LONDON (ShareCast) - (ShareCast News) - The value in Cairn Energy´s shares was underappreciated, analysts at UBS said, pointing out various sources of potential upside for the stock to back up their case.
For starters, the oil exploration outfit was set to test projects in Senegal that might give it access to several hundred millions of barrels of crude, with each 100,000 barrels worth 27p per share to the company, whereas the cost of wells in the country was cheap, at between $20m to $30m, analyst Daniel Ekstein said in a report published on 5 August.

To boot, investors were in effect getting paid to show patience for a recovery in oil prices, he said.

Furthermore, Cairn´s large tax loss pools meant that its projects in the North Sea, Catcher and Kraken - which were not due to come on-stream until the backhalf of 2017 - were notably cash-generative, offering free cash flow breakevens of about $33 per barrel.

Nor was the low visibility on the prospects for its recovery of the 10% Cairn India stake as much of an issue as some observers might think, as market expectations in that regards were also downbeat.

The prices on recent M&A deals in the space, such as Woodside Petroleum´s purchase of Conoco´s 35% stake in the SNE discovery (Senegal) and the possible Delek/EnQuest Kraken deal, were also misleading.

"Neither is a fair read-across. Conoco is executing a strategic deepwater withdrawal into a trough asset market. EnQuest, meanwhile, has pressing need for liquidity; tax effects reduce value for a new entrant; and, the final contingent consideration is still unknown," Ekstein explained.

The analyst upgraded his recommendation from 'hold' to 'buy' and kept his target price at 220p.

Email this article to a friend

or share it with one of these popular networks:

• DIGG
• FACEBOOK
• STUMBLEUPON
• MIXX
• YAHOO BUZZ
• DELICIOUS
• REDDIT
• NEWSVINE