Cairn India stake sale first of many?

Cairn Energy’s $240 million stake sale in Cairn India on Wednesday may just be the beginning of a longer divestment process, according to market analysts.

The relatively small-sized Cairn Energy, the owner of Cairn India and Capricorn Oil, holds extensive exploration acreages in countries such as Bangladesh, Nepal, India, Greenland, Tunisia and Albania, much of which is still unexplored.

“Given Cairn Energy Plc’s focus in Greenland and the substantial capex needed there, we would not rule out more stake sales going forward,” said analysts Nilesh Banerjee and Nishant Baranwal of Goldman Sachs India in their comment on the latest deal.

On Thursday, a day after Cairn India said it had raised debt of $1.6 billion to fund its exploration in Rajasthan, its parent, Cairn Energy, said it is raising $310 million by selling stakes in its Indian and Greenland units to Malaysian oil firm Petronas International.

The 2.3% stake in Cairn India was valued at $240 million, with the 10% it sold in its six Greenland blocks fetching the remaining $70 million. The transaction was done at around Rs 260 per share, a small discount to Cairn India’s closing price of Rs 263 on Monday.

The $75 billion Petronas group, fully owned by the Malaysian government, said it has plans to increase its presence in India’s oil & gas sector and the latest acquisition was part of it. Cairn Energy, in a filing before the London Stock Exchange, said it will use all the money for conducting exploration in Greenland, considered a promising, if unproven, oil and gas source.

Indeed, says analyst Deepak Pareek of Angel Broking, Cairn’s overall strength has been in exploration and the company is likely to stick to it. “If you go purely by their track record, it has been one of exploration and discovery rather than of portfolio management, for example in the North Sea (of Britain),” he said.

Pareek, however, refused to speculate on which companies are the suitable candidates with the requisite project execution skills to carry on the production work. He, however, said that the company is likely to wait for a year or two before divesting further, to get better valuation for the block which is yet to be fully explored.

With the latest divestment, the holding of Cairn Energy in the Indian company is down to 62.75% while the Malaysian firm increased its interest to 14.94%. Analysts, however, do not expect Cairn to divest any more stakes in favour of Petronas as it would make the Malaysian firm’s stake as big as that of Cairn itself due to the open offer requirement under Indian laws. Under the takeover rules in India, any firm buying more than a cumulative 15% stake in another will have to make an open offer to its investors to acquire another 20%.

Besides the possibility of more action, analysts see the latest move as a validation of the prospects in Rajasthan. The company, too, pushed the interpretation. “The acquisition of additional Cairn India shares by Petronas reflects our shared belief in the continuing growth potential of Rajasthan while giving Cairn increased financial and operational flexibility in line with our growing confidence in Greenland,” Bill Gammell, CEO of the British firm, said.

“We note this is the second time that Petronas has increased its stake in Cairn India after acquiring its initial holding of 10% from Cairn India’s listing in January 2007, with each subsequent stake purchase at a higher price. In our view, this could reflect Petronas’ growing confidence in the resources of Rajasthan basin as drilling progresses,” Banerjee and Baranwal of Goldman Sachs said.

Cairn shares closed at Rs 280.2 on Thursday before touching an intra-day high of Rs 289.