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Cairn Energy PLC (CNE)

  Print      Mail a friend       Annual reports

Tuesday 22 March, 2011

Cairn Energy PLC

Preliminary Results Announcement

RNS Number : 3565D
Cairn Energy PLC
22 March 2011
 



EMBARGOED FOR RELEASE AT 0700                                                                      22 March 2011

 

 

CAIRN ENERGY PLC

Preliminary Results Announcement

 

HIGHLIGHTS

 

Ø  Record revenues of approximately (~)$1.6 billion, profit after tax before exceptional items of ~$1.1 billion and operating cashflow of ~$837 million

Ø Completion of the sale of up to 51% shareholding in Cairn India to Vedanta is awaiting Government of India approval 

Ø Upon completion Cairn's residual holding could be up to 22% in Cairn India

Ø Initial Mangala production plateau of 125,000 bopd reached in August 2010

Ø Rajasthan resource base can support production of 240,000 bopd, subject to further investment and Government of India approval

Ø Award of three frontier exploration blocks in Baffin Bay bid round, offshore Greenland

Ø Operatorship and increased equity in Lady Franklin and Atammik blocks, sub-Arctic offshore west Greenland

Ø Subject to Greenland Government approvals, it is planned to; drill up to four exploration wells, conduct three shallow (~400 metres) marine soil investigations and acquire three 3D seismic surveys of 1,500km2 following encouraging results from the 2010 exploration campaign

 

OPERATIONAL

 

Ø Group booked entitlement reserves:    225.0 mmboe (2009: 253.9 mmboe)

Ø Gross operated production:                130,961 boepd (2009: 77,222 boepd) (70% increase)

Ø Average net entitlement production:     65,299 boepd (2009: 20,307 boepd) (222% increase)

 

FINANCIAL

 

Ø Total revenue for the year increased to ~$1.6 billion (2009: $234 million)

Ø Profit for the year of ~$1.1 billion (2009 restated: $53 million)

Ø PLC/Capricorn net cash of $187 million and $900 million undrawn committed loan facilities

Ø Cairn India net cash of $217 million, comprising $891 million cash and $674 million debt

 

 

Sir Bill Gammell, Chief Executive of Cairn Energy PLC said:

 

"Cairn continues to believe the necessary approvals to complete the Vedanta transaction will be received and is working with the Government of India in a positive and constructive manner.

 

The planned sale of Cairn's majority stake in India would lead to a significant return of capital to shareholders whilst maintaining balance sheet strength and flexibility. 

 

Cairn is continuing its active exploration programme offshore Greenland which has the potential for transformational growth while also seeking to add new opportunities."


 

Enquiries:

 

Analysts/Investors
Sir Bill Gammell, Chief Executive

Dr Mike Watts, Deputy Chief Executive

Jann Brown, Finance Director
David Nisbet, Corporate Affairs

 

 

 

 

Tel: 0131 475 3000



Media
Patrick Handley, David Litterick

Brunswick Group LLP

 

 

Tel: 0207 404 5959



 

Cairn Energy Live Audio Webcast

 

The webcast of the 2010 preliminary results presentation will be available at 0900 (UK time) on Tuesday 22 March 2011 on the Cairn Energy PLC website: www.cairnenergy.com.  Also at 9:00am, you may listen to the conference call via telephone by calling 0208 817 9301 or +44 208 817 9301 (outside the UK). The call will remain in listen only mode throughout.

 

A recording of the conference call will be available from 1pm, Tuesday 22 March 2011 until 11:59pm, 29 March 2011 by dialling +44 207 769 6425 and using the passcode: 454 812 9#.

 

A transcript will be available on the website as soon as possible after the event.

 

An archived version of the webcast including a transcript of the presentations will be available later.

 

 

These materials contain forward-looking statements regarding Cairn, our corporate plans, future financial condition, future results of operations, future business plans and strategies. All such forward-looking statements are based on our management's assumptions and beliefs in the light of information available to them at this time. These forward-looking statements are, by their nature, subject to significant risks and uncertainties and actual results, performance and achievements may be materially different from those expressed in such statements. Factors that may cause actual results, performance or achievements to differ from expectations include, but are not limited to, regulatory changes, future levels of industry product supply, demand and pricing, weather and weather related impacts, wars and acts of terrorism, development and use of technology, acts of competitors and other changes to business conditions. Cairn undertakes no obligation to revise any such forward-looking statements to reflect any changes in Cairn's expectations with regard thereto or any change in circumstances or events after the date hereof.


 

CHAIRMAN'S STATEMENT

Corporate Overview

Highlights of 2010 include:

 

i.    The successful startup of piped oil production from the large Mangala field in India contributing to a record turnover of $1.6 billion and profit of $1.1 billion;

ii.  The commencement of our potentially transformational multi-well and multi-year exploration drilling programme offshore Greenland; and

iii.  The announcement of the proposed part sale of up to 51% of Cairn's shareholding in Cairn India (CIL) to Vedanta Resources Plc (Vedanta).

 

Rajasthan crude is now transported to a number of Indian refineries by the world's longest continuously heated pipeline, which was built, and is operated, by Cairn India. This infrastructure is strategically important as it means all the remaining fields and discoveries can be tied-in to the pipeline as they are developed. The total resource base supports a combined potential production of 240,000 barrels of oil per day (bopd) subject to further investment and Government of India (GoI) and joint venture (JV) partner approvals.

 

The accelerated multi-well and multi-year exploration campaign planned in the frontier basins of Greenland means Cairn is now the largest acreage holder offshore Greenland and the most active operator in this new frontier.  There is heightened industry interest in this region, as exemplified by the number of major oil companies participating in the Baffin Bay Bid round in May and the subsequent block awards in December.

 

India

The IPO of Cairn India in 2007 provided a return of $1 billion cash to Cairn shareholders and generated sufficient financial flexibility to allow the fast-track development of Cairn's (discovered and appraised) world-class fields in Rajasthan. The completion of the first phase of the Rajasthan development represents a significant milestone for the Cairn Group, with the Mangala field now producing at an initial plateau rate of 125,000 bopd. The overall development project is now materially de-risked from a technical and commercial perspective and demonstrates significant shareholder value creation.

 

In the summer of 2010 Cairn was approached by Vedanta with a proposal to purchase the majority of Cairn's equity in Cairn India.  This presented Cairn and its shareholders with an early opportunity to realise a large proportion of the value created.  The proposed transaction was agreed and announced by the two companies in August and approved by Cairn and Vedanta shareholders in Q4 2010. The transaction is currently awaiting GoI approval.

 

Greenland

The Group's strong financial position and entrepreneurial exploration focus has allowed it to build a strategic and leading early entry position in the frontier offshore basins of Greenland, a country which Cairn believes has the necessary geological ingredients for exploration success. Cairn currently operates 11 blocks, with a combined area of 102,000km2, which is equivalent to 15 quadrants or 450 blocks in the UK North Sea.

 

Cairn successfully drilled three wells and acquired 15,000km of seismic offshore Greenland in 2010 and all operations were carried out safely and without a major incident.

 

In January 2011 Cairn increased its equity interest to 87.5% and became operator of the sub-Arctic Atammik and Lady Franklin blocks offshore west Greenland. These prospective blocks are virtually free of sea ice throughout the year and consequently offer a potentially wider operating window.

 

To conduct its planned 2011 exploration campaign offshore Greenland Cairn has contracted a sixth generation drill ship and a fifth generation semi-submersible drilling unit to drill up to four wells during the summer. We also intend to acquire three 3D seismic surveys (approximately 1,500km2 each); two of the surveys are planned over high graded lead and prospect areas whilst the exact location of the third is yet to be decided.

