Cairn shares crash after setback in Rajasthan

Shares in Cairn, the high-flying oil exploration company which entered the FTSE 100 Index earlier this year, crashed 18 per cent yesterday after it unsettled investors with news of a double setback in its key Indian oilfields.

Shares in Cairn, the high-flying oil exploration company which entered the FTSE 100 Index earlier this year, crashed 18 per cent yesterday after it unsettled investors with news of a double setback in its key Indian oilfields.

The announcement sent Cairn shares down by 247p, wiping £392m from its stock market value and making it by far the biggest faller in the blue-chip index.

In an operational update on its Rajasthan field in north-west India, Cairn said that it had failed to find any oil after test drilling in a new region north of its big discovery, Mangala. It also said the Indian government believed it was liable to pay an extra tax on crude oil production from Rajasthan amounting to $3 a barrel.

Bill Gammell, the former Scottish rugby international who heads Cairn, admitted that the results of the new appraisal programme had been "disappointing", saying most of the wells drilled had turned out to be dry. The company had previously estimated reserves in this so-called extension area at up to 400 million barrels. It now puts them at between 30 and 80 million barrels.

But Mr Gammell said he was "delighted" with the increased confidence Cairn had in the potential for Mangala, which independent consultants have confirmed contains 1 billion barrels of oil, one-quarter to one-third of which are likely to be recoverable.

Cairn also said that it had raised its production target for Mangala and its other key Rajasthan field Aishwariya to between 80,000 and 100,000 barrels a day. The two fields come on stream at the end of 2007.

Mr Gammell, Cairn's chief executive, was philosophical about the sharp correction in the share price, which had more than trebled since the start of the year until yesterday's update. "Let's see where the share price is in a month's time," he said. "We try hard to under-promise and over-deliver but the market will take a view at any point in time. The pendulum is never in equilibrium."

A number of analysts also felt that the share price reaction had been overdone, with one commenting that the stock was beginning to look cheap at about 1,000p. But Cairn's own house broker, ABN Amro, cut its recommendation on the stock from "buy" to "add" and lowered its net asset value for the company from 1,776p to 1,519p.

Mr Gammell also sought to downplay the potential impact of the tax claims made by the Indian government. Cairn disputes the government's right to levy the tax but says that even if did have to pay, it would only reduce the value of its Rajasthan fields by 5 per cent.

Cairn has enjoyed a meteoric rise since it acquired the Rajasthan exploration rights from Shell for just £7.5m two years ago. Its big breakthrough came early this year when it made its first discovery in Mangala. At the peak, its shares were worth 1,570p, valuing the company at £2.5bn. At last night's closing price of 1,115p, the company was valued at £1.77bn which would mean it losing its FTSE 100 place unless there is a rebound in the stock price. Mr Gammell's stake in the company of 1.1 million shares is worth £12.3m.

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