Jefferies downgrades Cairn Energy after $1.6bn Indian tax bil

News that Cairn Energy has been handed a $1.6bn tax bill in India has prompted Jefferies to cut its rating on the oil and gas stock from 'buy' to 'hold'.

The broker, which lowered its target price from 220p to 172p, said it was "blindsided" by the developments.

The bill by the Indian government relates to unpaid tax by a Cairn India subsidiary, Cairn UK Holdings Limited.

FTSE 250-listed Cairn Energy said it would dispute the bill under the UK-India Investment Treaty in order to protect its legal position and shareholder interests, but had made no accounting provision. Parties are now required to enter a three- to six-month negotiation period.

However, Jefferies said that whatever the legality, a "new overhang moves in" for the company.

It pointed out that the $1.6bn bill is equal to Cairn Energy's current market capitalisation and significantly greater than the $700m estimated value of its 9.8% stake in Cairn India.

Jefferies has lowered its core net asset value (NAV) forecast for Cairn Energy by 3% to 125p per share after including higher assumed legal costs to fight the claim.

However, the total NAV estimate has been cut by 14% to 238p per share as a result of an increased risk to the group's Cairn India stake.

The shares were down 18.2% at 150p by 09:56.