Cairn has dropped 15% since it announced last week the Indian tax authorities had told it to hold its residual stake in former subsidiary Cairn India pending a review of its tax affairs.
The Cairn India interest is worth around $1 billion and a divestment of this stake was seen as an obvious means for the £1.3 billion cap to bolster its balance sheet. The company now says the matter - which relates to income tax assessments for the year ending 31 March 2007 - has come about thanks to amendments introduced in the 2012 Indian Finance Act which seek to tax transactions in previous years under retrospective legislation.
It pledges to 'take whatever steps are necessary' to protect its interests and says it will pursue its current exploration and development programme as planned. There is no information on the size of any potential liability.
Ahead of today's announcement but in the wake of a meeting with the company's management broker Numis put its 406p price target and buy recommendation under review. It comments: 'Other than the obvious financial impact of a tax claim, we believe that a lengthy restriction on Cairn Energy's ability to sell its Cairn India shareholding may impact the company's ability to deploy capital.
'Cairn Energy currently has a cash pile of $1.25 billion which we believe should fund a planned capex programme (with limited reserve based debt) to end 2015. However, we believe management's ability to allocate significant amounts of capital to 2015 exploration/appraisal may come into question.'