Market Report: Cairn stands firm on Greenland prospects
Saturday 24 July 2010
Cairn Energy was in focus as analysts looked ahead to some key news on the oil explorer's Greenland drilling campaign. Earlier this month, Cairn commenced a widely watched exploration drilling campaign off the coast of western Greenland, with results from the first two wells likely in mid-to-late August.
Ahead of the results, Royal Bank of Scotland's analysts said commercial discoveries could drive the shares as high as 794p, indicating a significant upside to last night's closing price of 473.1p, up 0.8p.
On the other hand, if both wells fail the commercial test, but data from the campaign is encouraging enough for management to strike a positive note on future drilling, the share price reaction may well be neutral. If the campaign fails on both counts, however, the shares are liable to fall back, but the downside is likely to be limited by Cairn's Indian interests and by its unlisted Capricorn Oil subsidiary.
"We see our 375p base case valuation as the ultimate 'backstop' for the share price," said RBS, which acts as a broker to the company. It added: "We believe it unlikely that Cairn would trade at a discount to our base case valuation for a sustained period of time. Many of the world's prolific hydrocarbon basins experienced disappointments in the early phases of exploration and we believe that this is well understood within the market."
In the wider sector, Dana Petroleum was fired up, adding 13.4 per cent or 201p to 1,706p after the Korean National Oil Corp said it had made an indicative bid proposal of 1,800p per share. The Koreans added, however, that it was still awaiting for what it termed a "satisfactory response" from Dana. The announcement, which follows an initial indicative proposal of 1,700p per share in June, added to the steady upturn in deal-related newsflow, and boosted the mood among those eyeing the possibility of further mergers and acquisitions activity.
Overall, dealers were preoccupied with one topic, namely the European banking stress tests, the results of which were published after the close in London. The FTSE 100 ended 1.19 points behind at 5,312.62 amid nervousness ahead of the results, while the FTSE 250, which is seen as more representative of the UK economy, rose by 90.49 points to 10,093.67 following better-than-expected GDP figures for the second quarter.
On the FTSE 100, the stress test jitters weighed on Barclays, which was 1.65p lower at 302p, Lloyds, down 0.1p at 63.52p, and HSBC, which closed at 646.2p, down 8.8p. The Royal Bank of Scotland, which was also tested, managed to rise, ending on 0.63p higher at 45.33p. Standard Chartered, though not subject to the stress tests, was held back, shedding 18p to 1,824p after UBS turned cautious.
While still positive on the business – the broker said it expected a healthy set of interim results in August – UBS said it considered the shares to be "up with events" and went on to lower its recommendation to "neutral".
Elsewhere, Intercontinental Hotels, up 29p at 1,189p, was driven up on the read-across from US peer Starwood Hotels & Resorts, which posted a better than expected quarterly report overnight. Millennium & Copthorne Hotels was also higher, gaining 15.4p to 483.4p. Besides the news from across the Atlantic, Millennium was supported by Morgan Stanley, whose analysts upgraded their view on the stock to "equal weight" ahead of the interim results next month.
"We think the recent weaker share price performance fails to reflect that trading in key cities continues to improve, currencies are moving in its favour and the proposed disposal of the Singapore shopping centre suggests that its attitude to low return assets is changing," the broker said, revising its target for Millennium to 480p from 440p.
Further afield, Chemring was 110p ahead at 3,069p thanks to UBS, with the broker initiating coverage on the military parts manufacturer with a "buy" recommendation. "Chemring's current valuation reflects concerns over the outlook for defence spending and potential margin pressures," the broker said, setting a 3,600p target price on the stock. "We believe management recognises this long term threat and is positioning Chemring accordingly by looking to diversify into areas where defence spending is expected to continue growing."
Charter was 5p up at 729p after Goldman Sachs repeated its "conviction buy" view ahead of the engineering group's results next week, telling clients that not only was the update likely to underline improvements in demand, but that the valuation offered ample scope for upside gains.
Ocado, the online grocer which made its market debut earlier this week, was unchanged on the last day of conditional trading in its shares. The IPO was priced at 180p, but last night, after falling earlier in the week, the stock stood at 159p.
The company had initially set a flotation range of 200-275p, but scaled back the pricing to 180-200p in advance of the listing on Wednesday. Friday's weakness followed the expiry of the deadline for eligible Ocado customers who had subscribed to the shares before Monday to cancel their application for stock.
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