According to analysis by Investec, the shares are over-valued because the company has over-factored in the value of recent prospects in West Africa.
Cairn Energy and its partners recently kicked off a three well, back-to-back, offshore Senegal appraisal programme. The campaign follows 2014 exploration success which saw two discoveries at the FAN-1 and SNE-1 wells.
The latter is the focus of the current campaign with the partnership aiming to de-risk and refine a 330mmbo 2C FPSO development concept. The first well (SNE-2) should complete this month with a flow test to follow.
In his note, analyst Brian Gallagher said: “Defining Sangomar’s reservoir continuity and well deliverability will be the focus and, while we acknowledge that the field could be world class, we also believe that valuation already assumes appraisal success…and a higher oil price.
“This is too big of a leap for us ahead of appraisal and therefore we reiterate our ‘Sell’.
“Sangomar’s potential does unsettle us. Fiscal terms are attractive, reservoir quality looks good, and Sangomar’s size could be meaningful in a global context. In short, this could be a tier one asset in time, and if it is, IOCs and NOCs will take note.
“The problem is…. this dynamic is already appreciated. For example, when we assume the lower end of Cairn’ capex range ($17/b), the upper end of its peak production range (100kbopd) and the earliest first oil date (2021) our valuation returns a 2016 NPV of $2.7/b or a 16% IRR.
“Not bad – and definitely good enough to be sanctioned. Nevertheless this also assumes that the oil price rises by 50% ($65/b LT) over the next three years. Therefore even fully de-risked (we apply 70% currently) it’s hard to see a favourable risk -eward.
“We accept that the three upcoming wells will help refine project inputs, but it should also be remembered that both upside and downside risks apply to the appraisals. It is not a given that the campaign will meet current expectations!”