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Why did the Cairn Energy share price jump 25% on Thursday afternoon?

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Oil pipes in an oil field
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Cairn Energy (LSE: CNE) has been on a slide in 2021, like other smaller oil and gas explorers. But on Thursday afternoon, the Cairn Energy share price spiked up nearly 45%. It didn’t maintain that level, but it still ended the day with a 26% gain.

It seems to be down to an update on the company’s situation in India. The firm’s release simply notes “the introduction to the Indian parliament of the Taxation Laws (Amendment) Bill 2021, which proposes certain amendments to the retrospective taxation measures that were introduced by the Finance Act 2012.

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Those few words hide a major headache that Cairn shareholders have been suffering from for some time. Cairn, along with Vodafone and other companies, has been involved in a long-running tax dispute with the Indian government. After the introduction of the retrospective Finance Act 2012, Cairn was slapped with a 10,247 crore rupee tax bill. That’s almost $1.4bn (£993m) at current exchange rates.

Lawsuit and damages

A subsequent hearing at the Court of Arbitration in The Hague awarded Cairn damages of more than $1.2bn. And last month, French courts froze 20 properties belonging to the Indian government to force a partial guarantee on the amount owed.

Now, it seems, India is backing down and is scrapping the retrospective tax legislation. The settlement includes refunding disputed payments to companies, on certain conditions. Those would appear to be the cessation of legislation and an agreement not to file any claims for damages.

India is proposing to pay only the principles involved and no interest, though it still sounds like a significant win for Cairn. But the big question for me as an investor is, should I buy now? Well, the immediate leap in the Cairn Energy share price hides a less impressive longer-term picture.

Cairn Energy share price history

From a 52-week peak at 283.6p in December, Cairn shares are now down nearly 45%. And that’s after the Thursday afternoon spike. And over five years, we’re looking at a 30% fall. By comparison, the FTSE 250 is up 35% over the same period.

Cairn’s 2020 results revealed an operating loss, due to the collapsing oil price during the pandemic. Cairn achieved an average price of $42.56 per barrel in the year, way down on 2019. Still, Brent Crude stands at $70, as I write. If that can be maintained over the next year, Cairn’s 2021 profits could get a welcome boost. But I suspect oil prices could remain volatile for some time. Just over a week ago, the same Brent Crude was over $76.

No debt struggles

Cairn Energy is unlike a number of other oil explorers in that it had cash on its books at the end of last year. So it’s not struggling with huge debts, and that makes me perk up a bit. I see potential for Cairn for the future, perhaps better than riskier exploration companies.

But I see the same kind of risks too. And the seemingly perpetual swinging between annual profit and loss is enough to keep me away. The long-term erratic Cairn Energy share price also discourages me.

So no. The world of oil exploration is one I’ll keep away from, even if Cairn might be one of the better prospects.

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Alan Oscroft 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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