares Outstanding

Market Cap (mil)

 

 

 

Cairn Energy plc

$46.90     

130.7

6,038

 

 

Company

Share Price

Shares Held By Cairn Energy (69%)

Less Value Held By Cairn Energy

Adjusted Market Value (mil)

Adjusted Market Value Per CNE Share

 

Cairn India

$5.30

1,227.1

($6,503)

($465)   

    

        

 

 $3.55 

 

 

 

 

Catalyst

1. Oil prices remaining high and development of the oil fields with material earnings developing in 2009 and beyond. 2. Discovery by other investors 3 Once investors are able to focus on "next year earnings", beginning late next year, and P/E oriented analysts can place a P/E on the stock, as opposed to valuing the assets in the ground, value will out. It always does in the fullness of tine
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    Description

    Cairn is an oil and gas exploration company headquartered in Scotland and listed on the London Stock Exchange. The company was founded by Bill Gammell, who has been its chief executive since the company's initial listing in 1989. Cairn Energy was formed in 1980 and initially invested in several unsuccessful oilfields in the U.S. before making a modest strike in the Pennsylvania oilfield.


    In the mid-1990s Gammell led the company in a radical reallocation of its assets, moving outside of the U.S. and the North Sea oil and gas concerns and into neglected fields in South Asia. The company's fortunes soared when a field it had bought (for 7 million pounds) from Shell in the Indian province of Rajasthan turned out to be the largest find of the year.

    The company holds a 69% stake in Cairn India Limited, which is listed on the Bombay Stock Exchange and National Stock Exchange of India. Cairn India traces its roots to 2004 when Cairn Energy entered India. Cairn India Limited was established in August 2006 to own and operate all of Cairn Energy's oil and gas development and production assets in India, and the majority of Cairn Energy's exploration assets in that country.

    At the time, the company estimated probable reserves of 30 million to 500 million barrels, with six wells and three oil discoveries. Today with 130 wells, 18 discoveries and 21 separate oil and gas accumulations, it has a discovered 3.6 billion barrels of oil equivalent in place, with an additional reserve potential of around 1 billion barrels of oil equivalents as they still have wells to drill.

     

    Cairn India owns an oil field on the eastern shores of India, the Ravva field, which currently produces about 62,000 BOE per day. A second field, the Gujarat field, is located on the west coast and produces roughly 22,000 BOE per day. However, by far its largest asset, its Rajasthan oil field located in the northwestern region of the country, has an estimated 3.6 billion barrels of oil on a total resource basis (2.2 billion barrels of proved and probable reserves, with an estimated additional 1.4 billion barrels of potential reserve).


    In total, Cairn India currently has exploration and production sites in four different parts of India and other neighboring countries including 1) Rajasthan and Cambay Basins, Gujarat (Western India); 2) KG Basin, Andhra Pradesh (Southern India); 3) Bengal Basin (Bangladesh); and 4) Himalayan Foreland Basin (Northern India and Nepal). It operates 11 offshore platforms, approximately 200 kilometers of sub-sea pipelines and two processing plants.

    The Rajasthan and Cambay Basin has reserves of more than 2.6 billion barrels of oil equivalents. The area is dominated by Cairn, with more than 4,000 wells and approximately 100 oil fields. Cairn also has strategic alliances in this region, including a long-term contract with the government of India through its nominee, ONGC, to ensure fast production with maximum volume and lowest prices.


    With this asset, Cairn India is exceedingly discounted on a resource basis when compared with oil and gas production companies. However, production from this oil field is not expected to begin until mid- to late 2009. But when that happens, the company anticipates that production in or by the end of 2009 will quintuple.

    So Cairn India is a classic case of the equity yield curve at work--a deep discount for a value that is roughly twice the standard investment horizon. In addition, although parent Cairn Energy owns a relatively small amount of reserves (exclusive of its investment in Cairn India), the Cairn Energy stub, which represents the parent company assets (196 million BOE) exclusive of Cairn India, is also deeply discounted based on these reserves.


    On a total resource basis, there are 2.55 barrels of oil resident in each Cairn India share. At the current share price, that amounts to $2.05 per barrel of oil with each share. On a total resource basis, that makes Cairn much more attractive to investors than three pure upstream companies: Apache, Talisman Energy and Newfield Exploration. (See table below.)


