Cairn Energy - Costs down and resources up at Senegal

There was encouraging news for Cairn Energy investors today as the O&G company reported positive Interims. Resources at the SNE field in Senegal have increased, projected development and operating costs have come down and progress appears on track. There is no material progress in Cairn India but we would argue this hasn't been discounted in the share price for a long time.

Cairn's Gross Contingent Resources at SNE have increased with the range rising from 200-690 mmboe (385 mmboe 2C) to 274-906 mmboe (473 mmboe 2C). This is still below partner estimates with Far at 277-1,071 mmboe and Woodside at 560 mmboe. But Cairn is known for being conservative.

Projected breakeven costs have reduced from $40 to $35 with opex expected to be under $10/bbl and capex at an impressive $12-15/bbl. The project is clearly benefitting from the collapsed rig rates and Cairn flag the "continued cost deflation and project optimisation" as a further source or improvements to field economics.

Independent equity research provider AlphaValue highlight that the projects are on track in Senegal and that material savings had been made in the North Sea:

• North Sea capex savings and deferrals amounting to $226m to end-2017 (Cairn’s share)
• Senegal cost estimates (assuming leased FPSO):
• Development expenditure at $12-15/bbl (vs. $17-26/bbl previously);
• Opex at <$10/bbl;
• Time from FID to first oil: 3-5 years (i.e. first oil in 2021-23).
• Plateau production likely at 100-120kbpd (based on current 2C resources).

FirstEnergy analyst Stephane Foucaud said the results were positive to his firms numbrs on lower capex and higher resources, but acknowledged investors might be disappointed by the resources estimate at SNE. 

"The Development Capex Programme until end 2017 is estimated at US$315 mm, suggesting an overall development spending of US$405 mm over 2016-2017 vs previous estimates of US$465 mm.

Envisaged future exploration and appraisal expenditure across the portfolio is US$135 mm, of which US$55 mm is current committed activity, with the balance principally relating to expected additional drilling activity in Senegal and further evaluation of the SNE discovery from 4Q16/1Q17."