Business Overview
Cairn Energy PLC (LON: CNE) is a UK based independent oil and gas production and exploration company. The company has conducted activities related to exploration, discovery, development and production of oil and gas in multiple locations worldwide. The group holds an experience of over 20 years as an operator and as a partner in oil and gas lifecycle stages. It’s headquarter is situated at Edinburgh with offices located in the region of Norway, Mexico, Senegal and London. Cairn Energy entered into strategic partnerships and Joint Venture initiatives with the Government to expand its operations globally. The company works with major global players, national oil companies, independent listed oil companies. In India, the group provided professional training to enhance business skills and has trained over 3,000 people. In Senegal, Cairn established a new hydrocarbon province and made one of the largest oil discoveries in 2014. Project Hunger was initiated by the group under which the company is working in Senegal with 10 centres to serve over 200 villages. The company has operated over 200 wells in India from the year 1996-2011, 8 wells in Greenland from the year 2010-2011 and 11 wells in Senegal from the year 2013-2017. In the year 2013-14, the company operated 2 wells in Morocco. The group presently holds 16 licenses to operate in UK & Norway, Ireland, Mexico and Senegal. It has 40 significant oil and gas discoveries offshore and onshore in India. Cairn Energy Plc is a constituent of the FTSE 250 index and is listed on the London Stock Exchange.

On 10^th March 2020, the company will announce its preliminary results for the year to 31 December 2019.

Management

The current Chief Executive Officer is Simon Thomson and was appointed in July 2011. James Smith holds the responsibilities of the Chief Financial Officer. In March 2014, James Smith joined the group.

Key Statistics



Top Shareholders 
 
 
(Source: Thomson Reuters)

Business Segments

The company divided its operations into four reportable segments being Senegal, International, UK & Norway, and Other Cairn Energy Group. In International segment, the company has been split into two separate units; ‘East Atlantic’ comprises the Cairn’s exploration assets in Mauritania, Cote D’Ivoire, and Ireland and ‘LATAM’ comprises the Cairn’s increasing portfolio of Latin American assets in Nicaragua, Suriname, and Mexico. In Senegal segment and business unit, the company is focussed on the development of the SNE discoveries. The UK & Norway segment comprises continuing exploration programmes in the Norwegian Sea, Barents Sea, and the North Sea, UK Catcher and Kraken producing fields, and the Norwegian Nova development project. In the Other Cairn Energy Group segment, the company captures costs related to the Cairn’s head office and other corporate assets not allocated to a geographic segment. In the first half of 2019, the company conducted all its exploration activities in the region of Senegal and production, development activities were conducted in the region of UK & Norway. In the six months ended 30^th June 2019, the company’s UK & Norway business have shown growth in revenue and gross profit against the last year data for the same period.

Recent News

On 15^th January 2020, the company has taken final investment decision in Senegal. The company has informed that along with its joint venture partners, Woodside and FAR, in agreement with Petrosen and the Government of Senegal, have signed a joint FID (Final Investment Decision). The Final Investment Decision agreement on Phase 1 has received the 25-year Exploitation Authorisation from the Government of Senegal recently.

On 9^th January 2020,the company announced that it has been issued by Woodside regarding the approval of the RSSD (Rufisque Offshore, Sangomar Offshore and Sangomar Deep Offshore) joint venture (JV) Exploitation Plan and also granted the Exploitation Authorisation for the Sangomar Field Development, in which the company has a 40 per cent working interest.

Operational Update (as on 21^st January 2020)

The company announced an update on its operations and trading performance. Aggregate oil production from the Catcher and Kraken fields in 2019 averaged ~23,000 bopd. This has been at the upper end of previous guidance of ~21,000 to 23,000 bopd. The company’s Catcher (Cairn 20% WI) and Kraken (Cairn 29.5% WI) was averaged ~63,600 bopd (gross) and ~35,600 bopd (gross). Oil and gas sales revenue was US$504 million at an average realised price of US64.52/boe. Average production cost was stated at US$17.5 per boe. On the year-end 2019, the company’s cash stood at US$154 million, and excludes anticipated proceeds from the sale of Capricorn Norge of ~US$100 million. At year-end 2019, the net oil sales receivables were US$18 million. The group’s US$575m RBL (Reserves Based Lending) debt facility was undrawn at year-end. During the year, the capital expenditure stood at ~US$245 million. In working capital, there was an increase, relating to capex of ~US$20 million in the year. In 2019, The Catcher Area fields continued to outperform and achieving excellent operating efficiency from the Fixed Production Storage Offloading (FPSO). In India, the Arbitral Tribunal has indicated that it anticipates being in a line to issue the Award in the summer of 2020. The company is seeking full restitution for losses of over US$1.4 billion. In the fourth quarter of 2019, the competition farm-out contract for the sale of 10 per cent interest in the Nova development to ONE-Dyas AS for US$59.5 million. The Norway asset disposals agreement to dispose of the whole share capital of Capricorn Norge AS to Solveig Gas Norway AS for 100 million US dollar plus working capital adjustments.  The transaction is expected to be completed in the first quarter of 2020.

