Cairn Energy Reaches Far Beyond Scotland

The oil and gas explorer will more than double its oil output, with new fields in India's Rajasthan. And it has drilling rights around Greenland

The past few years have been good to Scotland's Cairn Energy (CNE.L), an Edinburgh oil and gas exploration company that ranks No.16 on this year's BusinessWeek European Hot Growth list. Buoyed by high energy prices, Cairn has increased its operations in Northern India and secured drilling rights for as-yet-untapped regions around Greenland.

Now, Cairn is gearing up for its biggest expansion to date. By the second half of 2010, the company is expected to more than double its daily oil output after it starts production at three fields in the Indian state of Rajasthan.

All told, the jump in production means Cairn will generate a fifth of India's total daily domestic oil output by the end of the decade. That's not bad for a British company started in 1980 by its current CEO, William Gammell, a former Scottish international rugby player. After listing on the London Stock Exchange (LSE.L) in 1988, Cairn finally joined the FSTE 100, the index of Britain's leading companies, in 2004. The company booked revenues of $287.7 million in 2007, flat with the year before, and scored a net profit of $1.5 billion after it floated its Indian subsidiary on the Bombay Stock Exchange.


Cairn's fortunes are divided between its existing Southeast Asian business, known as Cairn India, and its oil exploration arm, called Capricorn Energy, which operates from Greenland to Nepal. Analysts say this diversification should help the company navigate the volatile swings in oil prices that have caused energy contracts to halve in price since July 2008. After all of its new Rajasthan fields come online by 2010, Cairn should enjoy a steady revenue stream from the roughly 175,000 barrels of oil produced each day there, which it can aggressively reinvest in search for new energy reserves further afield.

"Mangala [the largest Rajasthan field] is the biggest oil field to be discovered in India in the past 20 years, so we'll be producing there for the next 20 to 30 years," says David Nisbet, Cairn's head of group corporate affairs. "Regions like Greenland also offer us a long-term transformational opportunity."

Despite tight global credit markets, the company says it has sufficient funding to complete its new Indian fields by the end of 2010. According to Rahul Dhir, CEO of Cairn India, the company will spend $2.6 billion on the projects over the next 18 months, on top of a previous outlay of $1 billion. Cairn has an existing debt facility of $910 million and additional cash reserves of $994 million as of Sept. 30, 2008, as well as revenue from its operations in Southeast Asia.

"We're comfortable that we're in a good financial position," says Nesbit.

But while Cairn may have enough money to ramp up production, Citigroup (C) analyst Marc Kofler cautions that unexpected production delays, such as pipeline malfunctions or unforeseen technical glitches, pose the biggest risk to the company's future revenue stream. Any profits from new oil fields, particularly in Greenland, are still at least five years away, so setbacks at its Rajasthan operations could hit the company's bottom line. "Cairn's operational performance depends on production from a small number of fields," Kofler says.

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