Berenberg downgrades Cairn Energy to 'hold', cites 'continued uncertainty' around award payment

Analysts at Berenberg downgraded exploration and production firm Cairn Energy from 'buy' to 'hold' on Wednesday, stating more clarity on the award payment related to its arbitration with the Indian tax authorities was needed.

In December 2020, Cairn was awarded $1.2bn in damages, plus interest and costs in relation to the arbitration and while discussions with India remains the "preferred route" for the company to recover the funds, Berenberg said recent reports indicated enforcement via the seizure of foreign assets of Air India, potentially alongside Indian multimedia firm Devas, was also progressing. Monetisation of the award through specialist funds was also allegedly being considered.

The German bank said full recovery would generate "significant upside" to the stock's current price, but acknowledged that there was no clarity on when or, in the case of enforcement/monetisation, to what extent said upside might be realised.

"Full recovery of the India arbitration award could generate material upside for Cairn Energy. However, with continued uncertainty around the timing and scale of the ultimate cash receipt, we move our recommendation to 'hold'," said Berenberg, which also lowered its target price on the stock from 200.0p to 170.0p.

Elsewhere, Berenberg updated its modelling of assets recently acquired by Cairn to "more accurately" capture the appropriate fiscal terms and cost guidance provided in its competent persons' report.

"We note that Cairn's FY21 pro-forma working interest production guidance remains 33,000-38,000 barrels of oil per day, lower than in the CPR (circa 53,000 boepd. The lower output is a result of reduced investment in recent years due to the low oil price and Shell's intention to sell the assets," said Berenberg.

The analysts also said their updated modelling indicated average cash flow from the assets of roughly $96.0m from 2022-26, meaning its valuation of the acquired portfolio increased by 23% to $462.0m, or 66.0p per share.