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Cairn Energy’s tax headache is set to clear, at last

The large SNE field off Senegal is moving forward, with first oil expected between 2021 and 2023.
The large SNE field off Senegal is moving forward, with first oil expected between 2021 and 2023.
CAIRN ENERGY

It looks set to be an interesting few months for shareholders in Cairn Energy as the finishing line approaches in a long-running $1.6 billion tax dispute. An international arbitration panel is scheduled to gather for its final hearing this summer and a decision is expected before the end of the year.

The issue has been hanging over the oil and gas explorer since 2014, when the Indian government made a retrospective tax claim. India suggested that Cairn should be paying tax in relation to a 2006 restructuring of Cairn India, then its subsidiary and now part of Vedanta Resources. Cairn, founded by Sir Bill Gammell, the fornmer Scottish rugby international, has consistently said that the claim has no merit.

The issue has been an unwelcome and time-consuming headache at a time when the oil price fell rapidly and then recovered only slowly. Aside from the legal costs, the company has been unable to access substantial dividend payments due to it from Vedanta. Cairn also has been unable to sell the stake it still has in the Indian company that, in 2014, was valued at around $1 billion.

Simon Thomson, chief executive of Cairn, has already promised that if the arbitration decision goes Cairn’s way, then a portion of cash will be returned to shareholders. After last month’s annual meeting, he said that he hoped the size of that return would be “significant”.

Cairn’s track record in this regard is promising. It paid £481 million to investors after the flotation of Cairn India in 2007 and £2.2 billion in 2012 after the sale of its controlling stake in the Indian subsidiary.

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Encouragingly Cairn’s operations are also moving forward. It now has minority holdings in two producing fields in the North Sea, Catcher and Kraken, both of which came on stream during 2017. The company expects its share from the fields to be between 17,000 and 20,000 barrels of oil this year, which will provide welcome cashflow. Nova, in Norwegian waters, is forecast to come into production in 2021 bringing a further 10,000 barrels. In addition, the large SNE field off Senegal is moving forward, with first oil loosely pencilled in for some point between 2021 and 2023. Cairn holds a 40 per cent stake in the field and its share of production is forecast to be 40,000 barrels.

Cairn, meanwhile, is busy scouting for the next big find. There is an extensive drilling campaign in British and Norwegian waters over the next two years and Cairn is going to be working off Mexico, Ireland and Surinam.

The improving oil price is clearly helping sentiment towards the company. Mr Thomson can point to the fact that the SNE field would be profitable even if prices were to fall back to $30 per barrel. Its spending plans and drilling programme are also fully funded, regardless of what happens with the arbitration decision.

Analysts seem generally upbeat about Cairn’s prospects. In recent weeks JP Morgan, Goldman Sachs and UBS have all upgraded their estimates. UBS has Cairn as among its top picks in the oil sector and a target price of 280p on the shares. Goldman has moved from a “neutral” to a “buy” rating and has a 288p target for the stock, while JP Morgan is even more bullish with 300p.

Cairn’s shares have moved steadily upward for much of this year and have been trading at close to 233p in recent days. While that may remain below the highs of 290p touched in 2013, it is some way ahead of the 127p of the first few weeks of 2016.
Advice Buy
Why Putting the tax case to one side, Cairn has a clear roadmap to increasing its production over the next five years. Any special windfall from winning the arbitration would be an additional boost

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HSBC If you pick a continuity candidate, you get continuity, so investors in HSBC should not be surprised that John Flint, who has worked in its far-flung empire for almost 30 years, believes that the global banking giant is broadly on track.

It’s a reasonable argument. By the end of his tenure, Stuart Gulliver, Mr Flint’s predecessor, had managed to reverse much of the negative sentiment that swirled among investors, with his programme of leaving more than 100 markets and cutting costs, while investing heavily in improving financial crime controls. He sweetened all that with a string of share buybacks.

The key question has been about growth. Mr Flint should be given credit for setting out credible targets, with a plan for the bank to make a return on tangible equity higher than 11 per cent by 2020, lifting a previous target of 10 per cent. HSBC hopes to achieve “mid-single-digit percentage top-line growth”, while pinning down costs to a lower level of acceleration — thus creating a better ratio of costs to income. The bank will back its confidence that it can increase revenues faster than costs with investment of up to $17 billion, mainly in new technology and its Chinese business, by the end of 2020.

While these plans seem sound, HSBC’s approach to its troubled American division looks problematic. The bank punches below its weight in the United States and is unlikely to be able to turn the business into a success story without a more definitive change of strategy.

The new boss underwhelmed the market with guidance that dividends would be kept at present levels for the next few years and that buybacks would be used to neutralise the issuance of scrip — where investors receive dividends in shares rather than cash — to keep the share count stable. That disappointed investors, yet holding both back makes sense as Mr Flint seeks to plough investment into growth. His problem in wanting to get off to a good start is that the improvement of HSBC’s performance has already been factored into its shares, which trade at a premium to its net asset value. There are better opportunities in the shares of Barclays or, for risk-lovers, Standard Chartered.
Advice Sell
Why Expectations for growth are already reflected in price

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