Cairn Energy: From AIM To The FTSE 100

It’s not often a tiddler manages to enter the FTSE 100, but it can happen – and this week marks a significant event for one such stock...

Originally on Aim, this company made the largest onshore oil find in India for two decades. It was the very same company which bought Shell’s 50% share in Rajasthan for $7.25m - and has since gone on to create a business worth more than $6bn. The company is, of course Cairn Energy...

Company founder and oil tycoon Sir Bill Gammell can be proud that he created an oil business that is now one of India’s largest companies. This week, the company span out its Indian operations, which made a downbeat start on the Bombay Stock Exchange on Tuesday. But is this a good buying opportunity...?

The multi-million dollar question is, however, will Cairn India be as successful as its parent company Cairn Energy? The recent decline in the oil price has been a major factor surrounding the flotation - and the timing will guarantee that it won’t be a smooth ride. Investors also share the same sentiment, as the offering initially failed to be fully subscribed. The shares were also priced at the lower end of the range and slid a staggering 14% on their market debut on Tuesday. The shares fell a further 2% on Wednesday.

The closing price of the stock yesterday gave Cairn India a market capitalisation of around about £2.7bn. This is significantly below the valuation of £3.3bn implied by the IPO completed last month.

In its defence, Gammell makes a valid point He argued that India is a hugely under-explored country and he also believes it is very likely that the group will find more oil in the Rajasthan basin.

But how exactly will Cairn turn this oil to money..? There is huge expense from extracting the oil and, in turn, selling the oil. This requires a significant investment in infrastructure, as well as securing agreements with the Indian government. The latter is probably the trickiest part, however, but Sir Bill believes that the group’s move to Indian ownership had been one of its strongest strategic moves, which would help smooth out these potential political obstacles.

The main cause of the fall, apart from the slide in the oil price, is a dispute that may lead to production delays from the Rajasthan field. MRPL, which has been designated by the Indian government as the purchaser of the oil from the fields, has demanded that Cairn shares the cost of building the pipeline to carry the crude.

However, this week’s fall could prove to be a mere blip in the share price and, with the company predicting oil output from the Rajasthan field could reach 150,000 barrels a day by 2009, this could be a good buying opportunity for those of a contrarian disposition. These peak levels are also expected to be sustained for up to ten years.

With Sir Bill at the helm, with all his positive and creative thinking, Cairn India has every chance of doing well. The company stands as a shining example of what an Aim-listed stock could achieve – and the story is far from over yet...

Bye for now...

Melissa Carroll

for The Penny Sleuth