Cairn Energy rallies on UBS upgrade to 'buy'

Cairn Energy got a boost on Friday as UBS upgraded the stock to ‘buy’ from ‘neutral’ following recent underperformance, with an unchanged price target of 220p.

The bank said several potential sources are emerging in Cairn. Firstly, it said the resumption of drilling in Senegal later this year sees multi-hundred million barrels of upside tested in a frontier, but proven basin.

Secondly, UBS argued that investors get paid to wait for the oil price recovery.

“Cairn's North Sea projects don’t ramp-up until 2H17E and so weak spot prices impact sentiment but not value. Once on-stream Catcher and Kraken give it around 25kboe/d of production which, given large tax loss pools, is notably cash generative.”

Thirdly, UBS said that while visibility on recovery of its 10% Cairn India stake is low ahead of arbitration next year, so are market expectations.

The bank pointed out that Cairn’s share price has sold off in reaction to two partner transactions: Woodside's acquisition of Conoco's 35% stake in the SNE discovery and the mooted Delek/EnQuest Kraken deal.

“Neither looks good at face value, but neither is a fair read-across. Conoco is executing a strategic deepwater withdrawal into a trough asset market. EnQuest, meanwhile, has pressing need for liquidity; tax effects reduce value for a new entrant; and, the final contingent consideration is still unknown.”

At 0825 BST, shares were up 6.2% at 192.90p.