Edinburgh oil firm thriving in North Sea

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Cairn Energy has underlined its appetite for acquisitions as it continues to generate lots of cash from its North Sea oil and gas production despite the slump triggered by the coronavirus crisis.

The Edinburgh-based firm could use the resulting firepower to take advantage of the shake-up in the industry that has been given fresh impetus by the downturn.

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Chief executive Simon Thomson said: “The company is well-positioned to be opportunistic in the current market as it seeks to diversify and grow its production base.”

Cairn’s cash reserves are set to increase by $1.4 billion after the company last month secured victory in a long-running legal dispute with the Indian government.

However, Cairn is still waiting for the Indian Government to pay over the money, which an international tribunal decided was due to the company.

Mr Thomson noted: “We have engaged with the Government of India regarding adherence to the tribunal’s ruling and are taking all necessary steps to protect our rights to the award.”

The comment come from an update on trading in 2020 which provided evidence that some firms are still making plenty of money in the North Sea amid tough times in the sector.

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The sharp fall in the crude price last year posed challenges for many firms.

Cairn’s revenues plunged last year, to $324m from $504m. However, it made a gross profit of $20 plus on every barrel of oil sold.

With production averaging around 21,000 barrels daily that meant a weekly surplus of around $3 million.

Cairn is enjoying a healthy return on the investment it made in the development of the Kraken field off Shetland and Catcher east of Aberdeen.

These are large scale developments and utilise modern production facilities, which allow the operators to keep production costs low.

While Cairn and its partner EnQuest suffered teething problems on Kraken, the field performed strongly last year.

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Mr Thomson has made clear that Cairn is ready to use the cash generated in the North Sea to fund acquisitions.

In September he noted the potential to use acquisitions to scale up its established business in the North Sea.

The company could also use them to expand its international exploration portfolio, which is focused on what are seen as frontier areas.

In July last year Cairn struck a $400m deal to sell its interests in a giant find it made off Senegal under Mr Thomson’s lead.

The company plans to pay out $250m of the proceeds to Cairn shareholders next week.

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Mr Thomson has held out the prospect it could pay out a significant share of any money it is paid by the Indian Government, in respect of the dispute that reached a head last year. The dispute concerned events leading up to the 2007 flotation of Cairn’s former subsidiary in India.

Cairn made big finds in India under the leadership of its founder, Sir Bill Gammell, who was succeeded by Mr Thomson in 2011.

Cairn reduced exploration spending last year in response to the challenges posed by the coronavirus crisis without relinquishing any licences or acreage.

The company plans to drill an appraisal well off Mexico this year.

It has acquired interests in acreage off countries such as Israel and Cote d’Ivoire in recent months.

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However, Cairn still sees exploration potential in the North Sea. It plans to drill a well on the Jaws prospect with Shell this year.

Cairn generated $324m sales revenues last year, compared with $504m in the preceding year.

The company had $570m cash at December 31 and had not drawn on any of its debt facilities.

Regarding Cairn’s success in the legal dispute, JP Morgan Cazenove said the onus now falls on India to honour the decision of the court and to pay Cairn the proceeds due.

The investment bank added: “Timing of proceeds is key to the outlook, given the increased funds would both lead to an additional dividend and give management funds to broaden the portfolio at scale.”

Cairn acquired interests in Kraken and Cairn under a strategy that involves combining relatively low risk activity in the North Sea with exploration in areas in which there has been relatively limited activity.

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It developed Catcher with Premier Oil, which last year merged with Chrysaor.

Shareholders in Chrysaor own the bulk of the enlarged business.

Private equity-backed Chrysaor bought big North Sea portfolios from Shell and ConocoPhillips during the downturn caused by the plunge in oil prices between 2014 and 2016.

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