Last month, Cairn announced the results of a second well which confirmed the presence of gas in the main zone of the field and the prospect of a deeper area containing reserves. But it was the forecast of much lower production costs which got City analysts going. The company now expects that developing the wells, putting a production platform in place and building a distribution pipeline to bring the gas from Sangu to the Bangladeshi market will cost around $100m and not the $275m analysts had originally pencilled in. Irene Himona of Societe Generale Strauss Turnbull upped her net assets per share valuation of Cairn from 209p to 312p on the strength of the much reduced production costs.
Bangladesh may not sound exciting from a Western standpoint, but even though it ranks amongst the world's poorest nations, the population of up to 120 million still represents a sizeable market. Cairn reckons it will be supplying around 200 million cubic feet of gas a day by 1998, which compares with current national production of around 700 million cubic feet.
That should be easily absorbed by the state-run gas company and there is scope for further upside from here. Cairn could still tie in a contract to supply gas to India if it can satisfy the Bangladeshi government that local demand has been met. Meanwhile, there could be more discoveries to come: Cairn is sitting on the equivalent of 75 North Sea blocks offshore Bangladesh.
But there is more to Cairn than Bangladesh. Last year's results proved that the group had come of age. Daily production from the UK and Netherlands jumped from 4,900 barrels of oil equivalent to 5,800 and profits edged up from pounds 9.39m to pounds 9.98m. The shares are a firm hold.Reuse content