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Oil Column: Cairn Energy won’t waste US$850mln on exploration

Cairn Energy (LON:ENQ) won’t waste US$850mln on exploration despite investor fears to the contrary, according to City firm Liberum.

In a note, following last week’s interims, analyst Kate Sloan topped up her price target whilst highlighting that Cairn’s high impact exploration drilling programme starts next month, with the first two wells in Morocco.

The target now stands at 384p up from 360p.

“The market appears to believe that Cairn will destroy US$0.85bn of value through exploration again,” the analyst said.

“We believe this is statistically unlikely due to the breadth of the programme and reduced capital exposure.

“Significant latent value persists in the stock and we believe that near-term exploration offers multiple re-rating opportunities.”

Sloan says Cairn appears fully funded for its current development projects as well as its current exploration spend, which is about US$250mln a year, and there is still a visible path for it to become a self funding company.

According to Cairn chief executive Simon Thompson the upcoming exploration programme offers investors sustained exposure to material growth potential.

Last week, after the E&P group’s interims, Dublin based broker Davy highlights that the exploration drilling programme will target over 4bn barrels of un-risked oil resources over the next twelve months.

“This programme will test the real value of the careful corporate activity Cairn has engaged in over the past 18 months,” Davy analyst Caren Crowley said in a note.

In the months ahead Cairn will drill two wells in Morocco, two wells in Senegal, an appraisal well on the Spanish Point gas condensate discovery off the west coast of Ireland and potentially a well offshore Greenland.

“While it is clear that the focus of this drilling programme is the Atlantic Margins, the targeted plays are diverse, and it will be executed across multiple geographies with attractive fiscal regimes,” Crowley adds.

“Risk management for the upcoming drilling programme appears better than that for the last big campaign which was offshore Greenland.”

It has been said, by several brokers, that the exploration assets are in the Cairn share price ‘for free’.

Indeed, according to Morgan Stanley, Cairn’s valuation is underpinned by its financial assets – its cash and its remaining US$1bn stake in Cairn India - and as a result little value is attributed to the exploration or oil field development projects in the North Sea.

Morgan Stanley’s assessment also leans on exploration, which it agrees is set to become an important focus in the coming months.

The broker says the high impact frontier exploration campaign will be targeting ‘multiple times the current share price’.

The broker rates the E&P firm as a ‘buy’ and its increase price target of 375p (up from 365p) implies 36% upside from the current price of 275p, but, in its most bullish assessment – which assumes higher oil prices and more exploration success – the broker reckons Cairn could be worth as much as 633p per share.

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July 31 2012

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