Wherever it is active, Cairn seeks to operate in a safe and prudent manner and we recognise that our activities can have an impact on the environment. The Greenlandic Bureau of Minerals and Petroleum has established some of the most stringent operating regulations anywhere globally, which mirror those applied in the Norwegian North Sea. The Greenland Government and Cairn put a thorough and robust operations strategy in place even before the incident in the Gulf of Mexico. Following this industry incident the Greenland Government and Cairn reviewed the planned exploration programme to ensure that the lessons learnt which were not already part of the Greenland drilling operation's plan were captured and applied to the 2010 exploration drilling programme.

 

People

I would like to recognise all the creative effort, hard work and commitment the management, employees and contractor teams working in south Asia for Cairn have put in during our work in this region for more than 20 years.  Working effectively with government and partners is fundamental wherever we operate but the complexity of the Rajasthan development in particular has meant such collaboration was critical to achieve success.  Cairn's experience has shown it is possible to build world-class businesses and, when the time is right, to realise value for shareholders.

 

Cairn no longer has any interests in Bangladesh after 16 years of exploration, development and production activities.  During this period, Cairn discovered, developed and placed on production the offshore Sangu gas-field and I would like to thank all the past and present Cairn personnel who were involved during this period.

 

I would also like to thank the asset management and project teams working on Greenland over the past three years and in particular everyone involved during the first year of the drilling operations in 2010. The safe and efficient operations undertaken by Cairn is a testament to the hard work, dedication and commitment shown by all those involved.

 

Board

Two new independent non-executive directors: Ms M. Jacqueline Sheppard QC and Alexander Berger were appointed in 2010 to the Cairn Energy PLC Board.  Ms Sheppard was previously Executive Vice-President, Corporate and Legal at Talisman Energy Inc. in Calgary, a post she held for 15 years.  Mr Berger is currently CEO of Oranje-Nassau Energie B.V., a private Dutch exploration and production company based in Amsterdam and active both in the North Sea and internationally. These appointments greatly strengthen the industry knowledge represented on the Cairn Board and continue the board's goal of striving for diversity among its directors and senior executives.

 

Outlook

The potential completion of the Vedanta transaction would uniquely position Cairn to return significant value to shareholders whilst retaining the financial flexibility to continue to focus on Cairn's core expertise in exploration.  2011 looks set to be an exciting year for Cairn as we continue to pursue future growth opportunities.

 

 

Norman Murray 

Chairman, 21 March 2011

 


 

CHIEF EXECUTIVE'S REVIEW

 

Following more than 20 years of successful exploration, development and production in South Asia, Cairn has built a material business in India of strategic significance. This led to Cairn receiving an offer in the summer of 2010 for the purchase of the majority of Cairn's shareholding in CIL by Vedanta.

 

This transaction is an opportunity to realise value from our strategic stake, return significant capital to shareholders and return Cairn to doing what it does best: taking an entrepreneurial approach to exploring for new hydrocarbon sources in frontier basins so providing shareholders with exposure to future transformational potential, whilst at the same time maintaining balance sheet strength and flexibility. I would like to take this opportunity to extend my appreciation to all of those who have contributed to our success in India.

 

India

Mangala is the largest oil discovery in India for more than 20 years. It was brought on stream in August 2009 and inaugurated at a ceremony by the Indian Prime Minister.  The initial crude was evacuated by road tanker. In June 2010 CIL completed the world's longest continuously heated pipeline which allowed Mangala production to increase to 125,000 bopd in August 2010.  The next fields to be placed on production will be the Bhagyam and Aishwariya fields.

 

The Mangala, Bhagyam and Aishwariya (MBA) fields, at the field development plan (FDP) approved level of 175,000 bopd will produce more than 20% of India's overall domestic crude oil production. The resource base can support production of 240,000 bopd, subject to all required consents and further investment. Consequently, oil production from Rajasthan can significantly reduce India's crude import costs and provide increased energy security for the country.

 

Greenland

The US Geological Survey (USGS) in 2008 highlighted the multi-billion barrels of oil equivalent (boe) risked resource potential of the Greenland geological basins.  The survey found the country to be one of the top ten 'yet to find' hydrocarbon destinations globally. In this context, it is noteworthy that Cairn operates the largest acreage position (102,000km2, which is equivalent to 15 quadrants in the UK North Sea) and is currently the most active explorer in the country.  The significant scale of this position means Cairn is now better able to consider the portfolio management of the risk and reward balance as its investment in the exploration programme continues. Last year Cairn embarked on the first drilling exploration programme offshore Greenland in ten years and the first drilling within the Greenland Arctic for 35 years.

 

In December 2010 the Government of Greenland announced the results of the Baffin Bay Bid Round. Cairn was awarded an 87.5% interest in three blocks: Ingoraq, Napariaq and Pitu with its partner Nunaoil (12.5%), the Greenland National State oil company.  Evidence of the increased industry interest in the area was shown with Shell, Statoil, GDF, Conoco-Phillips and Maersk among the other recipients of block awards.

 

In January 2011 the Government of Greenland confirmed Cairn as the Operator of the Atammik and Lady Franklin blocks and Cairn has acquired the 47.5% interest previously held by Encana. The entitlement interests in these two blocks are now Cairn (Operator): 87.5% and Nunaoil: 12.5%.  The acquisition of these blocks provides material additional prospectivity and also operational flexibility as they are virtually free of sea ice all year round.

 

Over the past three years Cairn has acquired more than 85,000km of 2D seismic and during 2010 and into 2011 completed a record 13 consecutive months of continuous activity offshore Greenland.

 

We have been greatly encouraged by the well results from the 2010 drilling campaign, which, from an exploration viewpoint, proved that the previously undrilled Baffin Bay basin is hydrocarbon generative and possesses active petroleum systems. However, none of the wells drilled to date encountered thick reservoirs in the Tertiary section.  Also, the Cretaceous section prognosed in the Alpha well was not reached in the time available due to an unexpectedly thick sequence of Tertiary volcanics.

 

The geochemical analyses of the hydrocarbons sampled in the wells indicate the presence of two types of gas (biogenic and thermogenic) and three types of oil, one of which is pre-Tertiary and presumed Mesozoic in age, being similar in composition to the Itilli oil seeps seen onshore in the Nuussuaq area. It is the presence of this latter oil type in the Alpha well that is of particular interest because it demonstrates a working hydrocarbon system beneath the volcanics.  This gives fresh impetus to future exploration programmes in the offshore Baffin Bay basins as we continue to explore for the thick, high quality and prospective Cretaceous reservoirs seen at outcrops onshore in the Nuussuaq basin and further south in the Qulleq well drilled by Statoil offshore Greenland in 2000.

 

Cairn has now drilled three of the total nine exploration wells drilled offshore Greenland, previously five wells were drilled in the 1970s and one in 2000.  No previous operators were able to benefit from a sustained campaign. Following Cairn's successful operations in 2010, the Company's multi-year exploration campaign is planned to continue in 2011. Subject to approval from the Government of Greenland, the main elements of the 2011 exploration campaign, are:

 

·      The drilling of up to four exploration wells;

·      Three shallow (~ 400m) marine soil investigations to obtain critical stratigraphic information. These will be drilled in the north of Baffin Bay, the Disko area and the south offshore Greenland (across a distance equivalent to that between Edinburgh and Rome); and

·      Three 3D seismic surveys (total ~ 4,500km2), one in the north of Baffin Bay, one in the south of Greenland and one location to be decided dependent on early drilling results.

