Cairn Energy plc./Cairn India CRNCF/CAIRIN
November 26, 2007 - 8:33pm EST by
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

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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.



Talisman Energy

Newfield Exploration

Cairn India Ltd.

Cairn Energy "Stub"







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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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