Cairn Energy boosted by SocGen upgrade to 'hold'

Cairn Energy got a boost on Friday after Societe Generale upgraded the stock to ‘hold’ from ‘sell’ and raised the price target to 180p from 165p, saying the risk/reward has improved.

The bank said it was taking a more neutral view based on Senegal exposure.

In a world of lower commodity prices and capex cuts, investors should reassess whether to attach tangible value to pre-development assets within E&P portfolios, the bank said.

It added that this is especially true at a time when both industry and investor enthusiasm for exploration opportunities are at their lowest ebb in the E&P cycle.

“For Cairn, this meant revisiting our previous negative view on its prospective acreage in Senegal ahead of this year’s appraisal drilling programme,” said SocGen.

It said the market remains wary of de-risking a commercial find on the Senegal discovery well too early following Tullow's Zaedyus discovery well in 2011, which was later deemed to be sub-commercial.

“As such, we expect investors to maintain a healthy degree of scepticism ahead of a two well appraisal drilling programmes commencing in the fourth-quarter on the SNE-1 shelf discovery in Senegal.”

SocGen said the main upside to the Cairn Energy story remains the resolution of its Indian tax issue, but the bank noted that it has long taken a more cautious approach than the consensus on the timeline for any resolution.

“In our view, the share price trades at a small premium above core NAV that is equal to 15% probability of a commercial discovery in Senegal,” it said.

It added that the next catalyst will be the interim results on 18 August.

At 10:10, Cairn Energy shares were up 2.8% at 168.58p.