 

The final selection of prospects and well targets for the proposed 2011 exploration campaign will be made in May 2011.

 

Cairn has again secured two state of the art dynamically positioned drilling vessels for its planned 2011 dual rig exploration programme.  Both of these drilling units are owned and operated by Ocean Rig.

 

Cairn and its partner Nunaoil are currently completing a public consultation process with regard to the 2011 exploration programme. The process includes engaging with a number of communities along the western coast of Greenland and the submission of Environmental and Social Impact Assessment studies. Feedback from these consultations will be used to tailor the programme to minimise and mitigate against any potential negative impacts.

 

Financial Review

This year the Group has delivered record revenues of ~$1.6 billion, profit after tax before exceptional items of ~$1.1 billion and operating cashflow of ~$837 million.

 

Group net cash at 31 December 2010, after taking account of the $674 million debt drawn, was $404 million (2009: $524 million) including $217 million held by Cairn India.

 

The Board continues to focus the Group's capital resources to maximise shareholder value and maintain financial and operational flexibility.

 

 

Sir Bill Gammell

Chief Executive, 21 March 2011

 

 

 

OPERATIONAL REVIEW

 

Group Production

Cairn's average gross production during 2010 was 130,961 barrels of oil equivalent per day (boepd) which represents an increase of 70% from daily production in 2009 (2009: 77,222 boepd). The Group's average entitlement production for 2010 was 65,299 boepd net to Cairn (2009: 20,307 boepd) which is a 222% increase.

 

The figures in the table below show group production for 2010 on a gross, working interest and entitlement interest basis (including 100% of both CIL's and Capricorn's production).

 

Production (boepd)

Ravva

CB/OS-2

Rajasthan

Sangu*

Total

Gross field

 37,953

 12,225

  76,180

 4,603

 130,961

Working interest

  8,539

   4,890

  53,326

 1,726

   68,481

Entitlement interest

  4,251

   3,479

  56,415

 1,154

   65,299

 

The average realised price per boe for 2010 was US $69.17 (2009: $50.02). Cairn's current entitlement interest production is 95% oil: 5% gas.

 

* Sangu production represents 354 days as it was sold on 20 December 2010.

 

Group Booked 2P Reserves

The table below shows reserves information at 31 December 2010 on an entitlement interest basis for the Group (including 100% of both CIL's and Capricorn's reserves). For accounting and reserves purposes, the Group has used an oil price assumption of $75/bbl for 2011 (real) (2009: $65/bbl for 2010 (real)).

 

2P

Reserves

31.12.09

mmboe

Produced in mmboe

Additions in mmboe

Revisions in mmboe

Reserves 31.12.10 mmboe

India

253.7

(23.4)

0.0

(5.3)

225.0

Bangladesh

0.2

(0.4)

0.0

0.2

0.0

Total

253.9

(23.8)

0.0

(5.1)

225.0

 

On a direct working interest basis, proven plus probable (2P) reserves as at 31 December 2010 have decreased by 27.1 million barrels of oil equivalent (mmboe) to 315.7 mmboe (31 December 2009: 342.8 mmboe). The net entitlement reserves position has also decreased by 28.9 mmboe from 253.9 mmboe to 225.0 mmboe. The Group's reserves are now all in India following the sale of its interests in Bangladesh in December 2010.

 

The Group's net entitlement interest to reserves is significantly geared to the oil price assumption used and the potential movement in reserves at different long-term oil prices is shown below.

 

Oil Price

($/boe)

Net entitlement reserves

(mmboe)

Increase/(reduction) compared to $75/boe base case (mmboe)

$50

249.0

24.0

$100     

208.3

(16.7)

$125

199.3

(25.7)

Figures include 100% of CIL's and Capricorn's production and reserves.


 

CAIRN INDIA

 

Rajasthan - Block RJ-ON-90/1

(Cairn India 70% (Operator); ONGC 30%)

Cairn and its JV partner Oil and Natural Gas Corporation Limited (ONGC) have 3,111km2 under long term contract in Rajasthan. The main field development area covers 1,859km2 and the Bhagyam and Kameshwari development areas cover 430km2 and 822km2 respectively.

 

Average gross production from the Rajasthan block for 2010 was 76,171 bopd and working interest production was 53,319 bopd.

 

The Mangala field, which commenced production in August 2009, is delivering at its currently approved plateau rate of 125,000 bopd. The Mangala reservoir performance and surface facilities are ready to support production of 150,000 bopd, which is awaiting JV and GoI approval.

 

Since production start-up, the Mangala Processing Terminal (MPT) has had efficient and safe operations and has processed more than 27.5 mmbbls of crude oil as at 31 December 2010, which has been sold to Public Sector Undertaking (PSU) and private refiners.  The plant uptime stood at over 98% in 2010.

 

Cairn is committed to maintaining the highest Health, Safety and Environment (HSE) standards and has achieved top quartile global benchmarking.

 

Development - Upstream 

The MPT is designed to process crude from the Rajasthan fields and will have a capacity to handle 205,000 bopd with scope for further expansion. Trains One, Two and Three are completed while the construction activities for Train Four have commenced and are on track for delivery in H2 2011.

 

Development drilling and well completion activities are progressing with three drilling rigs and one completion rig operating in the Rajasthan block.

 

Cairn India has successfully drilled and completed 11 horizontal wells in the Mangala field and all have been put on production. A total of 129 Mangala development wells have been drilled to date, of which 84 have been completed and 55 are currently producing. The other wells will be brought on stream in a staged manner as production from the field ramps up.

 

Work on the development of the Bhagyam field, the second largest discovery in Rajasthan, has commenced. Development drilling has started with a total of 19 Bhagyam wells drilled to date. Crude oil production from the Bhagyam field is expected to commence in H2 2011 and achieve the FDP approved plateau rate of 40,000 bopd by the end of 2011. The well results from Bhagyam drilling have so far met expectations.

 

As a result of an increase in the estimated reserves and resources, an assessment of the plateau production potential and design optimisation of the Aishwariya field facilities is currently underway. Production is currently scheduled to commence in H2 2012, subject to obtaining all the necessary approvals.

 

Cairn India and its JV partner ONGC continue to develop the hydrocarbon resources in the state of Rajasthan with a continued focus on cost and the application of innovative technologies.

 

Midstream (Pipeline)

The already constructed MPT to Salaya section (~590km) of the pipeline and the associated facilities continues to safely deliver crude oil to various buyers. Construction work on the final ~80 km Salaya to Bhogat section of the pipeline and the Bhogat terminal and marine facilities is underway with completion targeted for H2 2012.

 

In 2010, more than 22 million barrels (mmbbls) of crude oil were safely delivered through the pipeline. The pipeline system availability is currently at 98.7% which was achieved within six months of start-up.

Crude - Sales

The implied crude price realisation represents an average 10-15% discount to Brent on the basis of prices prevailing for the twelve months to December 2010.

 

Sales arrangements are in place for 143,000 bopd with PSU and private refiners and discussions continue with the GoI for further nominations.

 

Resource Base including Enhanced Oil Recovery (EOR)

The MBA fields have gross recoverable oil reserves and resources of over 1 billion barrels, which includes 2P gross reserves and resources of 694 mmboe with a further 300 mmboe or more of EOR resource potential. The MBA fields will contribute more than 20% of India's domestic crude production when they reach the currently approved plateau rate of 175,000 bopd.

