Cairn Energy: Choosing Greenland over India?

It seems Cairn Energy has shifted its attention from India to Greenland. What else can be said of the Edinburgh-based independent upstream upstart’s announcement of plans to sell a 51% stake in its Indian operations to mining group Vedanta for up to US$8.5 billion?

After a week of nudges and winks, Cairn confirmed rumours of the sale doing the rounds in the city of London. The company’s Indian operations have a market capitalisation of just over US$14 billion which makes Cairn India, the country’s fourth largest oil company.

Apart from seeking a "substantial return of cash" to shareholders, it is now clear that Cairn hopes to pursue its drilling ambitions in Greenland with some vigour. In a media statement, Cairn’s chief executive Sir Bill Gammell said, “I am delighted to announce the proposed disposal of a significant shareholding in Cairn India in line with our objective of adding and realising value for shareholders.”

To fathom what the announcement means for Cairn energy is easy. In fact, market analysts I have spoken to reckon the sale would generate more than adequate capital for Cairn's Greenland prospection in the medium term. This makes Cairn pretty cash rich and the market wonders what the inimitable Bill Gammell has up his sleeve. That it could bag another similarly scaled production asset akin to its fields in India’s Rajasthan state is doubtful.

Working out what the deal means for Vedanta is trickier. Its chief executive Anil Agarwal gave a rather simplistic explanation. In a statement he said, “The proposed acquisition significantly enhances Vedanta's position as a natural resources champion in India. Cairn India's Rajasthan asset is world class in terms of scale and cost, delivering strong and growing cash flow.”

Hence, simply put Vedanta has stated its intentions of venturing beyond metals and make a headline grabbing foray into the oil and gas sector. The market would be watching how the two aspects of the business gel under the Vedanta umbrella, but there are precedents of success – most notably at BHP Billiton.

In a related development, Cairn energy was featured in Deloitte’s half-yearly assessment of UK independent oil and gas companies. At the end of H1 2010, according to Deloitte the top five UK independent oil companies by market capitalisation were - Tullow Oil, Cairn Energy, Premier Oil, SOCO International and Heritage Oil in that order. The top three have maintained their respective positions from December 2009 while SOCO International entered the top five with a 31% increase in market capitalisation.

Overall, the first half of the year was broadly positive for the UK independents, with market capitalisation of the majority of companies in the league table increasing by 4.6% over the 6 month period to 30 June 2010. It stood at £26.482 billion as of end-June. (Click box on the left for the entire list)

On the oil price front, the crude stuff plummeted nearly 7% over the course of the week ended Fri 13th on either side of the pond. The price resistance is presently above US$75 a barrel and I expect it to remain there despite some pretty disappointing economic data doing the rounds these days. Looking further ahead, analysts at Société Générale’s Cross Asset Research team forecast NYMEX WTI to average US$80 in Q3 2010 (revised down by $10) and $85 in Q4 2010 (revised down by $5).

Looking further ahead, an investment note states that they expect NYMEX WTI of US$92.30 in 2011 (revised down by $8.70). NYMEX WTI is forecast at US$88.30/$87.50 in Q1 2011/Q2 2011, increasing to $95/$98.30 in Q3 2011/Q4 2011. On a monthly average basis, Société Générale expects NYMEX WTI of US$87.50 in December 2010 and $100 in December 2011.

In truth, fear of a double dip recession persists in wider market, especially in the US, EU and UK. However, many crude traders are quietly confident that in such an event, India and China’s crude oil consumption will help maintain the oil price at US$70 plus levels.

© Gaurav Sharma 2010. Photo courtesy © Cairn Energy Plc. Chart Courtesy © Deloitte LLP