Mid cap oil explorer Cairn Energy's (CNE) difficult start to 2014 continues as it cans a $300 million buyback, gives further detail on its latest drilling disappointment in Morocco and reports a 2013 pre-tax loss of $1.1 billion – the counter falls 9.6% to 177.5p in response.


The sell-off extends the year-to-date decline to 33.3%. At current levels the shares look well underpinned with net cash of $1.25 billion as at 31 December and its 10% residual holding in former subsidiary Cairn India valued at $1 billion.


Yet the company is unable to crystallise any value from this interest pending the outcome of a tax probe by the Indian authorities.


This has not only led it to suspend its buyback – having repurchased $94.7 million worth of shares – but also put its post-2014 spending plans under review. These plans are now dependent on three factors:


  • the progress of its Catcher North Sea field through to project sanction;
  • the conclusion of debt facilities for both Catcher and its Kraken heavy oil field;
  • the results of the 2014 drilling programme.


The significantly-increased loss for last year (extended from just $194.2 million) reflects in part the increased cost of exploration and Cairn's investment in this area is yet to yield any tangible success.


This dials up fears the company will see a repeat of its experience in Greenland where it spent $1 billion without making a commercial discovery. The first two wells offshore Morocco have been plugged and abandoned and the company is now gearing up for the first of two wells offshore Senegal.


Deutsche Bank retains its 'hold' rating and 345p price target (which looks somewhat out of date) and comments: 'Although suspending the $300m buyback programme ($95m repurchased to date) appears prudent to us, liquidity restrictions on Cairn India have initiated a review of capital allocation post-2014.' It adds 'an increased focus on contingency plans suggests a resolution (of the Indian tax issue) may take some time'.

Issue Date: 18 Mar 2014