 

The first phase of EOR pilot consisting of the drilling and completion of four injectors, one producer and three observation wells and their hook up to the facilities has already been completed. The water injection and production phase commenced in December 2010.

 

A pilot hydraulic fracturing programme to test the potential of the Barmer Hill Formation is planned, subject to GoI approval. The pilot programme will allow evaluation of the appropriate cost effective technology for a fully optimised development of this low permeability oil resource base. A declaration of commerciality for Barmer Hill was submitted to the GoI in March 2010 and a FDP is under preparation.

 

Exploration

Cairn India has a total of 10 blocks in its portfolio in three strategically focused areas, namely one block in Rajasthan, three on the west coast of India and six on the east coast of India, including one in Sri Lanka. Out of these, eight, including the three producing blocks, are operated by Cairn India. Activities are ongoing at different stages in the exploration blocks. Over the years, Cairn India has optimised its exploration portfolio by adding new prospective blocks and relinquishing some, but has continued to increase its net unrisked potential resource base.

 

Technical evaluation work continues in the RJ-ON-90/1 block to assess existing and new plays in the basin to generate further prospects in Rajasthan.  Development wells drilled in 2010 encountered additional contingent oil and gas resources in the Raageshwari and Bhagyam areas, which are being further evaluated.

 

In the KG-ONN-2003/1 block (Cairn India - 49%, Operator) preparations are ongoing for further exploration and appraisal drilling.

 

Frontier exploration drilling in the SL 2007-01-001 block (Cairn India - 100%, Operator) in Sri Lanka is planned to commence in the summer of 2011. A drillship has been contracted and preparations are ongoing.

 

Krishna-Godavari Basin - Eastern India

Block PKGM-1 - Ravva field (Cairn India - 22.5%, Operator)

Average gross production from the Ravva field for 2010 was 37,953 boepd (comprising an average oil production of 29,381 bopd and average gas production of 51 million standard cubic feet per day (mmscfd)).

 

Cairn India and its JV partners have completed a 4D seismic campaign and data interpretation is ongoing to identify bypassed oil zones. An infill drilling campaign has commenced to drill new wells to augment production.

 

Cambay Basin - Western India

Block CB/OS-2 (Cairn India - 40%, Operator)

Average gross production from the CB/OS-2 block for 2010 was 12,225 boepd (comprising an average oil / condensate production of 7,344 bopd and average gas production of 29 mmscfd). To date, the asset has produced more than 200 billion cubic feet of gas and 11 mmbbls of commingled oil (crude and condensate).

 

GREENLAND

 

Subject to approval from the Government of Greenland, Cairn is planning to carry out an exploration drilling programme of up to four exploration wells offshore Greenland in the summer of 2011. This programme follows on from the 2010 three well exploration programme offshore west Greenland in the Baffin Bay basin.  While drilling operations ceased at the beginning of October in accordance with the Greenland Government's regulations, Cairn has now been operating offshore Greenland (recently acquiring environmental survey data) for thirteen consecutive months which demonstrates the ability to be able to work all through the year in this area.

 

The 2010 exploration campaign emphasised safety and following the Gulf of Mexico incident, Cairn, with the full participation of the Greenland Government, reviewed its exploration programme.  The 2010 plan included:

·     Contracting two state of the art 'dynamically positioned' fifth and sixth generation vessels to explore simultaneously, allowing almost immediate drilling of a relief well as a back-up should this be necessary

·      Designing the drilling schedule so that only one rig entered a hydrocarbon-bearing section at any given time

·      A well design with primary and secondary barriers to minimise the possibility of an uncontrolled release of hydrocarbons, which was reviewed by an independent external expert in accordance with North Sea practice

·      Full testing of the blowout prevention equipment, including a mechanical test by independent authorities prior to operations commencing and subsequently fortnightly testing of the equipment

·      Blow-out preventers with two shear rams which could be remotely activated; in the event of a failure of the blow-out preventer, each vessel also had a remotely operated vehicle capable of closing the well

·      Assembling a team of dedicated experts to manage the programme for Cairn with a combined total of more than 1,000 years of successful oil exploration campaigns in challenging and remote environments including extreme arctic conditions.

 

During 2010, Cairn acquired more than 15,000km of 2D seismic on the Eqqua, Ingoraq, Napariaq, Pitu, Sigguk and offshore south Greenland blocks, bringing its total 2D seismic database in Greenland to over 85,000km.

 

For reasons of operational flexibility evaluation efforts are focused on maintaining between 10 and 12 separate potential exploration well locations in a variety of operating environments and geological settings for as long as possible.  The prospect inventory is being finalised for the various target options in the different locations.  Unrisked mean prospective resource potential range from 0.35 billion to >1 billion barrels contingent resource potential for each prospect.  The final selection of prospects and well targets for the proposed 2011 exploration campaign will be made in May 2011.  These will include a well in each of the Atammik and Lady Franklin blocks.  

 

The 2011 drilling programme will once again utilise a dual rig strategy with an emphasis on safety as well as providing increased operational capability and flexibility.  The primary vessel, the 'Ocean Rig Corcovado,' is a 'state-of-the-art' high efficiency, sixth generation dynamically positioned drillship. The second vessel, the 'Leiv Eiriksson', is a fifth generation dynamically positioned semi-submersible. Both rigs are designed and equipped for working in harsh environments.

 

A number of other vessels have been selected to provide additional operational support including cover for emergency response, rig stand-by, ice management, oil spill response, re-supply operations and helicopter support. Negotiations are ongoing with a wide range of oilfield service contractors to provide the necessary support for the 2011 exploration programme.

 

Cairn also plans to undertake a 3D seismic acquisition programme in Greenland during 2011, subject to the necessary approvals. Two 3D seismic survey vessels are expected to be contracted to acquire up to three 3D surveys in different areas.

 

Cairn also plans, subject to the required approvals, to implement three shallow (~400 metres) marine soil investigations to obtain critical stratigraphic information. These will be drilled in the north of Baffin Bay, the Disko area and offshore south Greenland.

 

West Disko Blocks

Cairn continues to evaluate the results of its 2010 exploration campaign on the Sigguk Block in the Disko Bay area.  The wells found both gas (biogenic and thermogenic) and oil (geochemical evaluation has now identified three oil types) although significant target reservoir rocks were not encountered. The Alpha-1S1 exploration well was suspended to allow possible re-entry to sidetrack or deepen the well at a later date.

 

Baffin Bay Bid Round

In December 2010 the Government of Greenland announced the results of the Baffin Bay Bid Round. Cairn was awarded three blocks; Ingoraq, Napariaq and Pitu.  Other recipients of block awards included Shell, Statoil, GDF, Conoco-Phillips and Maersk.

 

Atammik and Lady Franklin blocks

In January 2011 the Government of Greenland confirmed Cairn as the Operator of the Atammik and Lady Franklin blocks and Cairn has acquired the 47.5% interest previously held by Encana. The participating interests in these two blocks are now Cairn (Operator) 87.5% and Nunaoil 12.5%.

 

The operatorship of the Lady Franklin and Atammik blocks provides additional prospectivity and operational flexibility as these blocks are virtually free of sea ice all year round.  Cairn's exploration programme for 2011 includes drilling a well in both the Atammik and Lady Franklin blocks.

 

Southern Greenland

In 2010 Cairn also acquired 2D seismic on its blocks offshore southern Greenland.  The 2011 programme includes acquiring 3D seismic in certain of these blocks.

