Cairn Drops in London After First Greenland Well Fails to Find Crude Oil
Cairn Energy Plc fell in London trading after its first well off Greenland found natural gas rather than crude oil.
An exploration well encountered gas in thin sands in the Baffin Bay basin, the company said in a statement in London today. The find is “indicative of an active hydrocarbon system” and the well hasn’t yet reached target depth, it said.
“The sands we’re talking about aren’t thick enough to be commercial,” Deputy Chief Executive Officer Mike Watts said on a conference call. “But it can be associated with oil. We just need further work and further evaluation.”
Cairn fell as much as 20.4 pence, or 4.4 percent, to 444 pence in London trading. The stock traded at 457 pence at 8:50 a.m. Cairn rose to a record 497.6 on Aug. 16 after it agreed to sell a majority stake in Cairn India Ltd. to Vedanta Resources Plc for as much as $8.5 billion.
Cairn is spending $400 million this year on drilling the four wells off Greenland. The territory’s waters may hold 50 billion barrels of crude and gas, the U.S. Geological Survey estimates, enough to meet Europe’s energy demand for almost two years.
“Until we have more detail on the Greenland wells, we stick with our ‘hold’ recommendation,” said Richard Rose, an analyst at Oriel Securities Ltd. in London, in an e-mailed note.
The stock has six “buy” recommendations, 14 “holds” and three “sells” among analysts surveyed by Bloomberg.
A “substantial portion” of the proceeds from the India sale will be returned to shareholders, Finance Director Jann Brown said on a conference call. Cairn stands to make between $6.5 billion and $8.5 billion from the sale, which is subject to approval from the Indian government. Cairn will retain a minority interest in the unit.
“The transaction with Vedanta will result in a substantial return of cash to shareholders whilst ensuring the company has the financial flexibility to pursue its multi-basin exploration strategy in Greenland,” Cairn CEO Bill Gammell said in the statement. “I am encouraged that we have early indications of a working hydrocarbon system with our first well in Greenland.”
Cairn reported a net loss of $12.6 million for the first six months of the year compared with a $61.6 million loss a year earlier. Revenue before exceptional items rose more than fourfold to $333 million.
Production in the period rose to 32,866 barrels of oil equivalent a day from 11,573 in the first half of 2009.
Exxon Mobil Corp. and Chevron Corp. also own rights in Greenland, the island territory Denmark has had sovereignty over since 1721. Watts said that the basin Cairn is drilling in is the size of the North Sea, and the block is as big as the Niger Delta.
“We’re at the very early stages of the valuation,” Watts said. “The North Sea in 1964 is the analogy.”