Market Report: Cairn lifted by hopes for Greenland drilling
Tuesday 12 January 2010
Cairn Energy stood out as the FTSE 100 touched a new 16-month high yesterday, with buyers outnumbering sellers amid hopes for the oil and gas prospector's foray into Greenland.
Citigroup said the fast tracking of Cairn's offshore exploration project had brought the company "back under the exploration spotlight". Cairn plans to drill prospects across its Disko blocks in the Baffin Bay basin later this year. While it has yet to release guidance on individual prospect sizes, Citi said the Greenland campaign could be worth about 45p per share on a risked basis and had the "potential to prove transformational".
"Cairn has raised the possibility of eyewatering prospect sizes," the broker said, upgrading the stock from "hold" with a 274p target price to "buy" with a 420p target. "Indeed, the decision to commit two rigs to the region, which we estimate could cost up to $400m, reinforces the company's belief in the prospectivity of its acreage."
Beyond Greenland, near-term news about Cairn's operations in India also has the "potential to surprise on the upside", Citi added, boosting sentiment around the stock.
The assessment was supplemented by renewed weakness in the US dollar and upbeat export figures from China, which also supported the commodity-related stocks and helped to drive up Cairn's share price by 8.4p to 370.3p.
Traders welcomed official data showing that Chinese exports rose in December for the first time in 14 months, adding to evidence of the country's economic recovery.
Coupled with currency movements, the figures lifted commodity prices, which in turn boosted oil and gas and mining stocks. Though a number of stocks fell back as investors moved to bank profits in the latter part of the session, Lonmin, which touched 2198p before closing 31p higher at 2157p, managed to remain in the black.
Others were less fortunate, including BHP Billiton, which was down 11p at 2104.5p, Kazakhmys, which closed 7p lower at 1492p, and Vedanta Resources, which fell 52p to 2834p.
Overall, the FTSE 100 was broadly unchanged at 5,538.07, up 3.8 points, while the FTSE 250 rose by 37.39 points to 9,726.44. The benchmark index touched a 16-month high, rallying to 5,600.48 at one point as commodity-related stocks gained ground, but it fell back as investors moved to bank profits in that sector.
ICAP was among the laggards, declining by 5.7p to 450.9p, with traders pinning the weakness on a placing of about 10.3 million shares by HSBC. Shortly after the close of play, it emerged that INCAP Finance, a subsidiary of the ICAP chief executive Michael Spencer's IPGL vehicle, had sold seven million shares in ICAP at 440p apiece, while Mr Spencer had offloaded 3.3 million shares at the same price.
Elsewhere, the banking sector was unsettled, with Royal Bank of Scotland retreating by 0.14p to 34.98p and Standard Chartered falling 34p to 1590p. Barclays, which was raised from "hold" to "buy" by Citigroup, was also 3.55p lower at the end of the day, at 317p. "In our view, the market is applying too low a rating to Barclays' earnings, considering these earnings to be 'low quality' and continuing to view the stock as relatively 'high risk'," Citi said, highlighting the scope for a re-rating of the bank's share price.
On the upside, commercial property was in favour after Goldman Sachs weighed in, saying that a combination of strong demand and limited supply was set to drive the recovery in prime office rents. "We believe office market rents are likely to recover strongly from 2011 across most of Europe, but particularly in London and Stockholm," the broker said. It recommended Land Securities, which closed 19p higher at 683p, because of its exposure to the London market.
"While about 44 per cent of the company's income-producing portfolio is in London offices, its plan to launch three West End office developments to let in 2012 amplifies its leverage to positive market trends," the broker added, as it promoted the stock to its widely followed "conviction buy" list.
Goldman was less keen on Liberty International, which came under pressure and fell 2.8p to 493.1p after the broker switched its stance from "neutral" to "sell".
Further afield, Morgan Stanley supported sentiment around the construction and support services group Carillion, which rose by 5.5p to 314.5p after the broker initiated coverage on the stock with an "overweight" stance. Bank of America-Merrill Lynch also weighed in, setting a "buy" rating on Carillion's shares. "We see 2010 as the year the story will shift to organic opportunities after five years of portfolio reshaping through mergers and acquisitions," Morgan Stanley said.
Also on the upside, Rentokil Initial was 2.2p ahead at 117.2p following some words of support from Panmure Gordon, which said the stock was an "attractive investment proposition for 2010". "Since the new management team came in during 2008 to turn Rentokil around, the recovery strategy has been well executed," the broker added. "We expect this momentum to build further during 2010, providing positive newsflow on a number of different fronts."
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