 

 

BANGLADESH

 

Production and Development

In December 2010, Santos International Holdings Pty Limited (Santos) acquired the entire issued share capital of Cairn Energy Sangu Field Limited (CESFL).  As a result of this transaction, Cairn no longer holds any interests in Bangladesh. 

 

Cairn has always sought to operate in the best interests of its shareholders, workforce, the local communities and the people of Bangladesh, running operations which have had a strong safety record while benefiting local communities with a comprehensive range of community programmes.

 

Over the last 16 years, Cairn has been a strong supporter of international investment in Bangladesh and with its partners has invested more than US $1 billion in Bangladesh helping to provide energy for the people of Bangladesh. 

 

 

MEDITERRANEAN

 

Tunisia

An exploration well (M'Sela-1) targeting a 20 million barrel exploration prospect in the Louza Permit, was spudded in March 2010.  This well was plugged and abandoned in April 2010.

 

Cairn entered into an asset purchase agreement with Cooper Energy for its entire equity in the offshore Nabeul Permit in November 2010.

 

Spain

The Spanish Government has awarded Cairn two hydrocarbon exploration licences comprising five contiguous offshore blocks in the Gulf of Valencia area. The total combined area covered by these licences is approximately 3,992km2 and the water depths range from 50 metres to more than 1,000 metres.  Cairn has a 100% interest in these blocks which were officially published on 23 January 2011.

 

Cairn is in the very early stages of the exploration process and during the initial two year period will be evaluating and consolidating existing data, as a result of which Cairn will consider implementing offshore research in the second discretionary phase.

 

Nepal

Cairn lifted force majeure on its acreage in Nepal in late 2009 based on an assessment of the security situation. Planning for field operations is in progress.



 

FINANCIAL REVIEW

 

The financial strategy of the Group remains focused on maintaining the balance sheet strength to allow us to invest in our exploration and development opportunities. With completion of the first phase of the development of the MPT in Rajasthan and the associated pipeline the Group's cash flow generation has increased over six fold this year and Cairn India is set to continue to grow its operating cash flow.

 

At 31 December 2010, Cairn had net cash of $404 million (2009: $524 million).  Cairn India had net cash of $217 million, comprising $891 million and $674 million debt.  PLC/Capricorn's cash balances were $187 million, with no debt drawn.

 

Presentation of results - impact of Vedanta transaction

As at the balance sheet date 31 December 2010, the transaction to sell a majority stake in Cairn India to Vedanta had already been announced and was considered, under IFRS, highly probable.  As a result, the financial results of Cairn India are shown as discontinued operations in the Group Income Statement and its assets and liabilities are reflected as assets held-for-sale in the Group Balance Sheet.  The sale of our Bangladesh operations have also been reflected as discontinued operations.

 

As a consequence of our interest in Cairn India being classified as held-for-sale, two accounting adjustments were required which have had an impact on the Income Statement.  The first adjustment is the treatment of charges for depletion, depreciation and amortisation.  From 16 August 2010, the date on which the transaction was announced, no further such charges have been made, the impact of which is to increase reported profits by $193 million.  The second is the accounting for deferred tax.  Previously, deferred tax was provided on the basis that the carrying value of the net assets would be recovered through use in the continuing business, which would pay tax on its profits in due course.  In these accounts, deferred tax is provided on the basis that the carrying value of the net assets will be recovered through the sale of our interest in Cairn India.  As the accounting carrying value is significantly lower than the tax base of the assets deductible against the sale proceeds, the result is a credit to the Income Statement of $445 million.

 

The overall impact on the Income Statement is an increase in reported profit after tax of $638 million.

 

The Vedanta transaction is currently awaiting GoIapprovalThe proceeds, gain on sale and related tax charges arising from this transaction will not be recognised in the accounts until such time as all contractual conditions between Cairn and Vedanta, including receipt of all necessary approvals, are satisfied.

 

While these accounting adjustments noted above are required to comply with our financial reporting obligations, the Board has monitored the performance of the Group throughout the year by reference to the underlying results of each operating segment, i.e. as if Cairn India was a continuing business of the Group and so ignoring the adjustments to depletion, depreciation, amortisation and deferred tax set out above.

 

For clarity, the table below shows the results of the Group on a continuing basis and before exceptional items.  The adjustments noted above and the exceptional items are shown separately, and reconcile profit after tax on a continuing basis and profit after tax as reported.  The commentary in this financial review is provided on the continuing basis, unless stated otherwise.

  

Key Financial Performance Indicators

 

 

 

2010

 

2009

Production (boepd)*

65,299

13,803

Production sold (boepd)*

63,366

12,760

Average price per boe ($)

69.17

50.02

Average production costs per boe ($)**

11.49

12.31




Revenue ($m)

1,601

234

Gross profit ($m)

741

***42

Operating profit/(loss) ($m)

635

***(38)

Profit/(loss) before tax ($m)

577

***(27)




Profit after tax ($m)

483

***43

Exceptional items ($m)

(38)

10

Vedanta transaction adjustments ($m)

638

-

Reported profit after tax ($m)

1,083

***53




Cash flow from operating activities ($m)

837

111

Net assets ($m)

3,201

***2,677

Net cash ($m)

404

524




 

*     on an entitlement interest basis

**    excluding stock movement and pre-award costs

***  restated for change in accounting policy for inventory valuation

 

Production, Revenue and Gross Profit 

All numbers are stated before the impact of exceptional items.

 

Group oil and gas revenues for the year were ~$1.6 billion, compared with $234 million in 2009.  Average entitlement production increased to 65,299 boepd (2009: 13,803 boepd), of which oil production accounted for 95% (2009: 71%).  Production costs also rose to $259 million from $53 million.

 

The significant increases in revenue and production reflect the contribution made by the Rajasthan field which in May 2010 saw the milestone of first oil through the pipeline from Mangala.  In the last quarter of the financial year gross daily production averaged 124,861 bopd, in line with the currently approved plateau production rate.

 

The Group's blended average price realised was $69.17 compared to $50.02 in 2009.  Rajasthan crude realised an average price of $70.86 per barrel (bbl) for the year (2009: $65.48 per bbl).

 

Production costs include the cost of trucking oil from Rajasthan to Kandla port until May, when the primary delivery method was switched to the pipeline from MPT to Salaya.  Due to the significant increase in volumes, the Group's average production cost of $11.49 per boe (2009: $12.31 per boe) primarily reflects the operating cost of the Mangala field.  This includes cess at 2,500 Rupees per tonne (~$7.50 per bbl at current exchange rates) levied on Rajasthan production.  Cairn India is currently disputing the obligation to pay this through arbitration.

The majority of the unsuccessful exploration costs of $235 million (2009: $57 million) relate to the Greenland drilling campaign. The T8-1 and T4-1 wells did not result in commercial discoveries; consequently the well costs, including all associated demobilisation and other costs have been written off in accordance with Cairn's accounting policies.  The primary objectives of the Alpha prospect were not reached, the well has been suspended and any future re-entry work depends on the results of further evaluation.  These costs, totalling $203 million, have not been written off.

Depletion and decommissioning charges, on a continuing operations basis, have increased from $60 million to $352 million and the charge per boe has increased from $11.92 per boe to $14.79 per boe.  Both increases are as a result of Rajasthan production.  The depletion and decommissioning rate per boe is calculated using booked reserves.  In Rajasthan, if the planned EOR and Barmer Hill trials are successful we would expect to increase the Group's booked reserves.  Consequently, the depletion and decommissioning rate per boe would decrease accordingly.

 

Gross profit for the year was $741 million (2009 restated: $42 million).

 

Results for the Year

All numbers are stated before the impact of exceptional items.

