Thoughts post Cairn FY14 results & India tax update

Since we posted our blog about Cairn’s results presentation, the company has released material news on the Cairn India tax situation. It confirmed that it has received from the Indian income tax department a draft assessment order quantifying the tax claim for the 2006-07 fiscal year at $1.6bn, plus any applicable interest and penalties. Cairn had not previously given guidance on the Indian tax assessment.

When the dispute was first announced, the shares dropped by around $400m over four days. Whether anymore of the claimed liability will be priced in, time will tell.

It is worth noting that Cairn has not made nor intends to make accounting provisions to reflect the Indian tax claim, indicating its level of confidence in resolving the issue to its advantage.

After the jump: Notes from Cairn’s FY14 presentation

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Cairn’s FY14 results presentation brought useful colour on Senegal, while unsurprisingly little new news came out on its non-operated North Sea developments Catcher and Kraken, and on the Indian tax issue.

Senegal (40% WI – op, COP 35%, FAR 15% and Petrosen 10%):
In a year when many companies are pulling back from exploration, Cairn is ramping up activity in Senegal after the H214 discoveries, with a busy appraisal and exploration programme in H2 2015. Interestingly, CNE plans to appraise existing discoveries from the FAN-1 and SNE-1 wells in order to bring them into production as quickly as possible, rather than target new hydrocarbon accumulations in the rest of its acreage.
While appraisal activity is critical to determine commerciality, it tends to typically be less NAV-accretive or share price accretive than wildcat exploration or even development.

Next steps: The evaluation programme is being prepared and will be submitted in early May.

• Cairn is planning a total of 3 firm wells in Senegal.

• Two appraisal wells on the shelf-edge SNE-1 discovery, including coring and testing of the reservoir – should narrow the P10-P90 range of currently 150-670mmbbls with the P50 at 330mmbbls. CNE says the reservoir quality was better than expected – according to African Petroleum, CNE must have done a mini-DST or MDT to make that statement.
• There will be 1 firm exploration well, likely on a new play. No colour was provided on the location of the well.

• In addition there could be another 3 contingent wells, of which 1-2 appraisal wells on the deepwater FAN-1 discovery, and 1-2 contingent exploration wells.

• On FAN-1, CNE needs more appraisal (notably need to get to the OWC) to assess the recovery factor. FAN-1 is a more complicated structure than SNE-1 as it’s deepwater, with higher pressure, stacked reservoirs and different oil qualities.

• CNE is also planning another 3D seismic survey to refine the geological model and identify new prospects.

Exhibit 1: Cairn acreage in Senegal

Source: Cairn

Development concept:

• If all goes to plan, CNE could start its appraisal programme in H215 and determine commerciality (not yet FID) by end 2016. The commerciality threshold for a standalone FPSO development is seen at c 200mmbbls gross (which CNE are very confident they can firm up), and could allow for tie-backs within a 25km radius of >75mmbbls.
• The development concept will include gas reinjection and waterflood. CNE didn’t provide a good answer to the question “what happens if you get too much gas and need to export it back to shore” – relevant especially in light of the delays to the Jubilee ramp-up…
• Given size of resources and relatively vanilla nature of the development, the breakeven price is seen in the $40bbl’s to get a 10% IRR.
• COP have the option to become operator in Senegal in the development phase, and are “very excited” about what they see there…

Exhibit 2: Senegal timeline

Source: Cairn

More detail to come at a Capital Markets Day on Senegal on 11 May 2015.

Other tidbits:

• Catcher and Kraken are on time and budget. First oil in 2017.
• Morocco: Cap Boujdour (Kosmos-op): CNE haven’t given up hope, now incorporating results of non-commercial well into geological model. CNE hopes the play works better elsewhere. There are no more well obligations, so CNE will take their time to study the play.
• Spanish Point well delayed beyond 2016
• 30% cut to SG&A in 2015 following 40% headcount reductions
• No progress to announce on Cairn India tax situation.
• RBL of $575m in middle of review. Should drop slightly to reflect 10% sale of Catcher to Dyas, but bulk will remain available.