A 40% Discount
As far as the potential valuation of Cairn Energy is concerned, we are looking at a company where the average analysts valuation of the group is some 40% higher than the present share price.
This is a very unusual state of affairs, especially as analysts looking to keep their (cushy and overpaid) jobs are not known for sticking their necks out. This average price of analysts at 250p approximately suggests that if there was any offer for Cairn it would have to come out as high as 300p.
Added urgency here is provided by the way that Goldman Sachs have Cairn Energy on its M&A target list for 2017, something which by definition only has just over 3 months to pan out.
The company appears fully aware it is vulnerable whilst trading at such a large discount to its notional valuation. We cannot rule out that approaches have already been made.
All of this makes Cairn Energy attractive on a fundamental basis due to it being a more lean and mean business than previously, but also due to the M&A interest stimulated off the back of newly discovered assets. For instance, French giant Total recently acquired significant assets in the North Sea, and is open in terms of being on the acquisition trail in various hot geographies.
ConocoPhilips, the US giant is even closer to Cairn in the sense that the companies share 40% each of the Woodside project, and therefore will be well acquainted with the UK listed group. The question now is which party needs the other most?
Wall Street Wires contacted both ConocoPhilips and Total they declined to comment on M&A speculation.
Cairn Energy also did not return our communication on the same theme.
In addition, there is always the smoking M&A gun in the sector which originates from potential Chinese buyers. This point is brought into focus given Cairn’s joint venture with Petrochina. In fact, it is the way that the group’s JV’s have started to reach significant maturity across the board which highlights this situation currently.
Cairn Energy is a company where there have been recent significant positive changes. So much so that the company is a standout in terms of both valuation and strategic importance within its sector. For instance, the group used to have a massive operation in Indian, which was subsequently sold to Vedanta. Since then a couple of significant finds have been made in Senegal, West Africa, an area of increasing importance to the group’s peers.
A final fundamental kicker is provided by the way Cairn announced a return to profitability driven by the Kraken Field in the North Sea at the end of August – with the swing from loss to profit always a significant moment. This means the clock may already be ticking in terms of M&A activity here.