Cairn Energy: Producer, Developer, Explorer We refresh our view...

Cairn Energy: Producer, Developer, Explorer
We refresh our view on Cairn Energy Plc (LON:CNE), focusing on key areas of interest for investors already familiar with the company. We examine a number of valuation approaches for SNE in Senegal, the potential for reserve upgrades and exploration value. We believe SNE is an outsized asset and assume Cairn seeks to farm-down. This will naturally affect long-term value upside, but would in our view drive a better balance of asset and financial risk. We also examine features of Catcher, Cairn’s cost of capital and look at the Indian tax dispute.

SNE reserves upgrades hinge on upper reservoir
The recent SNE-6 well test appeared to show strong connectivity between wells in the upper reservoirs, going some way to settle concerns that the pressure declines seen in past well testing would be major obstacles to recovery. If we assume that lower reservoirs have recovery of 30% (as hinted at by Cairn), this implies the current 473mmbbl 2C estimate has recovery factors in the upper reservoirs of between 9-14%, with FAR’s 641mmbbl estimate implying 19-22%. The interference test may well clear the way for higher recovery factors than 9-14% to be used by Cairn, but it may be more difficult to move much beyond 20% we suspect. Given the positive interference test and other appraisal results, we choose to use FAR’s estimate for the time being, awaiting an August update from Cairn.

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