Fiscal discipline remains critical for Cairn Energy
UK-based Cairn Energy reported an operating profit of US$155mn in 2019, up from a US$129mn loss in 2018, adding it would ride out the current oil price volatility by maintaining financial discipline and flexibility.
“We designed a company that had balance sheet strength and financial flexibility,” Cairn CEO Simon Thomson said during a conference call. “We can’t predict the oil price, but we wanted to ensure that we could remain relatively strong through cycles.”
Last year’s capex reached US$242mn with 2P reserves increasing 150% to 142Mboe (million barrels of oil equivalent).
Oil and gas sales revenue reached US$504mn, up from US$396mn in 2018, with an average realized oil price of US$65.7/b.
Profits will undoubtedly take a hit in 2020 with the oil price war emerging between Saudi Arabia and Russia. WTI crude prices were dropping heavily on Tuesday as a result, and are set to slide further.
Thomson said past discipline in capex decisions has guided the company through previous downturns.
“We’ve been here before. It was the beginning of 2016, I think that the oil price hit US$27 a barrel, and we were in the middle of two major developments in the North Sea, which are now obviously on stream,” he said. “As a company we have the strength and the financial flexibility to remain flexible and to deliver all of our strategy through this period of price volatility.”
The executive added, “we are very conscious of the fact that in that world of volatility, in that world of [energy] transition, our portfolio needs to be resilient. For us, capital allocation has always been a competition between securing low breakeven projects, exploring where we think it’s the right thing to do and obviously looking to return money to shareholders ultimately.”
MEXICO
The company reported in the presentation that of the US$150mn in capex committed to exploration in 2020, US$75mn was earmarked for wells in Mexico, including the Bitol well on Block 9, Ehecatl on Block 7 and another well on Block 7 and one on Block 10.
Meanwhile, US$35mn will be dedicated to exploration projects outside West Africa and Mexico, including 3D seismic projects in Suriname.
Cairn’s director of exploration, Eric Hathon, said at the call, “our exploration program has not delivered the results we desire to-date, but we continue to be a company that looks to add value through the drill bit, when the value proposition is attractive.”
Hathon added, “we have drilled a number of wells focused on either new plays or play extensions. And these are wells which have the potential to be highly material, but they were also higher risk.”
The executive said, “[Mexico’s] Sureste Basin is in the frontier at emerging phase, with relatively few wells, particularly deep miocene test, which we targeted in both Bitol and are currently targeting in Ehecatl."
Hathon said the company has the “flexibility in timing with few near-term drilling commitments. We will remain true to our exploration model of high grading and targeting exciting opportunities, but let me be clear, with a laser focus on being fiscally responsible in what we drill.”
Thomson hailed the firm’s success in partnership with Italy’s Eni in Block 10 in Mexico, highlighting the discovery of the Saasken reservoir, announced in February, “could form the potential for a commercial hub development.”
On the Saasken success, Hathon said, “we are gaining significant knowledge with every opportunity, knowledge which will now be applied to our future activity. And our current exploration phases extend well into 2022.”
SURINAME
Cairn has “identified multiple targets at very stratigraphic levels on our 2D seismic data, with a grid that covers virtually the entire block,” according to Hathon.
“We are in the planning stages for 3D seismic acquisition over our most promising leads. 3D seismic acquisition will satisfy our Phase 2 commitments and we have until the fourth quarter of 2023 to do so,” said Hathon, adding, “we will be looking for partners in this exciting opportunity later this year.”
NICARAGUA
The firm cited its decisions to exit exploration efforts in Nicaragua and Ireland as examples of Cairn’s commitment to disciplined spending, emphasizing Nicaragua was just beneath its capex threshold.
Thomson said, “further investment was not warranted from our perspective on a risk-reward basis. And that will continue to be a focus for us as we look at ranking the exploration portfolio on an ongoing basis.”
And Hathon added, “now the prospectivity in this frontier, it does remain intriguing, but the cost of the proposed drilling solution simply exceeded our fiscal discipline limits.”
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