Cairn Energy (LON:CNE)

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Naveen Kasthuri

Geoffrey Jordan

Cairn Energy (LON: CNE) is a Scottish oil drilling and explorations company whose activities are focused in South Asia where it holds material exploration and production positions in India, Nepal, and Bangladesh.^[1] Cairn Energy is comprised of Cairn India and Capricorn. The company owns 65% of Cairn India, the oil and gas production arm of Cairn Energy listed on the Bombay Stock Exchange and the National Stock Exchange of India.^[2][1][3] The company also owns 90% of Capricorn, its exploration-focused arm.^[3][1]

Company Overview

Cairn Energy has two divisions.^[1] Its Capricorn division explores for oil and gas in the Indian subcontinent and has been setting up an exploration organization in Greenland since the middle of 2008.^[1] Its Cairn India division drills for oil and produces gasoline in India, with production plants and drilling fields set up in northern India. As of 2009, Cairn India is setting up production in Bangladesh.^[4] Cairn India also had facilities in Nepal until geopolitical developments and violence have raised security concerns.^[5]

Business and Financial Metrics

2009 Results^[6]

Cairn Energy reported total revenue for 2009 of $234 million, down 28% from revenue of $299 million in 2008. The company reported profit after tax of $53 million, up 382% from profit of $11 million in 2008. Average production during 2009 was 13,803 barrels of oil equivalent per day. The average price of a barrel of oil equivalent was $50.02 in 2009. The average production cost of one barrel of oil equivalent was $12.31.

Business Segments

Cairn India Group (Revenue: $282.4 million^[7], Net income: $69.10 million^[8])

Cairn India drills for and produces oil primarily in Northern India, though it operates in Sri Lanka and various miscellaneous regions. Cairn Energy has a 65% interest in Cairn India. This is the company's primary source of revenue.

Capricorn Oil Group (Revenue: $16.90 million^[7] Net income: -$47.50 million^[8])

Capricorn is focused on exploration and finding of oil. Its efforts have mostly been in India.^[1] Capricorn also has 6 oil exploration blocks in Greenland for research and future oil capitalization. Since Capricorn is focused on exploration rather than monetizing, Capricorn has a trend of negative net income.

While the sum of these two segments' revenues equal Cairn Energy's total annual revenue for 2008, Cairn Energy's net income is much higher. This is because of a big increase in stock prices of Cairn India. Since Cairn Energy holds a sizable amount of Cairn India's shares, this stock price increase boosted Cairn Energy's net income directly.

Trends and Forces

Competition between Countries Offering Oil Blocks is Intensifying

In 2009, more than a dozen countries offered exploration blocks to oil drilling companies.^[9] Major oil exporters such as Iraq and Venezuela are capable of offering better licensing terms for oil companies due to their economies of scale with large, rich oil reserves. The oil environment in India has been a fluctuation between large discoveries and dry, failed explorations.^[9] With the risk of having a low return on investment by exploring in India, even multi-billion dollar companies headquartered in India such as Oil and Natural Gas Corporation and Reliance Industries Ltd are moving to more oil rich countries.^[9] For Cairn Energy's India division, this means reduced competition in Indian oil fields. India also provides tax incentives for oil exploration due to the decreased licensing of Indian oil blocks that oil-rich countries do not offer.^[9] However, Cairn India continues to share risks associated with failed oil explorations that other oil companies are hedging against.^[10]

Declining Oil Prices Responsible for Declining Costs

With the 2009 financial crisis and its associated decrease in global oil prices, oil companies fearing losses have scaled back their oil production goals. When oil companies decrease production, they decrease demand for construction elements such as steel and construction workers. This has decreased costs for building oil rigs, oil exploration facilities, and oil drilling facilities globally.^[11] Average prices oilfield service companies charge drilling rigs have decreased by 30% since the fall of 2008.^[11] Both Cairn India and Capricorn face reduced costs in setting up oil bases for drilling and exploration that extend until the end of the year.^[11]

Greenland may become the world's largest oil exporter

Greenland is estimated to have up to 20% of Earth's oil.^[12] As the ice melts away due to rising temperatures attributed to global warming, previously uninhabitable ice-covered land is becoming an oil-rich land suitable for drilling and exploration. Many of world's largest oil companies have acquired exploration blocks in Greenland to chart oil plans for the future, despite the expensive price that Greenland charges.^[12] Capricorn, Cairn's exploration division, has a lease for 12 exploration blocks in Greenland. ^[13] These exploration blocks are able to become drilling blocks once Cairn Energy and other companies are legally allowed to set up oil activities.

