Cairn shares hit after drilling off Greenland strikes a blank

Published on Monday 25 October 2010 21:41

CAIRN Energy disappointed investors with a lacklustre report on its Greenland drilling project yesterday after it announced it had abandoned two of its three exploration wells at the end of the Arctic exploration season.

Cairn's shares slipped 7.3 per cent on the news that initial hydrocarbon findings in two of its wells - T4-1 and T8-1 - had proved uncommercial. As a result the firm wrote off $185 million (117m) in costs.

Cairn also said it had not reached "primary objectives" at its third well, Alpha 1S1, and that it would take further evaluation before trying it again. The firm said the delay was due to encountering difficult-to-breach volcanic rock rather than disruption by Greenpeace protesters who attached themselves to the firm's rigs during the brief three-month summer exploration season.

Sir Bill Gammell, chief executive, told analysts yesterday that Cairn's Greenland ambitions were "a marathon, not a sprint", with any of the firm's planned drills there having a 7 to 10 per cent chance of finding recoverable oil.

Most analysts seemed to agree with Gammell. Richard Griffith, an oil and gas analyst with Evolution Securities, said Cairn's failure to discover oil at the first attempt "shouldn't come as a surprise to anyone". He described the sale of Cairn shares yesterday as a "knee-jerk reaction". A note from Collins Stewart said it expected the firm to announce results from the Greenland authority's May licence round of further offshore blocks soon.

In what is understood to be a hotly contested competition for blocks by some of the world's biggest oil explorers, there has been much industry interest in Cairn's exploration activities, although BP ruled itself out of the race for offshore Greenland blocks following the Gulf of Mexico oil disaster.

"Results from the May licence round of offshore blocks is likely soon - this could be important both for any blocks won directly by Cairn, as well as for an indication of the level of industry interest," said Collins.

Jonathan Jackson, head of equities at Killik & Co, warned that, since negotiating a majority share of its stake in its oil producing subsidiary, Cairn India, the firm's shares would tend to be more volatile.

Gammell also said Cairn expects to complete the sale of its majority stake in its Indian unit to Vedanta Resources in the first quarter of 2011. Killik said there was "still some uncertainty over the Vedanta deal" as the Indian government continues its deliberations over whether to give the $8.5bn sale its final agreement, although Gammell insisted there was "no particular road block".

Nor were the analysts concerned about the impact of the $185m write off.Griffith said: "When you have got a budget of $1bn and you plan to drill up to 12 wells, and you have 7 per cent chance of success, you expect potentially in the worst case to write off $900m of that."

Early reports yesterday that the Greenpeace protesters had disrupted work significantly were denied by Cairn, which said the disruption only caused its workers to down tools for about 30 hours. A spokeswomen said: "The Alpha well required a sidetrack. No NGO action has hindered Cairn this summer."

The firm said it would recommence its drilling programme next year and would announce the details of these in the first quarter of 2011. In the meantime, Cairn's deputy chief executive, Mike Watts, said the firm would remain busy evaluating the seismic and geophysical data already collected, and that research was still ongoing. Watts, said: "Exploration in Greenland is at a very early stage and consequently to have encountered both gas and oil in two of the first frontier exploration wells in the previously undrilled Baffin Bay geological basin is extremely encouraging."