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Here’s why the Cairn Energy share price exploded this week

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The Cairn Energy (LSE:CNE) share price has had a pretty rough time this year. Since the start of 2021, the stock is down roughly 39%. Or at least it was until yesterday when it surged by 26%. What caused the sudden eruption of growth? To understand what happened, I have to go right back to 1994. Let’s dive in.

A bit of background history

Cairn Energy is a Scottish oil company engaged in exploration, development and production. It began investing heavily in the Indian Oil & Gas industry back in 1994. Around a decade later, it made one of the largest oil discoveries in the country. And reorganised its Indian division before listing it on key Asian stock exchange the BSE through an IPO in 2006.

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Things were going fine until 2012. A new retrospective tax law was introduced by the Indian government. Under this, income from the sale of shares in a non-Indian business whose value is derived from assets located in India will be taxed under the Indian system.  Consequently, a few years later, in early 2015, Cairn Energy was slapped with a tax bill roughly equal to £1bn due to the sale of its shares during the Indian IPO nine years prior.

And to ensure the business paid, the government seized unsold shares along with dividends, as well as blocking any tax refunds until the bill was paid. Needless to say, this was terrible news. And the Cairn Energy share price plummeted.

The Cairn share price has its risks

What’s happening to the Cairn Energy share price now?

After years of appeal, Cairn Energy finally caught a break. In December 2020, the international arbitration court at the Hague instructed India to return approximately £1.2bn to the business, which covered most of the original bill with interest. This development caused the Cairn Energy share price to jump 30% on that day. Despite this ruling, India continued to delay repayment, resulting in the stock’s decline throughout 2021.

But yesterday, a new legislative bill was presented in the Indian parliament that would withdraw all retrospective tax claims on Cairn and refund all seized assets. It seems this five-year tax debacle is finally coming to an end. And with a sudden surge in capital being returned to the business, funding for new projects worldwide may soon become available. So, I’m not surprised to see the Cairn Energy share price explode on the news.

What now?

After the recent surge in Cairn Energy’s share price, is this a business worth investing in? The company did just announce a new oil discovery in Mexico that could contain between 150 and 200 million barrels of oil equivalent. But even with that in mind, I’m personally not tempted.

Despite being a well-established player within its sector, the firm has struggled to remain profitable. In fact, in the last five years, only two of them were in the black. Perhaps that will soon change. But I think there are far more exciting and profitable growth opportunities to be found elsewhere. So, I’m keeping this stock on my watchlist for now.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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