OIL exploration and production is an unpredictable business fraught with risks. Getting the black stuff out of the ground is one challenge; piping it to market is another.
Four years ago, Cairn Energy struck it rich, discovering a huge gusher in India’s Rajasthan. The shares rocketed 50% in a day and the Edinburgh group was later propelled into the FTSE 100. Further finds and a near-doubling of production forecasts kept up the momentum until the middle of 2005.
Since then, the going has been tough. The company has been plagued by production delays and the complicated, though politically wise, move of listing Cairn India, which it still controls with a 69.5% stake.
Last week, Cairn India appeared finally to gain Indian government approval to build a pipeline from the oilfields to the coast. It looked like a breakthrough moment. The shares jumped 4% on the day and edged up 2.99% over the week to close at £18.62. The most bullish analysts were even joyously predicting the shares could leap more than 50% to about £29, partly because of the Indian “milestone” and hopes that Cairn will deliver on some other high-impact exploration interests.
Cairn’s management, led by Sir Bill Gammell, sound confident and insist their target of starting production in India in 2009 is on track despite recent slips in the timetable.
Sadly, this all looks a bit too rosy. The states of Rajasthan and Gujarat have to grind through the process of giving Cairn rights to use the land for the pipeline. Who knows how bureaucratic this will be, though the optimists argue that, with new licences up for grabs soon, the Indian authorities will not want to be seen as being tough on foreign oil companies.
Then there is the $780m (£387m) cost of the pipeline. True, Cairn India has $600m cash from its float and an $850m revolving credit facility, but it still needs to strike a deal with the Indian government over how it can recover costs before the capital spending kicks off. As each week passes, so the nervousness increases.
Cairn does have other interests. Its Capricorn business moved into the Mediterranean, buying Plectrum Petroleum and MedOil this month. It is also bidding for exploration blocks in Greenland and has assets in Bangladesh and Nepal. But these are dwarfed by the Indian business.
Look at the bigger picture and it is notable that the shares have gone nowhere over the past two years and are down 4.9% in the past 12 months. The shares may look cheap on a 15% discount to the sector, but with the uncertainty it is hard to see much upside soon.
If you want exploration excitement, Tullow, which has just hit the jackpot in Ghana, has a more balanced portfolio.
Royal & Sun Alliance
CAPITAL MANAGEMENT, dynamic financial modelling and “probability of ruin” calculations would provoke a big yawn from most people. But the devil is in the detail. Last week the insurer Royal & Sun Alliance (RSA) walked analysts through an exhaustive 68-page presentation of its capital position.
It is easy to see why. Since RSA raised £300m in May to buy out minority shareholders at its Scandinavian subsidiary, Codan, fears about pressure on the group’s finances have held back the shares.
In fact, RSA is looking pretty robust. Two ratings agencies have recently upgraded it and Standard & Poor’s is likely to follow suit. Strip away the jargon and this could allow the insurer to step up organic growth and expand further in insuring commercial property.
Like its rivals, RSA was hit by claims from the recent floods – slicing some £120m from profits – but other factors are going in its favour. Motor and household premiums are rising across the industry and the group has recently beaten forecasts for new business. Costs are being cut, with 700 jobs going as part of plans to save £70m. Chief executive Andy Haste has added real drive to the business over the past four years. Yet the shares, 139p, trading at well below those of European rivals, look cheap.
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