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Could the Cairn Energy share price go the way of Sirius Minerals?

Cairn Energy (LSE: CNE) shareholders were dealt a double blow Monday, announcing a delay to the firm’s tax dispute with the Indian government, alongside news of another dry well.

The $1.4bn dispute stems from Cairn’s flotation of its Indian subsidiary as long ago as 2007, over the government’s application of new 2012 taxation legislation retrospectively.

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Cairn had hoped for a settlement of the disagreement by the end of the current year, but it now seems it’s going to drag on until at least summer 2020.

In the other bad news, the Alom-1 well on Block 9 offshore Mexico was aimed at possible hydrocarbons in stacked Pleistocene targets, but there’s nothing there and it will be plugged and abandoned. What’s particularly disappointing about this well, drilled to 2,056 metres below sea level, is that it’s the first in Cairn’s Mexico programme.

A tough fortnight

And it’s the second dry well in as many weeks, after a similar failure in the North Sea, reported on 17 October. The company’s Chimera well, aimed at Paleocene Heimdal Sandstones within the Lista Formation, was found to be dry after drilling to a depth of 1,830 metres, again leading to abandonment.

The share price dipped more than 15% in Monday morning trading, but is Cairn heading for genuine trouble? It’s not in a particularly precarious position at the moment, expected to deliver modest profits this year and next. But there’s a world glut of oil and the price is showing increasing weakness, so any further drilling failures could start to pile on some pressure. And that tax dispute concerns a serious amount of money.

I think smaller oil explorers could be in for a risky few years, which is why I’m staying away.

Skin of its teeth

Meanwhile, with its share price hovering around 3p and its market-cap at £215m, Sirius Minerals (LSE: SXX) is still holding on. The share price crunch has, however, knocked the company out of the FTSE 250 and into the FTSE Small Cap index, and that’s something shareholders like me were certainly never expecting.

We knew Sirius wasn’t going to be producing any polyhalite potash until at least the second half of 2021 and wouldn’t be up to its planned production rate of 10m tonnes per year until at least 2024. But I, for one, always thought the asset was so good that someone really would want to put up the cash to get it into a productive state.

I still think that’s the case, but there’s an increasing likelihood existing shareholders aren’t going to see a penny of any profits. The company, which has already laid off 300 workers to try to preserve cash, has around £180m of cash that should be enough to keep the lights on until some time in early 2020. But it’s notable that Sirius is currently valued at only £35m more than its cash holdings.

White knight?

Who might come on board as the new strategic partner the firm is now seeking is anybody’s guess at the moment, although CEO Chris Fraser has denied claims the firm intends to go private.

I confess I’m hanging on to my shares mainly through emotional attachment. But if I didn’t have them, I certainly wouldn’t be buying any now.

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Alan Oscroft owns shares of Sirius Minerals. 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.