Takeover talk puts Cairn in the spotlight

Oil worker on the Nelson North Sea Oil Field. Picture: Hamish Campbell
Oil worker on the Nelson North Sea Oil Field. Picture: Hamish Campbell
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THE board of oil and gas explorer Cairn Energy will come under scrutiny by investors this week amid continued speculation that it is vulnerable to a bid from its former ­Indian subsidiary.

The Indian media reported last week that Cairn India (CI) was considering a $2.6 billion (£1.7bn) move on its former parent, although both sides declined to comment.

An investor speaking to Scotland on Sunday raised fears that any takeover would seriously undervalue the Edinburgh-based firm. Although he described the claims that Cairn India – now led by Indian conglomerate Vedanta Resources – was preparing a takeover as “pure speculation” he added “nothing is impossible”.

“They could pick it off at a ridiculously cheap price – all the potential Cairn has will be evaporated. Cairn is dreadfully undervalued,” he added.

Analysts have argued that Cairn’s current share price risks leaving it exposed to predators. A note from Jeffries argued that Cairn was trading at a price that only reflected its remaining 22 per cent stake in CI, worth an estimated $1.1bn, and the $1.6bn in cash on its balance sheet that it has earmarked for exploration and development. It estimates that Cairn shares trade at a 27 per cent discount to the “total sum of parts”.

Jeffries wrote: “Cairn is trading in line with the value of its cash and Cairn India stake only, with no value for its low risk development assets, moderate risk North Sea exploration or high risk/high impact frontier exploration.”

Sheridan Admans, investment research manager at retail stockbrokers the Share Centre, wrote in a note ahead of the company’s annual results presentation on Tuesday that investors would be hungry for information, adding that the explorer sold its “crown jewels” to Anil Agarwal’s Vedanta for £3.6bn in 2011.

“Investors will be keen on any news regarding further acquisitions and the rumours surrounding Cairn India, which Cairn Energy previously sold to Vedanta, possibly buying out the company.”

Midlothian councillor and financier Peter de Vink, who is also a long-term shareholder in Cairn, said a takeover of the firm would be a “tragedy if Scotland loses one of its great companies yet again”.

Analysts have complained that the Cairn board’s pre-close update to investors in January “contained little new news”, although several agree its share price is too low.

First Energy Capital, a Canadian brokerage, added that the company’s “story should draw much more attention from investors this year”. It said it expects the Cairn board to “provide further visibility” on its Moroccan drilling programme this week, after Cairn agreed a 50 per cent “farm in” deal on an offshore prospect, Foum Draa, in August last year.

The broker also said the board could comment on a “high impact” appraisal well in the North Sea at Skarfjell, one of five wells in the region Cairn has said it plans to drill in the first half of this year.

The Hindustan Times last week said “sources within” Cairn India had confirmed it had been approached by bankers with a variety of proposals, including one to acquire Cairn in the UK.

A research note from pan-Asian broker firm CLSA, which was reported in the paper, said a takeover of Cairn in the UK “could be a panacea for all the strategic ills of Cairn India” as it would give the Indian company access to 50 prospective oil and gas exploration blocks.

Cairn Energy declined to comment.