 

Administrative expenses include non-cash charges for share-based payments of $29 million (2009: $24 million) and for depreciation and amortisation of $10 million (2009: $8 million).  Net of these charges, administrative expenses have increased to $66 million (2009: $57 million).

 

Impairment charges of $16 million relate to the Group's Mediterranean operations.  The Group recognised an accounting loss of $9 million on the disposal of our Bangladesh operations and a gain on the sale of our interest in Papua New Guinea of $13 million.

 

Net finance costs for the year were $58 million (2009: $11 million income).  From April 2010 a proportion of interest charges incurred on the debt associated with the Rajasthan development were no longer capitalised following completion of the additional processing trains and pipeline.

 

The Group's current tax charge for the year is $253 million (2009 restated: $36 million) and mainly reflects Indian corporate tax on the profits from the Mangala field.  The deferred tax credit for the year is $604 million (2009 restated: $106 million).  This is due to a change in the basis of calculation for the Cairn India Group, previously a continuing use basis and now, as a result of the Vedanta transaction, on an assets held-for-sale basis.

 

Before taking account of the adjustments associated with the Vedanta transaction, the Group made a profit after tax before exceptional items of $483 million (2009 restated: $43 million).  This increases to $1.1 billion if these adjustments are included.

 

Exceptional Items

 

Ravva Arbitration

The calculation of the GoI's share of petroleum produced from the Ravva field in earlier years has been disputed for some years.  In January 2009 the GoI instructed the buyers of the Ravva crude not to pass over the revenues to Cairn until such time as they believed that the liability had been settled in full.  In 2009 Cairn provided for the full $96 million liability, and this has been collected by the GoI by withholding revenues.  Cairn continues to seek resolution of the dispute and recovery of these revenues through legal channels.  In 2010, additional interest charges of ~$1 million have been provided for.

 

Share-based Payments

In December 2009, Cairn's shareholders approved the conversion of notional "Units" in the Capricorn Group awarded in 2007 and 2008 into incentives over Cairn Energy PLC shares. Consequently, $38 million has been recognised in the Income Statement as a result of this modification (2009: $30 million).  The final charge relating to this share scheme conversion will be incurred in the first half of the 2011 financial year.

 

Cash Flow, Capital Investment and Liquidity

Cash inflow from operating activities was $837 million (2009: $111 million).  Whilst operating cash flows in 2009 were impacted by the GoI withholding Ravva revenues, 2010 operating cash flows have still increased significantly as a result of the contribution made by the Rajasthan field.

 

Significant inflows during the year arose from the receipt of $64 million proceeds from the disposal of a 10% interest in Cairn's operated Greenland licences to PETRONAS which completed in February 2010.  The Group also earned interest of $44 million during the year (2009: $39 million).

 

 

Cash outflow on capital expenditure is set out in the table below:

 


2010

2009


$ million

$ million




Exploration/appraisal expenditure

534

128

Development expenditure

527

785

Other capital expenditure

9

6




Total

1,070

919




 

Exploration/appraisal expenditure in 2010 includes costs of the Greenland drilling programme, the well costs in Tunisia and the Group's share of the non-operated drilling campaign in the KG basin offshore India.  Development expenditure in 2010 primarily relates to the Rajasthan development.

 

During the year, Cairn India refinanced its existing INR facility by raising INR 22,500 million (USD ~500 million) through INR Unsecured Non-convertible Debentures. This access to the Indian Debt Capital Market is a first for Cairn India, which received subscription from a wide range of investors consisting of mutual funds and insurance companies.  Total debt facilities for Cairn India are now ~$1,250 million of which ~$576 million remained undrawn at year end.

 

To provide the liquidity required to enable the Group to agree contracts for two state of the art drilling vessels for its 2011 dual rig exploration programme offshore Greenland, Cairn also entered into a stand-by secured revolving debt facility of $900 million.  The facility can also be used for general corporate purposes.

 

At 31 December 2010, Cairn had net cash of $404 million (2009: $524 million).  Cairn India had net cash of $217 million, comprising $891 million and $674 million debt.  PLC/Capricorn's cash balances were $187 million, with no debt drawn.

 

Going Concern

The directors have considered the financial and operational risks relevant to support a statement of going concern.  The Group's liquidity is carefully and routinely monitored with scenarios run for different assumptions, including oil price and production rates. The directors have a reasonable expectation that the Group has adequate financial resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis in preparing the financial statements.

 

Outlook

The Board continues to focus the Group's capital and human resources to maximise shareholder value and maintain financial and operational flexibility.

 

Our focus on value remains our top priority and completion of the transaction with Vedanta would provide the funding to continue a multi-year programme offshore Greenland, return a substantial proportion of the proceeds to shareholders and consider other portfolio management opportunities. By retaining a significant stake in Cairn India, the Group will also retain exposure to the future potential in this growing business.

 

The proposed return of capital to shareholders is in keeping with our long held strategy of creating and realising value for shareholders.

 

 

Jann Brown


Finance Director, 21 March 2011

Group Income Statement

For the year ended 31 December 2010

 


Notes

 

Discontinuing operations

December

2010

 

Continuing operations

December

2010

Discontinuing

operations

December

 2009

(restated)

 

Continuing

operations

December

2009


$m

$m

$m

$m







Revenue






Revenue


1,601.3

-

233.9

-

Exceptional revenue provision


-

-

(64.0)

-


 

1,601.3

 

-

 

169.9

 

-







Cost of sales






Production costs


(275.6)

(1.1)

(54.8)

2.3

Pre-award costs


(1.9)

(12.7)

(4.7)

(17.7)

Unsuccessful exploration costs


(23.1)

(211.9)

(50.2)

(7.2)

Depletion and decommissioning charge


(143.6)

-

(60.1)

-






Gross profit/(loss)


1,157.1

(225.7)

0.1

(22.6)







Other operating income


11.0

0.8

11.7

1.1

Administrative expenses


(67.5)

(35.0)

(53.5)

(35.7)

Exceptional administrative expenses

7

(2.3)

(35.6)

(2.1)

(27.8)

Impairment


-

(16.0)

(3.2)

-

Exceptional impairment and impairment reversals

7

-

-

-

(135.6)

(Loss)/gain on sale of oil and gas assets

5

(9.3)

12.6

-

-

Exceptional gain on sale of intangible exploration/appraisal assets

7

-

-

-

15.0






Operating profit/(loss)


1,089.0

(298.9)

(47.0)

(205.6)







Exceptional gain on disposal of non-controlling interest

7

-

-

-

199.5

Finance income


24.3

2.5

42.6

0.6

Finance costs


(77.4)

(7.2)

(10.3)

(21.4)

Exceptional finance costs


-

-

(31.6)

-






Profit/(loss) before taxation


1,035.9

(303.6)

(46.3)

(26.9)







Taxation






Tax credit

8

350.6

0.3

70.1

-

Exceptional tax credit

8

-

-

40.4

16.1






Profit/(loss) after taxation


1,386.5

(303.3)

64.2

(10.8)







Profit for the year from discontinuing operations

5


1,386.5


 

64.2

 

Profit for the year



 

1,083.2


 

53.4






Attributable to :






Equity holders of the parent



794.3


19.0

Non-controlling interests



288.9


34.4

Earnings per ordinary share - basic (cents)

3


 

56.88


 

1.40

Earnings per ordinary share - diluted (cents)

3


 

56.62


 

1.39







Loss per ordinary share - basic from continuing operations (cents)

3


 

(21.72)


 

(0.80)







