Cairn's tenuous price support

For starters, at last month's annual meeting, shareholders made plain their dissatisfaction with the company's operational performance by voting down - by a two-thirds majority - the recommendations on directors' pay set out by Cairn's remuneration committee.

Their anger focused on a proposed £1.4m payment to Cairn's founder, Sir Bill Gammell, as compensation for his move from chief executive to chairman - a proposal that runs counter to the recommendations of the UK's corporate governance code. Cairn's board acknowledged they had been "rebuked" over the pay award, but went ahead anyway, as shareholder votes on directors' pay are non-binding.

Admittedly, an earlier outcry from shareholders forced Sir Bill to eschew a £2.5m bonus to be paid in connection with the sale of a 40 per cent stake in Cairn India to Vedanta Resources. In the event, he pocketed around double that figure as part of a $3.5bn (£2.2bn) return of cash to shareholders that followed the Vedanta deal. Cairn Energy shareholders felt the bonus was unwarranted, given that the share price had been hit by a costly and ultimately fruitless exploration campaign in Greenland during 2011. The campaign racked up a $942m exploration bill, which fed through to a $1.14bn year-end operating loss, so any talk of bonuses was likely to be met with a frosty reception.

Cairn has yet to flesh out details about further exploration in Greenland, although the results of further seismic analysis are due soon. Its bosses will be far more circumspect after the failure of last year's multimillion dollar campaign. So future proposals are likely to be of a modest scale, especially as Cairn can hardly tap shareholders for new money and cash resources have been cut to $1.08bn - a hefty sum, but only marginally more than last year's outlay in Greenland.

In April, Cairn acquired Agora Oil & Gas AS, a private Norwegian exploration company, for $450m in cash and shares. Agora has a busy programme this year, with drilling scheduled for nine exploration and appraisal wells in the UK and Norway. If successful, these may divert attention from Cairn's problems in Greenland. The Agora deal, however, is not off to a good start. Poor test results have already resulted in the suspension of the Tybalt appraisal well, in which Agora holds a 40 per cent stake.

At least Cairn has a guaranteed revenue stream through the 22 per cent stake in Cairn India that it holds following the Vedanta deal. A positive beat was provided in April when Cairn India announced another oil discovery in its onshore block in the Krishna-Godavari Basin in Andhra Pradesh. Although Cairn India has a 49 per cent stake in the block, estimated to hold 550m barrels of oil equivalent, its share price has still dropped 27 per cent in sterling terms over the past three months. This poses another problem for Cairn Energy, given that City analysts believe that around 70 per cent of Cairn's core value derives from its remaining stake in its former Indian subsidiary. And then there is the share price chart itself (see below), which prompts our in-house technical analyst to have bearish thoughts.  

Cairn Energy: a new downward leg?

Cairn Energy's share price is in a major downtrend, having peaked at 563p in August 2010. The price remains stubbornly below its 200-day moving average, a line which itself is falling. Having stabilised somewhat since October last year, it may now be beginning a new downward leg. This could easily take it down to 242p or even 218p. Only a sustained move back above the 200-day moving average (now 328p) would improve the outlook.