The Indian Government is Increasing its Support for the Environment

The Indian government, with support and assistance from the U.S., is working to make all carbon emissions more environmentally friendly.^[14] This will force India's oil industry to develop new technologies to avoid the heavy taxation that is associated with exceeding government regulated levels of carbon emissions. Since the oil drilling and explorations industry is especially prone to release large levels of greenhouse gases, governmental taxation based on carbon emissions is a growing threat to Cairn Energy and the rest of the Indian oil industry.^[15] The costs associated with developing new technologies to avoid carbon emissions is generally large.^[16]

Competition

• Oil and Natural Gas Corporation (NSE:ONGC): ONGC is Cairn Energy's largest competitor, responsible for 80% of all gas output in India. Among other things, the company primarily engages in oil exploration and oil drilling in and around Rajastan, North India. ONGC competes head-to-head with Cairn India in government auction sales for oil exploration blocks, resources for oil drilling and oil rig construction, and pipelines for oil output. ONGC also has one tenth of India's refining capacity.^[17][18]

• Selan Exploration Technology (NSE: SELAN): Selan is an oil exploration and drilling company primarily located in Gujarat, Northern India. SELAN was among the first private sector companies to have obtained rights to develop five discovered oilfields situated in the state of Gujarat. Selan competes directly with Cairn Energy's oil drilling and explorations activities in India. Both vie for the same oil block contracts in auctions from the Indian government.^[19][18].

• Hindustan Oil Exploration Company Limited (NSE: HOEC): HOEC was the first private company in India to enter into field of oil and gas exploration. The company has participating interest in seven oil/gas fields in west and south India, which are in varying stages of the exploration and production life cycle. This company competes with Cairn India and Capricorn during India's annual oil block auction for areas of interest. ^[18][20]

• Reliance Natural Resources Limited (NSE: RNRL): Reliance Natural Resources is in the business of sourcing, supplying and transporting gas, coal and liquid fuels. RNRL has been awarded a large oil and gas block in the state of Mizoram in India under the blocks auction for the exploration and production of oil and gas. The company engages in coal and natural gas fuel exploration and extraction, as well. Cairn Energy's Cairn India competes with Reliance Natural Resources for auction blocks and oil production.^{[18] [21]}

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} Cairn Energy: About Cairn
2. ↑ Cairn India: Investor Relations
3. ↑ ^{3.0 3.1} Cairn Energy: 2008 Annual Report, Page 41 (PDF 43)
4. ↑ Cairn Energy: 2008 Annual Report, Page 26 (PDF 28)
5. ↑ [Cairn Energy: 2008 Annual Report, Page 27 (PDF 29)
6. ↑ Cairn Energy 2009 Annual Report
7. ↑ ^{7.0 7.1} Datamonitor Cairn Energy Analysis. Page 9
8. ↑ ^{8.0 8.1} Datamonitor Cairn Energy Analysis, Page 10
9. ↑ ^{9.0 9.1 9.2 9.3} RIGZONE: Tough Times for India's Licensing Round, May 18th, 2009
10. ↑ Cairn Energy: 2008 Annual Report, Risk Factors, Page 41 (PDF 43)
11. ↑ ^{11.0 11.1 11.2} The Wall Street Journal: Lower Costs Give Oil Firms Breathing Room, May 20th, 2009
12. ↑ ^{12.0 12.1} ABC Australia: Greenland the focus of global oil hunt, August 8th, 2008
13. ↑ Cairn Energy: 2008 Annual Report, Notes to the Accounts, Item 18 Page 112 (PDF 114)
14. ↑ Reuters: Clinton upbeat on climate change talks with India
15. ↑ Cairn Energy: 2008 Annual Report, Risk Factors, Page 43 (PDF 45)
16. ↑ ChicagoTribune: Cheap oil, but at what cost?
17. ↑ ONGC India: Investor Center
18. ↑ ^{18.0 18.1 18.2 18.3} MoneyControl: Cairn India's competitors
19. ↑ Selan Exploration: Company Profile
20. ↑ HOEC: About Us
21. ↑ Reliance Natural Resources Limited: Business Profile