Cairn a hold amid unstable oil prices

St James's Place; Jamies Bars
Click to follow
The Independent Online

There's as much luck as judgment in oil and gas exploration, and Cairn Energy has had a charmed year.

The group was yesterday able to quantify the results from its latest drilling tests off the east coast of India, confirming that its oil and gas projects in the region have commercial development potential. It reckons it will be able to extract 80-120 million barrels of oil from its "M" and "P" discoveries in the area, and it hasn't even got to "Q" yet.

That's so much gobbledegook to the uninitiated, but it means it has at least three commercial discoveries from 10 wells and that Cairn is sitting on an oil and gas discovery so large that it will not be able to commercialise it by itself. Analysts expect it to partner with one of the industry's global giants, which would have the financial muscle and the deepwater drilling experience necessary for the task.

That will be good news, and not all of it is in the share price, which rose 3p to 294.5p yesterday and is now twice the level of 18 months ago. The risk may be that falling oil prices and fear of political instability on the Indian sub-continent could mean the terms of a partnership might not be as favourable as they had looked a few months back, but then the shares have fallen from their high of 367.5p.

While oil prices may have broken decisively through the bottom of Opec's target range of $22-$28 per barrel, few people expect a return to the $10 price that wreaked so much havoc on oil firms' balance sheets three years ago. At that time, Cairn survived well because of its relatively low gearing, and is likely to manage again without being forced to dispose of any assets. Meanwhile, it is expected to hoist production levels by some 20 per cent next year.

Cairn shares sit 12 per cent below CSFB's calculation of their net asset value, a deeper discount than rival Enterprise Oil. The economic and political climate counsels against buying until the direction of the oil price becomes clearer, but they remain a solid hold.

St James's Place

Unit Trust sales collapsed in September as the stock market slump before 11 September, and the volatility afterwards, made Joe Public fearful of the market. St James's Place Capital doesn't cater for Joe Public, though. It is investment adviser and life insurer to the wealthy, among whom are the sophisticated investors who rode with City fund managers back into equities at the end of the week after the terror attacks. So St James's new business figures for the three months to 30 September didn't look half as bad as feared.

Unit trust sales fell a relatively modest 12 per cent in the quarter and are running just 8 per cent down for the year as a whole. Overall, total new business for the nine months is 16 per cent higher than in 2000.

St James's pension product sales were particularly impressive, albeit against some weakness last year when it was revising it pricing structures. New pension business grew at 36 per cent in the third quarter, suggesting the group is whethering the introduction of low-cost stakeholder pensions targeted, in part, at the self-employed.

The famed "mass affluent" – mainly the self-employed – have been flocking back to their investment advisers in these uncertain times, and St James has been able to capitalise on its close relationships with clients. It has a salesforce often rated the best in the business, and is in the process of beefing up its range of income protection products, whose sales are expected to grow strongly as the economy weakens.

There are also positive murmurings from its recently launched banking business. The first figures from the venture will not be released until full-year results in three months time but, whatever the financials, the business should help cement relationships with customers, even when they are not coming to St James for particular investment or insurance products.

The stock has traditionally sold at a premium to other life insurers because of its wealthier customer base and sales strengths. Now on a little over three times embedded value, after the shares fell 15p to 320p yesterday, it remains a buy.

Jamies Bars

Jamies, the chain of City drinking dens, has suffered from the thinning of investment banking and media industry fat cats.

Pre-tax profit was lower even than its own broker, Peel Hunt, had been forecasting. The opening of Jamies' Canary Wharf venue had been delayed and other new outlets had missed sales expectations. Profits came in at £188,000 for the year to 28 July, compared to £456,000 the year before.

While the investment in new venues was always expected to hit this year's figures, there were a string of other excuses, too. One venue had scaffolding around it for longer than planned; one needed a redesign; one had suffered because the advertising moguls next door had suffered in the economic downturn.

There are only a few grounds for optimism. The brokerage Morgan Stanley is relocating to Canary Wharf next year, adding to the potential clients for the Jamies bar there, and Christmas bookings are okay so far. Peel Hunt is predicting profits will rebound to £305,000 this year.

It is difficult to escape the conclusion, after a string of bungles, that the management hasn't quite got a grip on the company's problems. Like-for-like trading since July is still down 2 per cent and debt needs rescheduling. The shares, off 7p at 38.5p, are unattractive.