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WIKI ANALYSIS
Cairn Energy(LON: CNE) is a Scottish oil drilling and explorations company whose activities alre 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 in 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].
Cairn Energy recorded revenues of $299.3 million during the fiscal year ended December 2008, an increase of 4.03% over 2007.[4]. In 2004, Capricorn made an on-shore oil discovery estimated to be worth at least $500 million in Rajastan, India. [5] Cairn Energy has more than 3000 square kilometers of oil development land under contract in Rajastan, India.[6] Capricorn continues to make discoveries in India, allowing Cairn India to expand its production capacity. Between 2007 and 2008, Cairn India's revenue increased by 18.9% due to new discoveries and higher production of oil barrels.[7]
Business Overview
Cairn Energy was set up in Edinburgh, Scotland and was listed on the London Stock Exchange in 1988. (datamonitor 5)[1] The company has two divisions.[1] Its Capricorn division explores for oil and gas in the Indian subcontinent and has been setting up an exploration organization for 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.[8] Cairn India also had facilities in Nepal until geopolitical developments and violence have raised security concerns.[9]
Business and Financial Metrics
| General Fundamentals (in millions) [10] | 2006 | 2007 | 2008 |
| Total Revenue | $286.30 | $287.70 | $299.30 |
| Net Income[11] | $-97.1 | $1543.1 | $367.0 |
| Plant and Equipment Assets | $399.9 | $504.80 | $1,128.20 |
In 2004, Cairn Energy discovered a massive oil field in Northern India.[12] This discovery, combined with previous smaller discoveries, led Cairn energy's revenue to increase by 73% from $172.91 million in 2004 to $299.30 million in 2008.[12][13] This discovery has also prompted a similar, explosive growth in their production and plant equipment assets. Cairn energy has been setting up oil extraction and production equipment in India since 2004. As of 2008, the company had $1,128.20 million in equipment assets, an increase of 172% since 2004's equipment assets of $414.49 million.[13]
Cairn Energy's net incomes in 2007 and 2008 are much higher than its revenues due to a substantial increase in Cairn India's share prices. Cairn India is listed in the Bombay Stock Exchange and the National Stock Exchange of India, and Cairn Energy is heavily invested in Cairn India's shares. The company reports that $356 million of the $376 million in net income are from its investment in Cairn India. [14]
Company Activities
| Industry-specific Fundamentals | 2006 | 2007 | 2008 |
| Oil & Gas Reserves under possession (millions of barrels)[15] | 170.164 | 243.340 | 347.972 |
| Production(barrels of oil per day)[14], [16] | 105,028 | 87,031 | 76,298 |
| Number of Indian oil field blocks in possession[17], [18],[19] | 15 | 14 | 14 |
Cairn Energy's reserves have been steadily increasing since the discovery of the oil fields in 2004. The company's exploration division, Capricorn, has shifted its focus to charting and finding oil in Greenland. Due to this, the number of oil field blocks under control of Cairn Energy in India has decreased since 2006. To offset this, Capricorn has acquired 6 exploration blocks in offshore Greenland.[20] Greenland is purported to have up to 20% of the world's untapped oil and gas. [21]
Company Segments
Cairn Energy has two business segments and five geographical segments.
Business Segments
- Cairn India Group (Revenue: $282.4 million[22], Net income: $69.10 million[23]): 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[22] Net income: ($47.50) million[23]): Capricorn is focused on exploration and finding of oil. As of 2008, its efforts have mostly been in India.[1] Capricorn also has 6 oil exploration blocks in Greenland for research and future oil capitalization.[20] 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.[14]
Geographical Segments
Since the end of 2004, Cairn Energy has focused exclusively on acquisition of oil blocks in India, dropping or selling other businesses. Cairn Energy has one block for oil exploration in Sri Lanka, and one block for oil exploration in Mauritius.[24] In comparison, the company has 7 blocks for oil exploration and 5 blocks for oil production in India.[24]
Key Trends and Forces
Competition between Countries Offering Oil Blocks is becoming Higher
In 2009, more than a dozen countries will be offering exploration blocks to oil drilling companies.[26] 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.[26] 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.[26] For Cairn Energy's Cairn 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.[26] However, Cairn India continues to share risks associated with failed oil explorations that other oil companies are hedging against.[27]
Declining Oil Prices Responsible for Declining Costs in First Quarter 2009
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.[28] Average prices oilfield service companies charge drilling rigs have decreased by 30% since the fall of 2008.[28] 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.[28]
Greenland is laying the grounds to become the World's largest oil exporter
Greenland is estimated to have up to 20% of Earth's oil.[29] 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.[29] Capricorn, Cairn's exploration division, has a lease for 12 exploration blocks in Greenland. [30] These exploration blocks are able to become drilling blocks once Cairn Energy and other companies are legally allowed to set up oil activities.
Indian Government is Increasing its Support for Environment
The Indian government, with support and assistance from the U.S is working to make all carbon emissions more environmentally friendly. [31] This will force India's oil industry to develop new technologies to avoid the heavy taxation that are 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.[32] The costs associated with developing new technologies to avoid carbon emissions is generally large.[33]
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 1/10th of India's refining capacity. [34][35]
- Selan Exploration Technology (NSE: SELAN): Selan is an oil explorations 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.[36][35].
