AUGUST saw first-half results from both Cairn Energy and Tullow Oil. As usual, the numbers proved to be largely a sideshow, with the market more interested in drilling results.
For Cairn, the results achieved their objective of highlighting the importance of the Rajasthan contribution. First-half revenues of more than $300million were a record, but included just 23,000 barrels oil equivalent (boe) from Rajasthan’s Mangala field because nearly all of that production had to be transported by trucks.
The pipeline did not come onstream until the middle of June. Current production is 125,000boe, on the way to the initially approved plateau production of 175,000boe from the three main fields (Mangala, Bhagyam and Aishwariya).
Rajasthan’s development also had a major impact on the company’s finances, with the capex spent almost halving the net cash position to $267million.
However, Cairn still has available funding of $1.9billion for its full-year exploration programme.
Next year, however, if things go to plan, further spending in Rajasthan and additional exploration in Greenland mean a less healthy funding position – hence the decision to sell at least 40%, and up to 51%, of its holding in Cairn India and return a substantial proportion of the proceeds to Cairn Energy shareholders, including the board.
Depending on the progress to more than double current production and its Arctic developments, Cairn will remain an important investor after the transaction (11% stake), with the option to increase it in 2011 and 2012.
Drilling news from the first two wells in Greenland was mixed. While the T-8 drillship found gas in the sands, the hole mainly found mud. However, a high gas pressure suggests a larger reservoir with potential oil. The second well had mechanical problems drilling through the volcanic rock, putting it three weeks behind schedule, and that could further postpone the fourth well to next year.
The early Greenland news should not be surprising. It’s the beginning of a very long campaign in a vast frontier region where drilling was last done 35 years ago. While there remain Greenland sceptics, patient investors should wait for the October results from the more promising, but technically challenging, Alpha 1-ST well.
As for shareholder return from the Cairn India sale, that will be in the first quarter of next year, pending Indian government approval.
Turning to Tullow’s figures, it was an excellent first half with significant progress on many fronts. The strong drilling track record has continued, with nine successful wells drilled in Uganda helping to increase the reserve resource base by 25%.
The delay and the tax dispute surrounding the sale of Heritage Oil’s assets to Tullow have been disappointing, but shouldn’t detract from the significant upside potential of the oil assets in the Lake Albert region. In Ghana, the Jubilee field’s subsea structure is 85% complete in anticipation of a production start-up near the end of the year. Tullow also made two major discoveries in its 49.5%-owned deepwater Tano block.
Ghana is the focal point for the “Equatorial Atlantic Transformation Margin” spanning both Africa and South America, each with significant progress in farming down positions as part of a planned exploration programme running into 2011.
In summary, we shouldn’t let a tax dispute or minor setback to an asset development which could be worth more than the current market capitalisation detract from the upside potential from the forthcoming drilling programme and the partnership with CNOOC and Total.
Mark McCue is a divisional director with investment manager and financial planning specialist Brewin Dolphin in Aberdeen. Past performance of shares is not a guide to future performance. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents