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August 19, 2014 5:52 pm
Cairn Energy is cutting its costs as the oil exploration company awaits a resolution to its Indian tax dispute.
The FTSE 250 company said it was reducing its central cost base to ensure it had the “appropriate structure to deliver the future work programme”. It will be outsourcing certain non-core capabilities and a staff consultation process is under way.
Cairn has considerable exploration spending commitments – $300m in the second half and $1.1bn from 2015 to 2017. Cash in hand at June 30 was $1.1bn.
However, the company remains unable to realise the $1.1bn value of its residual 10 per cent stake in its former subsidiary Cairn India, with the country’s tax authorities having forbidden it from selling while it investigates its tax affairs.
It said it had not received a tax assessment or demand from the Indian income tax department, and continued “to seek resolution and to take all necessary steps to protect shareholders’ interests”.
In its half-year results to June 30, the company’s pre-tax loss narrowed from $372.6m previously to $119.7m.
Simon Thomson, chief executive, said: “Cairn’s future programme of high quality development projects and material exploration drilling is fully funded through to delivery of free cash flow from 2017. The company is focused on creating value and shareholder returns from disciplined capital allocation across a balance of exploration and development assets.”
There was no news on its hotly anticipated FAN-1 well off the coast of Senegal other than that drilling was ongoing.
House broker Jefferies, which has a “buy” recommendation for Cairn, said in a note the interim results were “essentially in line” but that the “cash burn” from exploration was “only bolstered by a partial Cairn India sell down”.
The note said that because of these effects, it was reducing its target price from 285p to 266p.
Shares in Cairn Energy closed 0.1 per cent lower at 187.3p.
Referring to the company’s central cost base reduction, Jefferies said Cairn was “clearly not waiting for exploration results to address matters it sees as structurally incompatible with [the] present operating environment”.
It also said that an “unsuccessful exploration” off the Senegalese coast was the “principal near-term risk”.
JPMorgan Cazenove said in a note the “main positive” from Cairn Energy’s results was its “stronger than anticipated” cash position.
It said Cairn reached the midyear point with $1.1bn net cash and that taking into account costs of about $300m in the second half of this year, it should leave the company with cash of about $800m at year end. This was higher than JPMorgan Cazenove’s forecast of $631m.
Additional reporting by Nick Wilson
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