Cairn Energy
Receiving a billion-dollar tax demand from an overseas government could be the end for some companies. Cairn Energy has long since resolved that it isn’t going to be one of them.
For some onlookers, that tax issue, an Indian demand that has loomed over the Edinburgh-based oil company since 2014, remains the prime story at Cairn, one that has evolved into a tit-for-tat struggle, with the company counter-claiming for $1.4 billion and waiting for an international arbitration panel to give its verdict in the case.
Yet there is more to see here, with Cairn having re-established profitable production in the North Sea and loaded up its development plans elsewhere in the world. And it was this “other business” that dominated yesterday’s trading update.
Cairn — founded by Sir Bill Gammell, the former Scotland rugby player, in 1981 and listed on the stock market in 1988 — spelt out how it was benefiting from its involvement in the UK North Sea through minority stakes in the Kraken and Catcher fields. Net production for Cairn in 2018 is forecast to have been around 17,500 barrels of oil per day, which should generate revenue in the region of $395 million. Production is expected to rise to between 19,000 and 22,000 barrels during the coming year. A total of 2.7 million of those barrels are hedged at prices between $67 and $83, which gives some stability if the oil price starts to wander.
The cashflow from that production will help the company in its plans to drill seven exploration wells this year. Four of those are in Norwegian and British waters, with the rest off the coast of Mexico. Further seismic data is being acquired in Surinam on the southern fringe of the Caribbean and in Ivory Coast, west Africa, to assess prospects in those countries. A final investment decision will be made, too, on the huge SNE field off Senegal during 2019. That is pencilled in to begin production in 2022 and could add 40,000 barrels for Cairn.
The company expects to develop new fields this year, including sites near to the Catcher production hub in the North Sea. The Nova site in Norway will add 10,000 barrels to Cairn’s output when it begins operating in 2021.
Then, of course, there is the tax dispute. It centres around a restructuring of the Cairn India subsidiary, now part of Vedanta Resources, in 2006 and a subsequent change in Indian tax laws. As well as being unable to sell its remaining holding in Vedanta, the disagreement has meant that Cairn has not been given access to dividend payments that it is due. The international arbitration judgment is expected to be made public soon, with Simon Thomson, chief executive of Cairn, indicating that shareholders can expect to receive some form of windfall if the company wins. Encouragingly, Mr Thomson has stated that the company is fully funded for its plans, regardless of what happens in the tax case.
In common with many oil companies in recent years, the shares have been up and down. They started 2016 at less than 130p before reaching more than 267p in May last year. Concerns over the oil price saw the stock drop below 145p in December, but it has rallied in recent weeks and closed yesterday at 188¼p, up 3¼p, or 1.7 per cent, on the day.
David Round, from BMO Capital Markets, has an “outperform” rating on Cairn shares and a target price of 260p. Analysts at Citi, meanwhile, have highlighted the company’s robust balance sheet and the potential upside to the shares if the arbitration ruling goes its way.
Advice Hold
Why Uncertainty over tax case decision but patient shareholders could benefit from share price appreciation and chance of special dividend
IG Group
IG Group has been a poor bet for investors in recent months (Ben Martin writes). Shares in the online contracts for difference trader lost almost a third of their value during September, dropping sharply after the company warned that first-quarter revenues had been knocked by a regulatory crackdown on complex products that allow traders to bet on financial markets.
The stock tumbled again only a week later after it emerged that Peter Hetherington, the company’s veteran chief executive, was stepping down.
IG is one of the biggest spread-betting service providers in the world and helped to pioneer the industry. It was set up 45 years ago by Stuart Wheeler, who went on to use the fortune he made from the business for clout in politics, first as a Conservative party donor and then as a treasurer of Ukip.
Like its rivals CMC Markets and Plus500, IG has been hit hard by strict rules imposed by the European Securities and Markets Authority last year. In July, the regulator put in place restrictions on binary options, which allow traders to bet on movements in share prices and currencies. That was followed by tighter regulations on contracts for difference, another product that allows traders to wager on movements in financial markets — and can result in punters suffering losses that are bigger than their original bet.
Half-year results from IG yesterday laid bare the effects of the crackdown. Revenues generated from the region covered by ESMA tumbled by 17 per cent to £145.4 million in the six months to the end of November compared with the period a year earlier, with the number of active clients 15 per cent down at 66,400. Overall profit before tax fell 17 per cent to £113 million, with net trading revenue down 6 per cent at £251 million. Shares in IG fell 61p, or 9.5 per cent, to 580p.
Yet there were signs of confidence. The company reiterated its guidance that it expects to return to growth in 2020 and it declared an interim dividend of 12.96p a share, in line with previous guidance, and reiterated that it expected to keep its full-year payout at 43.2p.
Advice Hold
Why Market leader should recover as the regulatory environment stabilises