    Cairn Energy completed an initial public offering for its oil and natural gas properties in India in January 2007. The company raised $1.9 billion in the IPO, a record for India. Prior to the public offering, Cairn India raised $880 million in a private placement by selling 209.7 million shares at $4.20, representing about 12% of the company.

    Malaysian state oil firm Petronas purchased approximately 176.5 million shares, or about 10% of the company, making it the largest private investor. Much of the IPO proceeds remained with Cairn India, while a fair amount went to the parent to develop the remaining resources. Following the private placement of shares, 328.8 million shares were issued to the public at a price of $3.80 by means of an IPO in December 2006. The company was then listed on both the Bombay Stock Exchange and National Stock Exchange of India on Jan. 9, 2007.


     

    Apache

    Talisman Energy

    Newfield Exploration

    Cairn India Ltd.

    Cairn Energy "Stub"

     

    $84.20

    $18.31

    $49.31

    $5.30

    $3.56

    Shares outstanding

    331

    1,018

    131

    1,778

     

    Market capitalization

    $33,514

    $18,649

    $

    $9,433

    ($456) 

    Reserves (millions of barrels)

    1,937

    1,488

    295

    4,594

    196



    Barrels/share

    5.85

    1.42

    2.27

    2.55

     1.50

    Price per barrel

    $17.30

    $12.55

    $21.89

    $2.05

    $2.33

     

    Company

    Share Price 

    Shares Outstanding

    Market Cap (mil)

     

     

     

    Cairn Energy plc

    $46.90     

    130.7

    6,038

     

     

    Company

    Share Price

    Shares Held By Cairn Energy (69%)

    Less Value Held By Cairn Energy

    Adjusted Market Value (mil)

    Adjusted Market Value Per CNE Share

     

    Cairn India

    $5.30

    1,227.1

    ($6,503)

    ($465)   

        

            

     

     $3.55 

     

     

     

     

    Catalyst

    1. Oil prices remaining high and development of the oil fields with material earnings developing in 2009 and beyond. 2. Discovery by other investors 3 Once investors are able to focus on "next year earnings", beginning late next year, and P/E oriented analysts can place a P/E on the stock, as opposed to valuing the assets in the ground, value will out. It always does in the fullness of tine

    Messages


    SubjectWhat I think
    Entry11/27/2007 03:18 PM
    Memberdadande929
    I can not confirm or deny your thinking but I do feel you are aiming far too low in feeling the right price would be 250-270rs per share on what is currently known. Why that is merely some 26% above present price. I d onotsee whyvaluation should rise to be much more in line with comparables used. Do you not think that can occur?

    Subjectre: what I think
    Entry11/27/2007 04:09 PM
    Membervanbr707
    no well perhaps I should have put "on an extremely conservative" basis the stock is currently worth 250-270rs per share for Cairn India.

    I agree it is probably worth alot more... I think the company has been approached by other companies already but they are reluctant to sell as investors will come to appreciate the true value of Indian oil once it becomes closer online

    the big risk for me continues to be delays in the pipeline. you never know with these things

    what do you think about the Cess Tax issue?

    SubjectQuestion
    Entry11/28/2007 08:21 PM
    Memberthoreau941
    Hi,

    I am new to this company and not an expert in oil and gas. I’m having trouble coming up with your reserve estimates for Cairn India from public docs. The IPO prospectus had proved + probable net working interest reserves of 472 million boe. 442 million boe were from Rajasthan, and 30 million boe were from other fields.

    The company’s press release from September 11, 2007, gives an update on progress of the Rajasthan fields saying that they possess proved + probable of 2.2 billion boe. At 70% working interest for Cairn, this would imply net working reserves of around 1.54 billion boe. Adding the 30 million boe of other reserves from the prospectus gives 1.57 billion boe of working interest reserves.

    My guess from the public docs is that the company may have around 1.5 billion boe in contingent reserves (reserves that are not yet proven or probable). So I am coming up with 1.57 billion boe of proven + probable reserves and 1.5 billion of contingent reserves.

    This compares to your reserve estimate of 4.594 billion boe. Can you explain how you got to this estimate of reserves? Is the reserve calculation in the public docs somewhere? Thanks for the help.
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