Market Report: Hopes of share buyback see Cairn Energy advance

Investors in Cairn Energy had their fears calmed yesterday over the proposed sale of the group's controlling stake in its Indian unit, with analysts telling them instead to look forward to possible cash returns worth as much as $6.5bn.

The oil and gas explorer was lifted 6.8p to 448p after Bank of America Merrill Lynch upgraded its rating to "buy", saying "the uncertainties around the disposal of [Cairn India] could start to reduce near term".

The sale by Cairn of up to 51 per cent of the unit to Vedanta Resources – part of a $9.6bn deal announced in August – is still waiting to gain approval from the Indian government. The final decision has now being given to the country's cabinet, with the deadline of mid-April rapidly approaching.

However, the broker said India's latest oil and gas licensing round at the end of the month should be "a catalyst to smooth the process and soften government approval conditions (particularly around royalty payments)".

Its analysts said they believe the focus of the market will move onto other factors around Cairn, including the possibility of share returns using proceeds from the deal, and it estimated the group could "return to shareholders through a special dividend and/or buyback" between $4.5bn and $6.5bn.

They also talked up the company's Greenland assets, which they believe are barely reflected in its valuation. "Cairn's commanding position in Greenland offers [it] the option of bringing a partner, specifically a major, into the acreage medium term through a combination of cost carry and asset swap that could also serve to rebalance [its] portfolio," they said.

Overall, the FTSE 100 managed to just avoid a third session decline in a row, creeping up 0.98 points to 5,974.76 as oil prices dipped.

Market gossips certainly had plenty to keep them busy, with lots to discuss around Heritage Oil as speculation re-emerged that it could receive a takeover approach.

Not for the first time, the vague rumour was that the oil and gas explorer may be about to be the subject of a bid from the Austrian group OMV, while there was also chatter that BG could be interested in the group's gas assets in Iraq, although the energy giant said it did not currently have plans to get involved in the country.

Also helping Heritage put on 7.5p to 282p were reports emerging late on Monday that the tax dispute over its sale of assets in Uganda to Tullow Oil, down 33p to 1,460p, is close to being solved.

Meanwhile, takeover speculation continued to do the rounds about both Soco International – 10p ahead at 362.5p – and Micro Focus – driven back 0.5p to 314.7p – with private equity still supposedly considering making an offer worth 450p-a-pop for the latter.

BT and Vodafone found themselves in favour, jumping up 7.3p to 191.1p and 3.15p to 181.85p respectively, after Morgan Stanley upgraded both of their ratings to "overweight". As well as changing its view on the telecommunications sector to "attractive", the broker said BT was currently undervalued, while it praised Vodafone for its "better earnings momentum, plus disposal and dividend upside".

The top-tier index's wooden spoon was taken by Randgold Resources, after it slid 400p to 4,480p on worries over the escalating violence in the Ivory Coast. Its fellow yellow gold miner African Barrick Gold was also in the red, falling 20.5p to 547.5p. The group is expected to be one of the companies relegated from the FTSE 100 in the latest quarterly review of the indices, with the substitutions – based on last night's closing prices – due to be announced today.

Also likely to move down to the FTSE 250 are Alliance Trust and Bunzl, while their places are set to be taken by ITV, Hargreaves Lansdown and John Wood. Meanwhile the second line could be saying goodbye to Hansen Transmissions, McBride and Sportingbet, with the small-cap groups Kofax, Northgate and RPC the potential replacements.

There were a number of updates to keep investors busy, including from Antofagasta, which slipped back 38p to 1,382p as its earnings per share missed expectations. Weir was in an even worse shape, retreating 84p to 1,695p despite its pretax profit for 2010 rising nearly 60 per cent

Pace has enjoyed a positive run since the end of January, but most of its gains were wiped out as it shed 44.1p to 176.4p after the set top box maker revealed an unnamed US customer had chosen to delay an order until next year.

There was a better reception for Old Mutual, which increased 4.4p to 137.7 in the wake of its preliminary results. The insurer announced it was getting close to agreeing a $350m deal to sell its US business to Harbinger, with it expected to be completed by the end of the month.

On Aim, Nighthawk Energy shot up 1.51p to 10.25p following news from the oil group's cheerfully named Jolly Ranch project in the US that three of its six wells at the site in Colorado have now been completed.

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