Support for India project puts £250m on Cairn Energy

Published on Monday 1 June 2009 21:33

CAIRN Energy's value jumped by £250 million yesterday after analysts at one of the world's most influential investment banks gave the group's Indian projects the seal of approval.

Goldman Sachs said investing in Cairn India was the best way to take advantage of improving fundamentals in the oil market on the subcontinent, predicting the company would produce its first crude oil from Rajasthan "within weeks".

Adding Cairn India to its regional "conviction buy" list of favoured companies, Goldman Sachs increased its target price on the shares by 21 per cent to 290 rupees (376p).

Cairn Energy shares closed up 182p, or 7.3 per cent, at 2,672p in London last night, adding 250m to the value of the company.

Cairn Energy has been transformed after making major discoveries in Rajasthan in northern India in 2004. The company responsible for production in the fields was later demerged into a separate firm, which listed on the Bombay Stock Exchange at the start of 2007.

Cairn's Indian company, which is based just outside New Delhi, is expected to begin production from the fields before the end of the month, initially trucking up to 30,000 barrels of oil a day to coastal refineries, with a pipeline due to begin operation in September.

Only an agreement over the price Cairn will be paid by government-owned refineries appears to be holding the company back from producing the first oil from the field.

Reports from India at the weekend claimed oil could start being extracted with just a week's notice if an agreement over price was signed off.

A spokesman for Cairn said yesterday the report was "old news", and that while details such as the price it would be paid for the oil were to be finalised, there was "nothing physically preventing production".

"We're ready to go," he said.

Last week Cairn also reassured investors that the building of its 580km oil pipeline was on schedule. Goldman Sachs said that as well as risks over the timing and profitability of the project receding, the prospects for the oil market continued to improve, with signs of recovery in demand from China and the United States.

In New York, oil traded at above $68 per barrel for the first time in seven months yesterday, after reports that China's manufacturing economy continued to expand in May. Goldman Sachs said Cairn India's value implied Brent Crude, the London benchmark, would trade at $60 in the long term, while its own analysis was for $85 from 2013 onwards.

While the rate at which Cairn India will be paid has not yet been settled, Goldman Sachs said the risk of a discount of more than 15 per cent to Brent Crude levels now appeared to be "limited".