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20 January 2004
The Herald
Cairn value surges 260m as $7m Shell deal proves bargain
MARK WILLIAMSON January 20 2004
Cairn Energy saw its market value surge 260m, to around 821m, following news of a giant find in India's Rajasthan on a licence in which it bought out Shell's half-share for just $7.25m (4.1m).
Shares in the Edinburgh-based pioneer of south Asian oil and gas exploration soared almost 50%, or 182.25p, to 553p following the announcement of what analysts dubbed a company-transforming discovery. Some reckoned it could be one of the biggest finds anywhere in the world this year.
The Rajasthan find is estimated to contain up to 200 million barrels of oil reserves, which would make it roughly half the size of the giant Buzzard discovery made north-east of Aberdeen in 2001. With 400 million barrels of reserves, this was hailed at the time as the biggest North Sea find since 1993.
In a remarkable coup for Cairn its drilling success in an under-explored area of India could see it more than doubling its reserves of around 120 million barrels. By contrast, last week oil behemoth Shell faced acute embarrassment after cutting its own estimates of proved reserves by 20%.
Although Cairn has plenty of work to do to prove the field's potential, a lowest case estimate of 50 million barrels makes the find sizeable enough to put bigger fish on bid alert. Analysts expect the likes of BG and TotalFinaElf as well as Indian players, including ONGC and Reliance, to take an interest.
However, Finlay Thomson at ABN Amro said Sir Philip Watts, Shell's embattled chief, would likely be absent from the ranks of oil executives running the takeover numbers on Cairn.
'I don't think Shell would have the brass neck (to bid after selling its stake in Rajasthan),' he said.
Meanwhile, Bill Gammell, chief executive of Cairn, indicated he would be in no hurry to recommend the sale of the company, following a 1.5m increase in the value of his 0.6% stake, to 4.4m yesterday.
'In terms of Rajasthan we have no plans to sell anything to anybody. We're very keen to keep on exploring,' he said.
Yesterday's update on drilling activity in the onshore northern Rajasthan basin appeared to provide a stunning vindication of Cairn executive's decison to bet the bank on exploration in the area.
The firm, which has a producing gas field in Bangladesh, has narrowed its exploration focus largely to Rajasthan after selling most of its stake in a deep-water discovery off India's east coast and interests in the Dutch North Sea.
Last Wednesday, Cairn's shares fell 5% following a mixed report on an extensive drilling programme in the southern part of block RJ-ON-90/1. While 10 of the 14 wells drilled found hydrocarbons, Cairn left investors unclear about the commerciality of the discoveries.
However, yesterday it announced a significant oil discovery at shallow depths, with initial reserve estimates of 50 million to 200 million barrels of oil.
Noting the company needed to do lots of appraisal work on the find, Gammell said: 'We're doing 30,000 barrels per day or a bit more at the moment. If this find turns out to be in the middle of the range we're looking at, you may have an additional 30,000 bpd coming from this field.'
There would be no impact on earnings for two or three years, said Gammell. Nonetheless, Bruce Evers at Investec said: 'With decent flow rates this could be very valuable to them and certainly transforming.'
Cairn might make further big finds on the vast licence, on which it had found several similar prospects.
The company has a 100% interest in block RJ-ON-90/1, but state-owned ONGC has the right to 30% of any future development area. Cairn bought the 50% interest from Shell, its former partner in exploration in Rajasthan, in September 2002.

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