Financial Highlights (for the six months ended 30^th June 2019, US$ million)


(Source: Interim Reports, Company Website)

During the first half of FY19, the group’s revenue surged to $270.3 millionas against $182.4 million in H1 FY18. The increase in revenue was driven by an increase in the sale of oil for the period. For the first half of 2019, the company’s revenue from production surged to $257.1 million as compared with the corresponding period of the last year. This revenue was before adjusting for hedging gains of US$2.9 million. The company’s reported PBT (Profit before tax) from continuing operations stood at $43.4 million in H1 FY19 against an LBT (loss before tax) from continuing operations of $602.9 million in H1 FY18. The company’s reported PAT (Profit after tax) attributable to shareholders stood at $66.5 million in H1 FY19 against LAT (loss after-tax) of $500.5 million in H1 FY18. The company’s basic earnings per share for H1 FY19 was at 11.44 cents versus a basic loss per share of 86.20 cents in H1 FY18. The company received a tax rebate of $23.1 million in the H1 FY19 against a tax rebate of $102.4 million in the H1 FY18. The company’s total capital expenditure for the first half of 2019 stood at $135 million. The company’s production – net WI share in the first half of 2019 stood at 23,714 boepd, an increase from the corresponding period of the last year. The current sources of funding include cash of US$58 million in the first half of 2019 end and the US$575 million RBL facility of which US$60 million has been drawn.

Financial Ratios

 
(Source: Thomson Reuters)

The reported gross margin in H1 FY19 increased by 9.2 per cent to 38.5 per centagainst 29.3 per cent reported last year for the same period. The reported EBITDA margin of 65 per cent for the H1 FY19 stood higher than the industry median of 54.8 per cent. Net margin reported was 24.6 per cent for the first half of 2019. Return on equity for the current first half stood at 4.7 per cent and remained flat as compared to the industry median of 4.7 per cent. On the liquidity front, Cairn Energy Plc’s current ratio stood at 1.25x. Onleverage front, the debt-equity ratio of the Cairn Energy Plc’s was 0.27x which was lower as compared to the industry median of 0.63x, reflecting that the company is less leveraged as compared to its peers. 

Share Price Performance


Daily Chart as at February-12-2020, before the market close (Source: Thomson Reuters)

On February 12, 2020, at the time of writing (before the market close, at 10:00 AM GMT), Cairn Energy PLC shares were trading at GBX 172.20, up by 0.820 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 216.80/GBX 141.93. Stock’s average traded volume for 5 days was 991,835.60; 30 days – 1,020,654.10 and 90 days – 1,153,706.93. The traded volume (average) for 5 days was down by 2.82 per cent versus 30 days average traded volume. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 1.66. The outstanding market capitalisation was around £1 billion.

Valuation Methodology

Method 1: EV/Sales Approach (NTM)



To compare Cairn Energy Plc with its peers, EV/Sales multiple has been used. The peers are Diversified Gas & Oil PLC (NTM EV/Sales was 2.61), Premier Oil PLC (NTM EV/Sales was 2.80), Tullow Oil PLC (NTM EV/Sales was 3.23), and Energean Oil & Gas PLC (NTM EV/Sales was 5.37). The Average of EV/Sales (NTM) of the company’s peers was 3.51x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare Cairn Energy Plc with its peers, Price/Cash Flow multiple has been used. The peers are Petrofac Ltd (NTM Price/Cash Flow was 3.96), John Wood Group PLC (NTM Price/Cash Flow was 6.35), Pharos Energy PLC (NTM Price/Cash Flow was 5.96), and Seplat Petroleum Development Company PLC (NTM Price/Cash Flow was 4.12). The Median of Price/Cash Flow (NTM) of the company’s peers was 5.04x (approx.)

Key Risks

The energy sector was down due to less production in the China region. The ongoing trade tensions between the US and China will affect the oil prices in the international markets. Since an attack against Saudi Arabia’s oil facilities launched by one Iranian terrorist outfit, oil prices witnessed large swings in the commodity market. Organization of Petroleum Exporting Countries (OPEC) indicated that expected supply from non-OPEC sources to accelerate slightly less than as previously thought.

Financial Progress

  
(Source: Thomson Reuters)

Cairn Energy PLC witnessed an increase in revenue over the period of H1 FY17-H1 FY19. Cash from operating activities at $173 million in H1 FY19 also improved substantially from $42 million in H1 FY17. Currently, the capital expenditure for 2020 is forecasted to be at ~US$595 million. The company currently holds licences to operate in multiple geographic regions globally, which will help them to achieve the set production targets. The company has increased its full-year guidance based on strong H1 performance. In Senegal, the company has been awarded major contracts. The company is about to commence drilling activities in Mexico, Norway and the UK. It is expanding its operations across Senegal, Norway and Mexico, which is expected to generate good production volumes for the company.

Conclusion

The company has recorded decent financial performance for the first half of the financial year 2019. The company has shown good top-line and the bottom-line performance for the period. In the current operational update, Cairn shows a good increase in production.The company’s robust cash flow generation, active portfolio management and year-end net cash provided financial flexibility for continued strategic delivery across the balanced portfolio. The group is delighted to have achieved the Final Investment Decision (FID) in Senegal. It also looks forward to the results of the exploration drilling programme in Mexico. The sale of the Norwegian business through two attractively priced transactions demonstrates the company's continued focus on capital discipline and monetisation.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 170.80 (as on 11^th February 2020) with lower double-digit upside potential based on 3.51x NTM EV/Sales (approx.) on FY20E sales (approx.) and 5.04x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*The “Buy” recommendation is valid for the current price as covered in the report (as on 12^th February 2020).
*All forecasted figures and Peer information have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.771949 GBP.

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