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THE TIMES (UK): Cairn shares slide on oil tax shock and well warning: “Cairn has made five oil discoveries and one gas find on the Rajasthan block in western India, which it had bought from Shell two years ago for £4 million.” ( 18 Dec 04


By Peter Klinger

December 18, 2004


CAIRN ENERGY’S dream run on the stock market this year, which propelled the Edinburgh-based oil company from a relative unknown to a FTSE 100 constituent, came to a crashing halt yesterday when investors wiped £570 million off its market value.


Cairn’s shares plunged 359p, or 26 per cent, to £10.03 after an operating update revealed a substantial downgrade of one of its Indian oil discoveries and the prospect of a new tax on oil production.


ABN Amro and Canaccord Capital, Cairn’s joint house brokers, both slashed their share price targets. ABN Amro reduced its target from £17.80 to £15 while Canaccord was even more severe, moving from £16.28 to £12.33.


Investors had been hoping for positive news, such as another oil discovery or upgrades of existing finds, following a stunning year of exploration success. Cairn has made five oil discoveries and one gas find on the Rajasthan block in western India, which it had bought from Shell two years ago for £4 million.


Instead, investors were told by Bill Gammell, Cairn’s chief executive, that appraisal drilling around its NC oil discovery had been disappointing. Estimates of the amount of oil in the ground had to be reduced from 400 million barrels to between 30 and 80 million.


In addition, Mr Gammell said that it had been told by the Indian Government of a new oil production tax, equivalent to about $3 per barrel. Cairn is disputing the tax demand, which will be the subject of arbitration in London.


The bad news overshadowed an update on Mangala, Cairn’s first and biggest discovery in India, which the company expects will produce at least 75,000 barrels of oil per day. Combined with the Aishwarya find ,its second discovery, Mangala should produce between 80,000 and 100,000 bpd, up from an earlier estimate of between 60,000 and 100,000.


Cairn’s stock recovered some lost ground in afternoon trading to close at £11.15, down 247p. Its shares have fallen by almost a third since peaking at £15.70 four weeks ago amid fears that the company may be running out of luck.


Cairn had informed the market a week ago of its intention to publish an operating update yesterday.


The Financial Services Authority is expected to look at Cairn’s recent share trading patterns. An FSA spokesman would not comment.


Bruce Evers, an analyst at Investec Securities, said that Cairn’s share price had been priced out of proportion by an overenthusiastic market, buoyed by the early exploration success and a booming oil price. He said: “I have not seen anything like this on this scale in my City career, and that is 21 years. Today’s announcement was a ‘wake up and sniff the coffee’ call to the market.”


Richard Slape, an analyst at Seymour Pierce, said that the market had overreacted yesterday. He said: “I don’t think this story is dead yet and I would regard the pullback today, well we’ve had a pullback for the past four weeks . . . I think this is probably not a bad buying opportunity.”


Mr Gammell said: “Perhaps people are always looking for fireworks but this is a slow burn.”

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