Setback puts skids under Cairn

CAIRN Energy's incredible ride this year was brought to a screeching halt today as the first bit of bad news on its huge discoveries in India sent the oil explorer's shares tumbling 25% earlier today.

More than £535m was slashed from the group's market value as Cairn plunged 337p placing its hopes of remaining in the prestigious FTSE 100 index for much longer in jeopardy. By the close investors recovered some of their nerve and the shares were off 241p at 1121p - a fall of 21.6%.

After months of a love-in with fund managers following its monster 1bn-barrel find in the Indian desert in January, chief executive Bill Gammell now faces a frantic round of talks to reassure the City.

In a long-awaited trading statement, the group warned today that while recovery rates from its initial discovery, Mangala, may be higher than first thought, it had come up dry elsewhere. Projected reserves at one subsequent discovery in the area have been slashed from 400m barrels to between 30m and 80m.

The group also sent a shudder through a market already spooked by the Yukos affair by alerting investors of a rumbling tax dispute with the Indian authorities over oil from Mangala. Cairn could face an additional levy of up to $3 a barrel once production from the field begins.

Shares in the group fell nearly 5% yesterday as fears grew about what today's statement may contain. Peter Hitchens, oil analyst at French stockbroker Chevreux, said: 'The shares have priced in future success and what the statement today has done is giving people a reality check - exploration is never that easy. The big fear is they [Cairn] will leave the FTSE 100 on the back of this.'

Gammell, a former Scottish rugby international and friend of Tony Blair and George W Bush, called for calm and said he was 'delighted' with the group's progress. He urged the City to look at the positives, including the potential at Mangala and its second major field in the area - today named Aishwariya, after the Indian goddess of wealth.

He said Cairn may have stumbled across a major find of up to 2.3 trillion cubic feet of gas to the south of its Rajasthan exploration zone in the north west of the country. 'At the end of last year everyone was worried whether Rajasthan would work out. Obviously it has,' he said. Gammell has made millions for punters who bought into Cairn ahead of its success in India this year. Shares in the group were trading at little more than 360p at the start of the year, only to rocket once Gammell's team struck black gold at Mangala, a field discarded by oil giant Shell for peanuts.

Until this year Cairn was just one of a collection of tiny exploration plays, holding a smattering of small fields in India and Bangladesh. Its blockbuster year has thrown Gammell, and his colourful past, into the limelight. The US President is a friend of the family and the Cairn boss played basketball with Tony Blair at Fettes College.