CAIRN Energy is set to capitalise on opportunities created by the slump in oil and gas prices after agreeing to sell its stake in a giant find it made off Senegal which could be worth up to $400 million (£310m).
The deal agreed with Russia’s Lukoil by Edinburgh-based Cairn will increase its firepower for acquisitions while paving the way for it to make big payouts to shareholders.
Cairn said yesterday it expected to return at least $250m of the deal proceeds to shareholders. News of the transaction sent shares in Cairn surging.
The deal appears to represent a coup for Cairn.
READ MORE: Fresh warning on scale of challenge facing North Sea oil industry amid coronavirus crisis
The company negotiated the sale as oil and gas firms grappled with the most challenging conditions sector players have faced for years.
Commodity prices have tumbled this year in response to the sharp fall in demand that resulted from the imposition of lockdowns.
Chief executive Simon Thomson noted the transaction would put Cairn in a much stronger position to capitalise on the shake up in the industry this is likely to trigger.
He said acquisitions could be on the agenda as Cairn looks at “counter-cyclical opportunities”.
While buyers for oil and gas assets are in short supply, he said Cairn was comfortable with the price Lukoil has agreed to pay.
“What’s more important is the position it has put us in,” he added.
The deal will allow Cairn to reduce its dependence on Senegal while avoiding the hefty costs that would be involved in developing the Sangomar find it made there.
READ MORE: Cairn Energy approves plan to develop bumper field off Senegal
Cain expects to end the year with around $600m net cash at a time when many firms in the sector are labouring under massive debts.
The deal provides vindication for Cairn’s decision to take the risks involved in launching a pioneering hunt for oil and gas off Senegal.
The Sangomar oil field it discovered in 2014 is set to become the first to come into production off Senegal. The development was approved in January. First oil is expected in 2023.
Mr Thomson said the company was proud of what it had achieved in Senegal.
“Our discoveries were the country’s first deep-water wells and opened up a new basin play on the Atlantic Margin,” he said, noting that the Sangomar development will deliver enduring benefits to Senegal’s people.
The company could use proceeds from the Lukoil deal to invest in growing its operations in other areas.
Cairn has developed a big North Sea production business under Mr Thomson’s lead. He noted yesterday the company could increase its exposure to the area, in which it is producing oil for less than $20 per barrel. Brent crude is trading at around $43.50 compared with about $70 in January.
READ MORE: Cairn generates big profits in North Sea as revenues hit $500m
Cairn may invest in diversifying its portfolio, which also includes exploration interests in countries ranging from Mexico to Israel.
The company paid out billions to shareholders after selling a controlling stake in its former Indian subsidiary to Vedanta Resources in 2011. Cairn made bumper finds in India under its founder Sir Bill Gammell, whom Mr Thomson succeeded in 2011.
Mr Thomson has held out the prospect that Cairn could make big payouts to investors if it wins the tax case it has been embroiled in in India since 2014.
Cairn is seeking $1.4bn compensation from the Indian government in respect of the case. This concerns events leading up to an initial public offering of shares in the company’s former subsidiary in India in 2006.
A $250m total payout would be worth around $0.44 per share.
Lukoil will pay an initial $300m for Cairn’s interests off Senegal with up to $100m further payable depending on the timing of first oil from Sangomar and the average Brent oil price during the first six months of production. The deal is subject to regulatory, partner and shareholder approval.
Cairn shares closed up 7.8p at 132.31p.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here