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Cairn Energy bought massive find in India off Shell “for pennies”

Cairn Energy
£27.80 -86p
Questor says Buy

Cairn Energy, the oil exploration group, has been granted licences for six blocks in Greenland equivalent to the size of 250 in the North Sea, an area that the US Geological Survey said “may constitute the geographically largest unexplored prospective area for petroleum remaining on earth”.

It estimates that as many as 51bn barrels of oil may be bubbling away under the east coast – 51 times as large as Cairn’s massive find in Rajasthan, India.

Mike Watts, head of exploration, saw the potential in India, buying the field off Royal Dutch Shell for pennies. It is Watts who is staking investors’ futures on Greenland.

Cairn will spend an initial $25m (£13.6m) this year searching for drilling sites, but before any can be dug it needs the Rajasthan field on full stream. If Greenland is as oil-rich as hoped, Cairn may need to invest as much as $1bn in 10 test wells. Such a remote region will not be cheap to exploit.

Rajasthan, though, is on target to start production next year, with the funds all but in place. At full capacity and with an oil price of $100 a barrel, the Indian fields will generate $3bn of cash a year – of which Cairn will pocket about $1bn. The funds will be more than enough to start work in Greenland as well as continue with projects in Tunisia and Albania.

The risks are clear. Cairn has been a beneficiary of the high oil price (its average sale price in the first half doubled to $171.19 a barrel) and its small, producing fields are already in decline (gross production fell by 11,000 barrels a day to 80,873 in the half).

Unplanned delays to the Rajasthan field’s start-date would also be costly, and there is already so much expectation built into the share price.

Investors pay a premium for Cairn’s expertise, even after yesterday’s 86p share price fall to £27.80. But if you are looking for a stock that will move independently of the world’s economic woes and could prove a lucky punt, Cairn is it. Buy.

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