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Questor share tip: Cairn strikes oil off Senegal
The frontier explorer strikes oil off the Senegalese coast after a turbulent 12 months, says Questor
Cairn Energy
183½p+3.6p
Questor says BUY
SHARES in oil explorer Cairn Energy [LON:CNE] jumped by almost 3pc yesterday after it struck oil off the coast of Senegal, convincing Questor to keep faith with the stock.
The FTSE 250-listed oil explorer said it has discovered a “very substantial oil- bearing interval” at its FAN-1 well. Broker Liberum thinks the well may contain about 300m barrels of oil, which could be worth up to 60p per share to the company.
The reason for the difference between yesterday’s share price gain and the potential value is that further well testing is required to judge whether the reserves are worth recovering.
It is understood that different qualities of oil – from 41 API, which is high quality light sweet crude, to 28 API, which is lower quality heavy oil – were recovered in samples.
If further testing of the reserves discovers a smaller reservoir of lower quality heavy oil, it will not be worth extracting.
That said, this is a welcome piece of news for drilling in the region. The rig now moves to the second well in the area, SNE-1, with Liberum estimating that an oil discovery could be worth up to 40p per share.
Cairn focuses on oil and gas exploration in frontier regions and has eschewed a big role in the running of wells once the oil is flowing.
The business model for Cairn is that once oil discoveries are made and developed, they are sold off and the cash returned to shareholders.
Cairn was hit with a tax dispute from the Indian government in January, stemming from the firm’s largest-ever oil discoveries onshore in the country.
In a deal structured to minimise the tax bill, the company sold a majority stake in Cairn India to Vedanta Resources in 2010, but retained a 10pc holding valued at around $1bn (£622m), or 100p to shareholders.
Cairn returned $3.5bn to shareholders last year, but has put its $300m share buy-back programme on hold.
Frontier drilling is high risk. The odds of discovery are as low as about one in eight, said JP Morgan Cazenove. The costs of drilling offshore are also high, with each well costing up to $80m, compared with about $20m for onshore, according to Cairn.
Questor said this was a high-risk option and expected a bumpy ride with the shares. However, it wouldn’t make sense to realise a loss in advance of the Senegal drilling results. For that reason the shares remain a buy.