Cairn 'well-positioned' after solid 2017

Cairn Energy updated the market on its recent operations and trading performance for 2017 on Tuesday, saying it was “well-positioned” ahead of the release of its preliminary results for the calendar year, which are due on 13 March.

The FTSE 250 company said that in the UK, the Catcher - where it has a 20% working interest - and Kraken - where it has a 29.5% working interest - developments in the North Sea both achieved first oil in 2017, and were now ramping up to plateau production, following which they were expected to deliver “significant” cash flows for reinvestment.

“First oil from the Catcher Area development was successfully delivered in late December,” the board said in its statement.

“The operator has reported that the first two production wells from the field have been tested at rates in excess of 20,000 barrels of oil per day each, in-line with expectations and reflecting the high productivity from initial flush production.”

As planned, Cairn said production levels were being held at around 20,000 bopd while commissioning of the full gas processing modules and the water injection systems on the FPSO were carried out.

Production would continue to ramp up in phases over the next few months, with full production of 60,000 bopd targeted in the first half of this year.

Total project capex was forecast by the operator to be around 30% less than the original project sanction estimate.

First oil from Kraken was achieved during the first half of 2017, Cairn confirmed.

“On the basis of current well performance and subject to continued progress on plant uptime, the operator expects production to reach 50,000 bopd gross during the first half of 2018.

“Full cycle gross Kraken project capex is forecast to be ~25% less than the original sanctioned project cost,” the board said.

Full year production, net to Cairn, for 2018 was estimated to be 17,000 to 20,000 bopd with plateau production from Catcher and Kraken achieved by mid-year.

In Senegal, the SNE field - where Cairn holds a 40% working interest - appraisal and concept select definition were concluding for the first phase of development of the extensive resource base.

The joint venture was aiming to have a government-approved exploitation plan in place by the end of 2018 with a target of first oil in 2021-2023.

“The field exploitation plan will cover the development of the entire SNE resource base estimated at 563 million barrels of oil,” Cairn’s board said.

The first phase of the development was expected to have an initial well count of up to 25 wells, targeting around 240 mmbbls, principally in the S500 lower reservoir with an initial target plateau range of 75-125,000 bopd.

In Norway, an extensive exploration drilling campaign was now underway for 2018/19, with plans to drill up to 10 wells targeting at least 1.5 boe gross unrisked resources across a variety of play types in the UK and Norway, including the Barents Sea.

Cairn confirmed it was awarded non-operated interests in four licences in the Norwegian Sea and North Sea following APA 2017 awards in January 2018.

The Skarfjell - where Cairn holds a 20% working interest - joint venture plan for development and operation was anticipated in the first half of this year, with first oil targeted in 2021 and expected plateau production of 50,000 bopd - or 10,000 bopd net to Cairn.

“Skarfjell is a light oil development which offers significant potential in adjacent acreage,” the board said.

“It is situated in the northeastern North Sea, around 20 km southwest of the Gjøa platform and around 130 km northwest of Bergen.

“Based on the proposed plan, hydrocarbons from the Skarfjell reservoir will be developed with two subsea templates tied back to the Gjøa platform for processing and export.”

Cairn said Gjøa would also provide lift gas to the field and water injection for pressure support.

“Skarfjell has been renamed Nova by the Operator and the development will be known as such in future.”

In Mexico, Cairn said it secured two new licences in the Mexico offshore bid round in the first half of 2017.

The licences, one operated and one non-operated, were located in the “highly prolific” yet under-explored Sureste basin.

“Cairn anticipates exploration drilling to commence in 2019 on both blocks.”

On the corporate front, Cairn offloaded its first Kraken cargo of around 386,000 barrels - net of the Flowstream 4.5% share - in the fourth quarter of 2017, recording revenue of around $20m.

The pricing of Kraken crude relative to Brent was strengthening as the market was established, Cairn explained.

It also reported that the first cargo of Catcher oil had been pre sold at a premium to Brent.

Group net cash at 31 December was $56m, comprising cash balances of $86m and drawings under the Norway Exploration Finance Facility of $30m.

The reserves-based lending bank facility was undrawn at year end with expected peak availability of $350-400m, of which $200m was available at year end 2017.

Capital expenditure for the second half of 2017 was $205m, principally comprising $75m development expenditure and $130m exploration, appraisal and new venture expenditure.

A $30m exploration rebate in respect of previous Norwegian E&A activity was received in the second half of 2017, Cairn confirmed.

At 31 December, remaining cash outflows in respect of activities undertaken in 2017 were expected to be $35m.

Forecast Kraken and Catcher development expenditure for 2018 was set to be $125m, and currently-committed E&A expenditure for 2018 was estimated at $75m.

Cairn said outstanding Norwegian exploration rebate receivables were $35m.

“Having moved into production, Cairn has commenced a hedging programme in order to protect debt capacity and support committed capital programmes,” the board said.

“To date, Cairn has hedged around 2m barrels of 2018 oil production using collar structures with a weighted average floor price of $58.4/bbl.”

Looking at Cairn India, the company said international arbitration proceedings were “well-advanced” with the final hearing of Cairn's claim under the UK-India Bilateral Investment Treaty scheduled for August.

The Tribunal had stated that it would make appropriate arrangements to progress with the drafting of the award as expeditiously as possible after the final hearing.

Cairn said it was currently unable to access the value in its 5% shareholding in Vedanta, valued at $1.1bn at 31 December, or accrued dividend payments due of $104m.

“Over the last twelve months, Cairn has achieved several strategic milestones and is well positioned to deliver on its strategy in 2018,” commented chief executive Simon Thomson.

“Both the Kraken and Catcher developments in the UK North Sea have delivered first oil production.

“In Senegal, Cairn completed a successful third phase of drilling with the joint venture now targeting development approval for the world class SNE field by the end of 2018.”

In the current year, Thomson said Cairn would begin a sustained drilling campaign in the UK and Norway, where it had built an “extensive” portfolio.

“We also expect development sanction for the Skarfjell discovery in the first half of the year.”

Thomson confirmed Cairn remained funded in respect of all capital commitments with a “strong” balance sheet and growing production cash flows.

“We continue actively to assess and pursue new ventures within the context of a balanced exploration and production portfolio.

“We are excited by the potential of the recently awarded blocks offshore Mexico where we anticipate the start of exploration drilling in 2019.”