- 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. [35][37]
- Reliance Natural Resources Limited (NSE: RNRL): Reliance Natural Resources is in the business of sourcing, supply and transportation of gas, coal and liquid fuels. RNRL has been awarded a large an 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.[35] [38]
Market Share
As of 2008, Cairn India has exclusive access to 14 oil field blocks in Rajastan, India.[1] As of 2008, the Indian government has sold a total of 162 blocks for exploration and drilling to various company.[39] This brings Cairn India's market share to 8.64%.
Because all of Cairn Energy's primary competitors are Indian companies, and because all of them report their financials in Indian rupees, the following comparison table is in rupees.
| Name | 2008 Operating Revenue (in millions Rs.) [35][44][45] | 2008 Net Income (in millions Rs.) [35][44][45] | 2008 Expenses (in millions Rs.) [35][45][44] | 2008 Total Assets (in millions Rs.) [35][44][45] |
| Oil and Natural Gas Corporation (NSE:ONGC) | Rs. 475.15 | Rs. 838.60 | Rs. 6876.92 | Rs. 8310.01 |
| Cairn Energy (LON:CNE) - Cairn India | Rs. 27.78 | Rs. 57.83 | Rs. 28.25 | Rs. 2937.35 |
| Reliance Natural Resources Limited (NSE: RNRL) | Rs. 14.67 | Rs. 0.20 | Rs. 41.67 | Rs. 322.17 |
| Hindustan Oil Exploration Company Limited (NSE: HOEC) | Rs. 10.35 | Rs. 2.41 | Rs. 5.15 | Rs. 115.54 |
| Selan Exploration Technology (NSE: SELAN) | Rs.10.27 | Rs. 4.66 | Rs. 2.76 | Rs. 7.13 |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Cairn Energy: About Cairn
- ↑ Cairn India: Investor Relations
- ↑ 3.0 3.1 Cairn Energy: 2008 Annual Report, Page 41 (PDF 43)
- ↑ Financial Statements: CNE.L Cairn Energy PLC (CNE.L)
- ↑ Cairn Energy: 2008 Annual Report, Page 17 (PDF 19)
- ↑ Datamonitor: Cairn Energy Analysis, Page 5
- ↑ Datamonitor: Cairn Energy Analysis, Page 12
- ↑ Cairn Energy: 2008 Annual Report, Page 26 (PDF 28)
- ↑ [Cairn Energy: 2008 Annual Report, Page 27 (PDF 29)
- ↑ Fool.com UK: Cairn Energy Fundamentals
- ↑ BusinessWeek Financials: Cairn Energy
- ↑ 12.0 12.1 Independent News: Business Analysis, December 30, 2004
- ↑ 13.0 13.1 13.2 Calculations from Fool.com UK: Cairn Energy Fundamentals
- ↑ 14.0 14.1 14.2 Cairn Energy: 2008 Annual Report, Page 5 (PDF 7)
- ↑ [Cairn Energy: 2008 Annual Report, Page 132 (PDF 134)
- ↑ Cairn Energy: 2007 Annual Report, Page 2 (PDF 4)
- ↑ Cairn Energy: 2008 Annual Report, Page 4 (PDF 6)
- ↑ Cairn Energy: 2007 Annual Report, Page 12 (PDF 14)
- ↑ Cairn Energy: 2006 Annual Report, Page 2, (PDF 4)
- ↑ 20.0 20.1 Cairn Energy: 2007 Annual Report, Page 3 (PDF 5)
- ↑ ABC Australia: Greenland the focus of global oil hunt, August 8th, 2008
- ↑ 22.0 22.1 22.2 Datamonitor Cairn Energy Analysis. Page 9
- ↑ 23.0 23.1 Datamonitor Cairn Energy Analysis, Page 10
- ↑ 24.0 24.1 Cairn Energy 2008 Annual Report, Notes to the Account, Item 18, Page 113 (PDF 115)
- ↑ Datamonitor Cairn Energy Analysis. Page 7
- ↑ 26.0 26.1 26.2 26.3 RIGZONE: Tough Times for India's Licensing Round, May 18th, 2009
- ↑ Cairn Energy: 2008 Annual Report, Risk Factors, Page 41 (PDF 43)
- ↑ 28.0 28.1 28.2 The Wall Street Journal: Lower Costs Give Oil Firms Breathing Room, May 20th, 2009
- ↑ 29.0 29.1 ABC Australia: Greenland the focus of global oil hunt, August 8th, 2008
- ↑ Cairn Energy: 2008 Annual Report, Notes to the Accounts, Item 18 Page 112 (PDF 114)
- ↑ Reuters: Clinton upbeat on climate change talks with India
- ↑ Cairn Energy: 2008 Annual Report, Risk Factors, Page 43 (PDF 45)
- ↑ ChicagoTribune: Cheap oil, but at what cost?
- ↑ ONGC India: Investor Center
- ↑ 35.0 35.1 35.2 35.3 35.4 35.5 35.6 35.7 MoneyControl: Cairn India's competitors
- ↑ Selan Exploration: Company Profile
- ↑ HOEC: About Us
- ↑ Reliance Natural Resources Limited: Business Profile
- ↑ BusinessWorld: Off the Blocks, March 21, 2008
- ↑ Selan Exploration Company Profile
- ↑ ONGC India Company Profile
- ↑ HOEC India: About Us
- ↑ Reliance Natural Resources: Business Profile
- ↑ 44.0 44.1 44.2 44.3 MoneyControl: Selan Financials
- ↑ 45.0 45.1 45.2 45.3 MoneyControl: HOEC Financials
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