Market Report: Cairn energised by rumours of Italian swoop

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The Independent Online

The Italian oil titan Eni was talked of as the most likely buyer of the group and the speculation certainly gave Cairn shares a boost - its stock finished 37p better at 1,789p.

The UK group is without doubt an attractive proposition for an oil sector heavyweight such as Eni. Its site in Rajasthan, India, bought from Shell for next to nothing, has turned into a significant oil find. More recently, Cairn has negotiated a deal with India's Oil & Natural Gas Corporation (ONGC) that allows it to participate in a joint venture to build a major refinery in Rajasthan. Given India's growing power, this is likely to become a rather valuable asset.

Meanwhile, the deal with ONGC makes Cairn the only Western oil company with a potential stake in an Indian refinery, something a number of oil groups have failed to achieve in recent years.

Analysts believe rumours of a tie-up between Cairn and Eni have emerged because the Italian company acts as a partner to Cairn in a new exploration licence close to the Scottish group's existing Rajasthan site. Although sector analysts confirmed Eni has the firepower to buy Cairn, the majority were sceptical that a deal is imminent. They suggested that the sudden demand for Cairn stock may have been caused by the company's promotion to the FTSE 100.

On 19 September, Cairn will return to the blue-chip index, having dropped out in March after disappointing drilling results. Before the return of the stock, those investment funds that are paid to track the FTSE 100 have to build substantial shareholdings in the group.

The wider oil sector was in retreat as the price of crude dropped. Analysts said nine of the 20 oil refineries affected by Hurricane Katrina have resumed normal operations, with two more scheduled to restart this week. BG Group fell 5.5p to 506p, Venture Production lost 18.5p to 485p, Soco International retreated 10.5p to 758p and Burren Energy lost a penny to 732p.

Back among blue chips, Man Group put on 13p to 1,668p after the hedge-fund operator announced another week of strong gains at its flagship AHL fund.

Alliance & Leicester fell 13p to 870p after Merrill Lynch slapped a "sell" rating on the mortgage bank. The US broker said: "We cannot see where any real forward momentum is going to come from for Alliance & Leicester.

"Nearly 40 per cent of last year's sales growth came from unsecured personal loans, and although management has ambitions for further growth, the macroeconomic conditions are getting worse for this product."

Merrill Lynch was upbeat about Barclays, helping its shares add 2.5p to 571.5p. It is convinced the bank will perform well this year as the turnaround at its retail division continues and Barclays Capital moves to being a net generator of capital. The US broker was also behind a 13.25p rise in Yell to 481.75p. After a meeting with the management of the directories group, Merrill believes Yell is on track to meet, or even exceed, the City's earnings forecasts for its full year.

Next was not so lucky, falling 11p to 1,485p, as Morgan Stanley warned investors that the retailer's interim results next week are likely to disappoint. The broker gave a number of reasons for this bearish stance. Among them is the belief that the UK clothing market was pretty weak this summer, owing to the bad weather, poor consumer environment and prospect that sales may have been damaged by the terrorist attacks on London in July.

Among smaller companies, Grove Energy rose 2p to 30p after securing six licences in the North Sea from the UK authorities. Grove boasted that two of these are close to an existing project with about 28 million barrels of oil. Ascent Resources added 3.6p to 11.8p on the back of bullish research from WH Ireland. Ascent is focused on building a portfolio of oil and gas assets in Europe and the broker is convinced that the group's managementhas the credentials to deliver this.

Petra Diamonds rose 1.5p to 75p after the AIM-listed miner expanded into Botswana with an all-share takeover of Kalahari Diamonds worth about $22m. Petra, also listed in Australia, operates three mines in South Africa and has exploration projects in Angola and Sierra Leone.

Finally, Earthport added 9.25p to 60.25p amid stake-building rumours. Although the money-transfer company was, until a few weeks ago, priced as if it was going bust, it has since enjoyed something of a renaissance. Investors should not be surprised to see the group unveil a series of contract wins from blue-chip companies.