Loss per ordinary share - diluted from continuing operations (cents)

3


 

(21.72)


(0.80)

 

 

Group Statement of Comprehensive Income

For the year ended 31 December 2010

 





2010

2009

(restated)



$m

$m







 

Profit/(loss) for the year




1,083.2

53.4







Other comprehensive income

Deficit on valuation of financial assets




-

(1.9)

Currency translation differences




0.5

48.1

 

 

Other comprehensive income for the year




0.5

 46.2







Total comprehensive income for the year




1,083.7

   99.6







Attributable to:






Equity holders of the parent




793.6

57.7

Non-controlling interests




290.1

 41.9

 

 




1,083.7

99.6

 

 

Group Balance Sheet

For the year ended 31 December 2010

 



2010

2009

(restated)


Notes

$m

$m

Non-current assets




Intangible exploration/appraisal assets

9

262.8

         376.2

Property, plant & equipment - development/producing assets

10

-

 1,828.6

Property, plant & equipment - other


1.1

             6.9

Intangible assets - other


64.9

           72.9

Investments


-

              -  

 

 


328.8

       2,284.6

 

Current assets




Inventory


-

           10.7

Trade and other receivables


39.4

         346.6

Bank deposits

11

-

           13.2

Cash and cash equivalents

11

187.0

       1,176.5

Income tax assets


-

              8.1 

 

 


226.4

       1,555.1

 

Assets held-for-sale

 

5

4,725.6

10.1

 

Total assets


 

5,280.8

   

   3,849.8





Current liabilities




Trade and other payables


77.0

         348.5

Obligations under finance leases


-

             1.5

Provisions


2.8

           38.9

Income tax liabilities


0.1

             6.1

 

 


79.9

395.0

 

Non-current liabilities




Loans and borrowings

11

-

         666.1

Obligations under finance leases


-

             2.0

Provisions


-

           30.2

Deferred tax liabilities


-

           79.5

 

 


-

         777.8

 

Liabilities related to disposal units held-for-sale

 

5

1,362.5

-

 

Total liabilities


1,442.4

       1,172.8

 

Net assets


3,838.4

       2,677.0





Equity attributable to equity holders of the parent




Called-up share capital


16.7

           16.6

Share premium


484.7

         473.5

Shares held by ESOP Trust


(8.2)

         (27.2)

Shares held by SIP Trust


(0.8)

-

Foreign currency translation


(39.5)

         (38.8)

Capital reserves - non distributable


40.2

           40.2

Retained earnings


2,317.6

       1,488.8

 

 


2,810.7

       1,953.1

Non-controlling interests


1,027.7

         723.9

 

Total equity


3,838.4

       2,677.0


 

Group Statement of Cash Flows

For the year ended 31 December 2010

 

 

Notes

2010

$m

2009

(restated)

$m

Cash flows from operating activities 



Loss before taxation from continuing activities

(303.6)

(26.9)

Profit/(loss) before taxation from discontinuing activities

1,035.9

(46.3)

 

Profit/(loss) before taxation

732.3

(73.2)




Exceptional revenue provision

-

64.0

Unsuccessful exploration costs

235.0

57.4

Depletion, depreciation, decommissioning and amortisation

151.0

68.5

Share-based payments charge

68.8

43.4

Impairment and exceptional impairment

16.0

138.8

Gain on sale of oil and gas assets

(3.3)

(15.0)

Exceptional gain on disposal of non-controlling interest

-

(199.5)

Finance income

(26.8)

(43.2)

Finance costs

84.6

31.7

Exceptional finance costs

-

31.6

Net interest paid

(73.9)

(14.7)

Income tax paid

(221.5)

(50.8)

Foreign exchange differences

(3.4)

4.1

Movement on inventory of oil and condensate

(0.1)

(9.6)

Trade and other receivables movement

(210.6)

33.3

Trade and other payables movement

62.8

5.0

Movement in other provisions

26.2

39.1

 

Net cash generated from operating activities

837.1

110.9




Cash flows from investing activities



Expenditure on intangible exploration/appraisal assets

(533.7)

(128.1)

Expenditure on property, plant & equipment -  development/producing assets

(526.6)

(785.0)

Purchase of property, plant & equipment - other

(3.6)

(1.8)

Purchase of intangible assets - software

(5.9)

(4.0)

Investment in subsidiaries

-

-

Proceeds on disposal of intangible exploration/appraisal assets                   

78.5

5.1

Movement in funds on bank deposits

(439.9)

288.0

Interest received

43.5

38.9

 

Net cash used in investing activities

(1,387.7)

(586.9)




Cash flows from financing activities



Proceeds from increase in non-controlling interest

11.9

241.4

Buy back of shares in subsidiary out of capital

-

(3.7)

Arrangement and facility fees

(28.5)

(34.9)

Proceeds from issue of debentures

304.6

-

Proceeds from shares issued for cash

-

157.8

Cost of shares purchased

(9.8)

-

Proceeds from exercise of share options

11.3

4.7

Payment of finance lease liabilities

(1.5)

(2.4)

Proceeds of borrowings

(307.2)

166.1

 

Net cash flows (used in)/from financing activities

(19.2)

529.0




Net (decrease)/increase in cash and cash equivalents

(569.8)

53.0

Opening cash and cash equivalents at beginning of year

1,176.5

1,113.0

Exchange gains on cash and cash equivalents

18.8

10.5

 

Closing cash and cash equivalents                                                                                   11

625.5

1,176.5


 

Group Statement of Changes in Equity

For the year ended 31 December 2010

 


 Equity share  capital

 Shares held by ESOP Trust

 

Shares held by SIP Trust

 Foreign currency translation

 Capital reserves

 Retained earnings

(restated)

 Non-controlling interests

(restated)

 Total equity

(restated)


 $m

 $m

$m

 $m

 $m

 $m

 $m

 $m










At 1 January 2009

234.8

(28.8)

-

(78.8)

40.2

1,433.7

677.6

2,278.7

Prior year adjustment (note 12)

-

-

-

-

-

(0.5)

(0.3)

(0.8)










At 1 January 2009

234.8

(28.8)

-

(78.8)

40.2

1,433.2

677.3

2,277.9










Profit for the year

-

-

-

-

-

19.0

34.4

53.4

Other comprehensive income for the year

-

-

-

40.0

-

(1.3)

7.5

46.2

 

Total comprehensive income for the year

-

-

-

40.0

-

17.7

41.9

99.6

Exercise of employee share options

4.7

-

-

-

-

-

-

4.7

Non-controlling interests created on disposal of shares in subsidiary

-

-

-

-

-

-

41.8

41.8

Non-controlling interest buy back

-

-

-

-

-

-

(41.0)

(41.0)

Share-based payments

-

-

-

-

-

39.5

3.9

43.4

Shares issued for cash

157.8

-

-

-

-

-

-

157.8

Shares issued on buy back of non-controlling interest

 

92.8

 

-

-

 

-

 

-

 

-

 

-

 

92.8

Cost of shares vesting

-

1.6

-

-

-

(1.6)

-

-










At 1 January 2010

490.1

(27.2)

-

(38.8)

40.2

1,488.8

723.9

2,677.0










Profit for the year

-

-

-

-

-

794.3

288.9

1,083.2

Other comprehensive income for the year

-

-

-

(0.7)

-

-

1.2

0.5

 

Total comprehensive income for the year

-

-

-

(0.7)

-

794.3

290.1

1,083.7

Exercise of employee share options

11.3

-

-

-

-

-

-

11.3

Share-based payments

-

-

-

-

-

58.5

5.8

64.3

Increase in non-controlling interest through the exercise of share options

-

-

-

-

-

4.0

7.9

11.9

Cost of shares purchased

-

(9.0)

(0.8)

-

-

-

-

(9.8)

Cost of shares vesting

-

28.0

-

-

-

(28.0)

-

-

 

At 31 December 2010

 

501.4

 

(8.2)

 

(0.8)

 

(39.5)

 

40.2

 

2,317.6

 

1,027.7

 

3,838.4

 

 

 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

1.     Accounting Policies and Presentation of Financial Information

Cairn prepares its accounts in accordance with applicable International Financial Reporting Standards (IFRS), as adopted by the EU.

