Cairn's risky exploration in Asia worth a gamble

Laing winding road can pay off; Incepta's PR a good long-term bet
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The Independent Online

Divining which bits of the seabed contain oil has to be one of the least predictable businesses to be in, but yesterday Cairn Energy unveiled another highly respectable progress report.

Britain's biggest independent oil and gas explorer is another of those groups to have decided to move its focus of operations to the Indian subcontinent, and it has made some impressive finds there.

Cairn's results were boosted not only by the strong oil price but also because costs have come right down. It has sold off some of its interests in the North Sea, where oil costs $10 a barrel to extract. For comparison, Bangladesh costs are only $2 a barrel. No wonder businesses are keen to outsource to the subcontinent.

The company pumped a record 30,625 barrels of oil a day in the half-year to 30 June. And recent discoveries at its Lakshmi gas field in western India and at Ravva in the east will boost production further next year. Net profit rose 70 per cent to £26.3m and its shares rose 11.5p to 340p.

In Bangladesh, Cairn is on the brink of clinching a deal to buy some of Shell's assets, though the final details must be approved by the country's government. Cairn has also made breakthroughs in other parts of south Asia, having had a bid to explore the resources of Nepal accepted by that government in July. The company itself admits the move is "politically and technically high risk" because the government is in turmoil and because Nepal is virgin territory, which could turn out to have negligible natural resources.

The uncertainty doesn't end there. As well as being at the mercy of global oil prices, Cairn still needs a business partner for its deeper water sites in India. And despite many months of exploration, Cairn is still to strike it lucky at its site in Rajasthan in the west of the country.

While Cairn is at the riskier frontier of the stock market, its management has shown a steady hand and a willingness to pay down debt to keep the stakes as low as possible. The low labour costs in most of Cairn's favoured areas helps it to have a profit margin of $16 on every barrel of oil it produces - one of the fattest in the sector. Worth a gamble.

Laing winding road can pay off

John Laing, the historic construction group, has been travelling a rocky road these past couple of years. Along the way, it has had to ditch its construction business after liabilities grew too costly. It has also offloaded its house building division. This means Laing is now an investment company and project manager, managing private finance initiative (PFI) projects in return for regular fees and an equity stake. There are government contracts to build and maintain hospitals, schools and roads worth between £4bn and £5bn a year up for grabs.

The transformation has taken its toll on Laing's reported results. After losing the housing business, interim profits slipped 72 per cent. But profits on its investment portfolio, valued at £253m, grew 53 per cent. Laing says 23 projects are now operational and it is the preferred bidder on 14 new contracts.

It will be some time yet before Laing is really able to step up a gear. This wonderful world of PFI is still relatively new. Bidding for contracts is a costly process and most projects are still in their early stages, yet to bring in real earnings. By their nature, they are long term and should make for solid, steady returns, but there is an element of political risk that future governments may change public and private policy towards PFI.

Also, there is not yet a market for trading PFI stakes, which makes them a little difficult to value. Such a market should take off, though, and shareholders would be in line for special payouts as and when Laing is able to cash out.

The group's dividend was halved yesterday to reflect the new business model, but it should improve from here. On a three to five -ear view, Laing (down 1.5p to 168.5p) is a buy.

Incepta's PR a good long-term bet

The global downturn has affected the volume of our business and our profitability. What it has not done is affect the vitality of our people, the strength and leadership of our brands, our commitment to our clients and our continuing belief in the longer term potential of our group.

You can forgive Incepta the gushing tone of their most recent results: they are a public relations group, after all. You can forgive the company, too, because it's not far off the truth. Incepta is owner of the Citigate brand, one of the two or three biggest financial PR firms when it comes to advising on merger and acquisition activity, and an ambitious player in "marketing services" such as publicity stunts, special offers and telling businesses whom to send what sort of junk mail.

Following a £26m rights issue in July the group has cut debt to a more manageable £65m. And after some big cost cuts, there could be big profit gains in the financial PR business when flotations, mergers and acquisitions really do start to pick up.

The company chose to strike a cautious note in a trading update yesterday - clients and potential clients are still making swift decisions rather than planning for the long term, so the current optimism may yet fade. But trading in the second quarter has been stronger than the first, which is progress.

The rally since the rights issue looks to be over and the shares (down 3.5p to 96.5p) may be lacklustre until a real recovery is evident. But they look like a good earner for the long-term investor.

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