Cairn confident as it moves into the black

CAIRN Energy, the Edinburgh-based oil and gas explorer, said today it was increasingly confident about its prospects in Rajasthan.

The company has increased its estimates for oil from its Rajasthan reserves and is expecting to achieve targets of drilling the first commercial oil there in the second half of next year, sparking strong profitability for the company from 2010 onwards.

And Cairn's chief executive, the former Scotland rugby international Sir Bill Gammell, said today he expected oil prices to remain "strong", further helping the company's prospects.

The comments come after Cairn announced a move into profitability, with pre-tax profits hitting £768 million in its latest full year results, helped by a £775m gain from the successful initial public offering of its Cairn India arm.

Sir Bill said: "All of the major contracts for the midstream and upstream developments in Rajasthan have been awarded and work is progressing well towards first Mangala oil in half two of 2009.

"We are increasingly confident about the scale of the resource base in Rajasthan. We firmly believe that a plateau production of 175,000 bopd (barrels of oil per day) is now achievable with the potential for higher rates and more value optimisation should the encouraging tests on enhanced oil recovery be confirmed in the field trials."

"The group has the capacity to drive forward the Rajasthan development and the financial flexibility to pursue opportunities for growth."

He said that the 175,000 bopd forecast is more than had initially been predicted and could still increase. He also said that the company could be on site for much longer than had been forecast.

Cairn confirmed it was still in talks with the Indian government about financing the crucial pipeline needed to transfer crude from the Mangala field. It hopes to recover about £403m in construction costs by reducing the government's share of future oil sales.

Although the latest move into profitability was down to the successful IPO, without it the firm would have only narrowly missed profitability, having moved from a £48.9m loss last year.

Jann Brown, Cairn's finance director, said: "Our view very firmly is that the financial strength of the company is not in the income statement and that will be the case for the next couple of years until we get the income from Rajasthan.

"Right now, we have had a very successful IPO that has delivered a $1.5 billion (£775m) return to shareholders."

And the company's financial footing is likely to be strengthened further by the continuing strength of oil prices, although Cairn is cautious about planning finances around oil prices. Sir Bill said: "I suspect it will remain strong but we have always tended to run the company on very conservative oil prices."