The Motley Fool

Should You Buy Cairn Energy PLC Following Oil Find?

oil rigShares in Cairn Energy (LSE: CNE) shot up by more than 10% and touched a high of 203p this morning, after the firm announced an oil discovery in its offshore Senegal acreage.

A gusher?

The firm says that the FAN-1 exploration well in the Sangomar Deep block, offshore Senegal, has a mean gross oil-in-place estimate of around 950 million barrels, of which Cairn’s share is 40%.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

This could be important for Cairn: commenting on today’s news, chief executive Simon Thomson said that today’s find “materially upgrades the prospectivity of the block” and “may have significant potential as a standalone discovery“.

Too late to buy?

Explorers’ share prices often rise ahead of drilling results, before falling back again afterwards.

That’s not the case with Cairn, however — the firm’s share price has fallen by 28% so far this year, thanks to a run of disappointing results. Even after today’s gains, Cairn shares look relatively cheap: as I write, Cairn’s share price is 195p, but at the end of June, the firm had cash of $1.1bn — equivalent to 190p per share!

Cairn also has a number of other exploration wells due to complete this year, plus it owns stakes in the Catcher and Kraken fields in the North Sea, which are due to start producing oil in 2016/17.

Too good to be true?

Of course, there is a catch. Exploration companies with lots of cash don’t generally return it to shareholders — they keep on spending until they either get lucky, or run out of money.

In Cairn’s case, the size of the company’s cash resources suggests that the firm is more likely to strike oil than run out of cash.

However, although Cairn has $1.6bn in cash and undrawn debt facilities, this money is mostly spoken for: current planned capex on exploration and development is $1.4bn, and the company’s remaining $1bn stake in Cairn India is currently out of bounds, due to a tax dispute with Indian authorities.

Is Cairn a buy?

I don’t believe Cairn is as cheap is it looks, but the firm does offer potential value for investors willing to shoulder exploration risk, and today’s find is very promising.

I’d rate Cairn as a hold, rather than a buy, but braver investors who buy now could reap fat rewards at today’s price, if things go well over the next couple of years. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Cairn Energy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.