Cairn upbeat on India drilling

SHARES in oil and gas explorer Cairn Energy leapt 4% in early trading after the firm said production from its key oil assets in India would be better than expected.

The announcement overshadowed a sharp fall in 2004 profits. However, most of Cairn's value is based on its Indian Rajasthan assets hence investors focus more on those assets rather than on day-to-day profitability.

Shares in the company, which rose 45p to 1,145p in early trading, soared 300% last year on the back of its massive oil finds in Rajasthan. Cairn hopes production at the three Northern fields to be 120,000 to 150,000 barrels per day. Some analysts had expected production of only 100,000 barrels per day.

The news impressed analysts. Investment bank Merrill Lynch recommended investors buy the shares up to 1,400p-1,500p. ABN Amro was even more bullish, increasing its net asset value estimate by 18% and setting a new price target of 1,780p. 'It's becoming quite clear that they have been very conservative on the guidance they've given,' said analyst Finlay Thomson. 'It's looking like there's a lot more oil there than I think the market was assuming in the first place.'

Cairn said it now aimed to start production at its key Mangala field in the end of 2007. Investors had expected production to begin in 2008.

It also gave upbeat estimates for the oil reserves at the Rajasthan fields. It said the development plan for Mangala targets life-of-field proven and probable reserves of 376m barrels of oil, based on secondary recovery methods.

Cairn estimates life-of-field oil reserves of 500m barrels in total at Mangala and two other fields in the north of its Rajastahn development area called Bhagyam and Aishwariya. The firm said independent assessments put total oil in place at the three fields at 1.64bn barrels.

Cairn said it made a pre-tax profit of £29.4m in 2004, before exceptionals, compared with £69m the previous year.

Cairn hopes production at the three Northern fields to be 120,000 to 150,000 barrels per day. Some analysts had expected production of only 100,000 barrels per day.

The firm's exploration success last year briefly propelled it into the FTSE 100 index of Britain's largest companies, before disappointing drilling results in December hit the stock hard.