Tax man knocks at Cairn Energy

Independent Scottish oil and gas explorer Cairn Energy said on Friday that it had been contacted by India's tax authorities to discuss income tax assessments going back seven years, becoming the latest foreign company to attract attention in India's tax crackdown.

India has had tax disputes with a number of foreign companies including Vodafone, Royal Dutch Shell and IBM in attempts to enforce tax collection to bolster its budget deficit.

Cairn said the assessments were for the year ended 31 March 2007, and it would update the market in due course. Meanwhile it has been advised to retain its 10.3% stake in Cairn India, its 2007 spin-off that raised $1.18 billion (£714.87 million), at that stage the largest initial public offering in Indian corporate history. The company sold a majority stake in Cairn India to Vedanta Resources in 2010 and then returned $3.5 billion to shareholders last year.

The news comes at a time when Cairn is facing an exciting year in terms of exploration. Nine new wells will be drilled this year, with five in frontier regions including offshore Morocco, and four in the North Sea, altogether nearly double the activity of last year.

Investors are particularly excited by prospects in offshore Senegal where drilling is due in March or April, and in the Pitu block, offshore north west Greenland. But Cairn also has a robust position if further discoveries take time, with cash of $1.25 billion on its balance sheet, and oil fields in the North Sea.

Investor view

On the Interactive Investor discussion boards, 'Native Calgarian' said: "I know that O&G Exploration Co's are presently about as popular as Vladimir Putin at a Gay Pride Parade, but the market's attitude to CNE's numbers makes no sense to me.

"First off, CNE has cash and cash-equivalents (Cairn India) of $2.25 billion which is $3.79 per share, or £2.37. The sp is £2.67, so what do we get for our 30p?

"The Kraken field (Norway, so zero political or infrastructure risk) will start production within three years. CNE share 12,500 bopd[barrels of oil per day]. Assuming net receipts of $80 per bbl for 300 days per annum, that equals $300 million pa, or 50 cents per share. Take a low PE ratio of 10 = Market Value of $5, then discount that for three years at 12% pa, equals $3.44 or £2.15 per share.

"Why is a soon-to-be-producing proven asset which is conservatively worth over £2 a share valued on the LSE at 30p? With the rest of CNE in for nothing?"

Nonetheless, the shares dropped over 4% to 251.80p by midday.