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Cairn Energy’s Theseus year

Oil and gas producer signals India tax dispute near end, while it has sold off, or is in the process of selling off, most of its assets and replacing them with new Egyptian production
September 7, 2021
  • Shareholders will get $700m from India payout when it arrives
  • Shell Egypt transaction expected to close by end of September

While the Ship of Theseus offers the ultimate metaphysical test – if all the pieces of a ship are replaced, is it still the same ship? – Cairn Energy (CNE) has provided a real-world example. The company is selling off, or has sold off, most of its producing assets and will likely soon complete a deal to replace these with Royal Dutch Shell’s (RDSB) onshore Egyptian assets, leading to revenue for the first half from continuing operations coming in at just $500,000 (£365,000). 

The $646m Shell deal has more gas than oil production, with ready expansion options, chief executive Simon Thompson said. Full-year production for the company’s working interest is forecast at 33,000-38,000 barrels of oil equivalent per day (boepd). 

Cairn is also selling off its share of the Catcher and Kraken fields in the North Sea for $460m, to private company Waldorf Production. These assets provided the company’s first-half cash flow, of $123m, although the transaction is dated to 1 January 2020, meaning the “interim period adjustment”, or cash price reduction, is $273m. 

These are also not the biggest catalysts expected in the last months of the year: Cairn’s long-term battle with the government of India looks to be over soon. The “expected near-term resolution” would see Cairn handed $1.1bn (£770m) as a tax refund, rather than the $1.2bn arbitration award handed down by a panel late last year. The main condition of this payout, the legislation for which has not yet gone through parliament, is that Cairn withdraws the arbitration claim. 

When the $1.1bn  arrives, shareholders will get $700m, split in a $500m special distribution and $200m in buybacks. This follows a $257m special dividend in the first half following the sale of the Sangomar assets in Senegal. 

India had been hesitant to pay the $1.2bn, to the point Cairn moved to seize assets connected to the government, including Air India planes and property in Paris. 

This new solution will result in slightly less cash, but Cairn said it was “considering entering into statutory undertakings” with India to make it happen. 

Looking at next year, post sales and acquisitions, analysts see production at 36,000boepd, and earnings per share reaching positive territory, at around 50¢. 

Cairn has plenty of balls in the air, with the sales, acquisitions and India situation. It is trading strongly compared with other oil and gas companies, around its 2019 level, but this more a reflection of its rocky past few years. The hefty upcoming dividend for investors makes it more appealing, but we're still not sure what a long-term shareholder would be getting. Hold. 

Last IC View: Hold, 138p, 29 Sept 2021

CAIRN ENERGY (CNE)    
ORD PRICE: 196pMARKET VALUE:£ 969m
TOUCH:196-196.4p12-MONTH HIGH:240pLOW: 122p
DIVIDEND YIELD:NAPE RATIO:NA
NET ASSET VALUE:162¢NET CASH$337m
Half-year to 30 JunTurnover ($m)*Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20200.20-83.8-14.4nil
20210.50-87.4-17.5nil**
% change+150---
Ex-div:-   
Payment:-   
£1 = $1.37 *Majority of Cairn's producing assets held for sale, therefore excluded from revenue figures **Excludes special dividend of 32p