We update our valuation to reflect the Druid and SNE North well results and lower long-term oil price assumption. We look forward to the half-year results on 21 August when Cairn plans to update the market on reserves estimates and the development concept for SNE, which will help to firm up potential value for the field. After adjustments and accounting for our lower long-term oil price assumption, the contingent NAV falls to 196p (from 225p/share).
The large, primary target of Druid (we had modelled around 600mmboe) was water-bearing and the SNE North well was a technical discovery, but did not show connection to the main structure. The company is studying its potential commerciality – it could bode well for further exploration in the north of the block. As a result, the only exploration catalyst is the smaller, deeper Drombeg cretaceous fan target (1,000m below Druid) in Ireland, which Providence estimates could contain 1.9bnbbls OIP (we model 250mmboe recoverable), although lack of hydrocarbons in Druid may imply a lower chance of success.
While SNE North suggests further potential to the north, we do not have enough visibility to continue to include it in our valuation. Instead, we look at the effect of SNE volumes and development economics changes, which we expect on 21 August. We currently use FAR’s 641mmboe 2C estimate, higher than CNE’s 473mmboe estimate (albeit assuming higher unit costs and a longer development timeline). A $1.5/bbl fall in opex (or c $2/bbl move in capex) would increase SNE’s value by around 10%.
We have adjusted our valuation, removing SNE North and Druid for now, applying a higher risk for Drombeg and making other adjustments. We also take this opportunity to apply our lower long-term oil price assumption ($70/bbl in 2022 vs c $80/bbl). The cumulative effect is a decrease in our core NAV to 151p/share (from 159p) and a reduction in contingent NAV from 225p to 196p/share. Excluding all value for the Vendanta share stake would reduce this to 150p/share. Results of the tax arbitration, in which Cairn is claiming $1bn (137p/share), are due in H118.