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Cairn set for an exciting 2017

VALUE TIP OF THE YEAR 2016: Calling any oil stock 'low risk' is tempting fate. But we think Cairn's long-overlooked assets and conservative approach to its resource base provide a strong argument for the shares in 2017
January 5, 2017

Geopolitical events and price volatility, not to mention operational complexity, mean you should never call a commodity stock 'low risk'. That's even more true of companies in an oil sector that is not only adjusting to a world with two swing producers, but to greater climate-related sanctions in the years ahead. But to the extent that 'low risk' can be found among any of London's listed oil groups, Cairn Energy (CNE) is a strong candidate. With both cash and lowly valued, low-cost reserves on its balance sheet, the company should benefit from any further rise in oil prices, which we think is more likely than not in the year ahead. Throw in looming production from its stakes in Catcher and Kraken in the North Sea, and we think 2017 should be the year where Cairn's shares finally push beyond their narrow recent trading range.

IC TIP: Buy at 220p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Improved oil price
  • Cash-rich balance sheet
  • Low-cost production
  • Potential favourable tax case
Bear points
  • Counterparty and execution risks
  • No yield

Cairn's timing has been good. Unlike many of its peers, the FTSE 250 constituent did not spend the great price slump of 2014 to 2016 selling oil at unprofitable prices, booking massive impairments and taking on debt - a history reflected in a share price that has outperformed the sector. While others have been retrenching, cutting and scrambling to protect dividends, Cairn has been busy building its asset base from 30m barrels (mmboe) of booked 2P (proven and probable) reserves at the end of 2013 to a best-estimate gross contingent (2C) resource of 473mmboe as of August 2016. Crucially, that figure omits a further 2.7bn of "associated 2C oil in place" the company believes sits in the twin discoveries it made off the coast of Senegal in 2014.

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