 

The financial information contained in this announcement does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. However, the financial statements contained in this announcement are extracted from the audited statutory accounts for the financial year ended 31 December 2010, which will be delivered to the Registrar of Companies.  Those accounts have an unqualified audit opinion.

 

All accounting policies applied are consistent with those adopted and disclosed in the Group's annual financial statements for the year ended 31 December 2009, except for a change in the accounting policy for the valuation of inventory and where the Group has adopted new IFRS.  During the year, the Group adopted the following standards and interpretations:

 

·      Amendment  to IFRS 2 'Group-Settled Share-based Payment Arrangements';

·      IFRS 3 'Business Combinations (revised)';

·      IFRS 5 'Non-current assets held-for-sale and Discontinued operations';

·      IFRS 8 'Operating Segments';

·      IAS 1 'Presentation of Financial Statements';

·      IAS 7 'Statement of Cash Flows'; 

·      IAS 27 'Consolidated and Separate Financial Statements (amended)'; and

·      IAS 36 'Impairment of assets'.

 

Cairn has changed its accounting policy for the valuation of inventory. The Group's policy is now to do so at the lower of cost or net realisable value. Previously, inventories of oil and condensate were valued at estimated selling price. See note 12 for further details and the impact of this change on comparatives.

 

 

2.     Going Concern

 

The directors have considered the factors relevant to support a statement on going concern. They have a reasonable expectation that the Group will continue in operational existence for the foreseeable future and have therefore used the going concern basis in preparing the financial statements.

 

 

3.     Earnings per Ordinary Share

 

Basic and diluted earning per share are calculated using the following measures of (loss)/profit:

 


Notes

2010

2009



$m

$m





Loss for the year - continuing operations


(303.3)

(10.8)

Profit for the year - discontinuing operations attributable to the equity holders of the parent

 

5

 

1,097.6

 

29.8

 

Profit attributable to the equity holders of the parent


 

794.3

 

19.0

Less potential increase in non-controlling interest - discontinued operations


 

(2.4)

 

(0.1)

 

Diluted profit attributable to equity holders of the parent


 

791.9

 

18.9





Analysed as:




Diluted loss attributable to equity holders of the parent - continuing operations


 

(303.3)

 

(10.8)

Diluted profit attributable to equity holders of the parent - discontinued operations


 

1,095.2

 

29.7



 

791.9

 

18.9

 


 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

3.     Earnings per Ordinary Share (continued)

 

The following reflects the share data used in the basic and diluted earnings per share computations:

 



2010

2009



'000

'000





Weighted average number of shares


1,398,761

1,365,117

Less shares held by ESOP and SIP Trusts


(2,127)

(10,984)

 

Basic weighted average number of shares


 

1,396,634

 

1,354,133





Dilutive potential ordinary shares:




Employee share options


2,151

1,357

Diluted weighted average number of shares


 

1,398,785

 

1,355,490

 

 

4.     2010 Annual Report and Accounts

 

Full accounts are due to be posted to shareholders in April 2011 and will be available at the Company's registered office, 50 Lothian Road, Edinburgh, EH3 9BY.

The Annual General Meeting is due to be held on Thursday 19 May 2011 at 12.00 midday.

 

5.     Discontinued Operations and Assets Held-for-sale

On 16 August, Cairn announced the conditional agreement with Vedanta, for the sale of a maximum 51 per cent of the fully-diluted share capital of Cairn India.  Shareholder approval from both parties has been obtained and although regulatory approval and joint venture partner approval is required to complete the proposed transaction, as at 31 December 2010 Cairn believed the necessary approvals would be received and has classified the assets and liabilities of the Cairn India Group as a disposal group held-for-sale.

 

The size of the interest in Cairn India sold by Cairn may be reduced down to 40 per cent of the fully-diluted share capital of Cairn India.  Immediately following completion, Cairn is expected to have a residual interest of between approximately 10.6 per cent and 21.6 per cent of the fully-diluted share capital of Cairn India, while Vedanta will hold a controlling 51% interest. Cairn is expected to receive a cash consideration of between $6.6bn (40 per cent sold) and $8.5bn (51 per cent sold), depending on both the number of shares comprised within the fully-diluted share capital of Cairn India at completion and the size of the interest in Cairn India sold to Vedanta pursuant to the proposed transaction.

 

On 20 December 2010, Santos International Holdings Pty Limited agreed to purchase the entire share capital of Cairn Energy Sangu Field Limited, which holds 37.5% interest in the producing Sangu gas field, offshore Bangladesh, and a 50 per cent interest in Block 16 exploration acreage for a consideration of $0.8m.  As a result of this transaction Cairn no longer has operations in Bangladesh.

 


 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

5.     Discontinued Operations and Assets Held-for-sale (continued)

The results of the Cairn India Limited Group and of Cairn Energy Sangu Field Limited operations are presented as discontinuing operations and summarised below:

 


 Cairn

India

Limited  2010

Cairn Energy Sangu

Field

Limited

 2010

 Total

2010

 Cairn

India

Limited

2009

 Cairn Energy Sangu Field Limited 2009

 Total 2009


$m

$m

$m

$m

$m

$m








Revenue

1,594.2

7.1

1,601.3

156.7

13.2

169.9

Cost of sales

(438.1)

(6.1)

(444.2)

(158.4)

(11.4)

(169.8)

 

Gross profit/(loss)

1,156.1

1.0

1,157.1

(1.7)

1.8

0.1

Other operating income and expenses

(53.6)

(14.5)

(68.1)

(40.5)

(6.6)

(47.1)

 

Operating profit/(loss)

1,102.5

(13.5)

1,089.0

(42.2)

(4.8)

(47.0)

Net finance (costs)/income

(53.1)

-

(53.1)

0.7

-

0.7

 

Profit/(loss) before taxation

1,049.4

(13.5)

1,035.9

(41.5)

(4.8)

(46.3)

Taxation

350.6

-

350.6

110.5

-

110.5








Profit/(loss) for the year

1,400.0

(13.5)

1,386.5

69.0

(4.8)

64.2








Attributable to :







Equity holders of the parent

1,111.1

(13.5)

1,097.6

34.6

(4.8)

29.8

Non-controlling interests

288.9

-

288.9

34.4

-

34.4








Profit/(loss) on ordinary activities for the year

1,400.0

(4.2)

1,395.8

 

69.0

(4.8)

64.2

Loss on disposal

-

(9.3)

(9.3)

-

-

-









1,400.0

(13.5)

1,386.5

69.0

(4.8)

64.2

 

Earnings per share:







Basic (cents)



78.60



2.20

Diluted (cents)



78.30



2.19


The earnings per share has been calculated on profit available to equity holders of the parent divided by the weighted average number of ordinary shares for both basic and diluted amounts as disclosed in note 3.


 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

5.     Discontinued Operations and Assets Held-for-sale (continued)

The major classes of assets and liabilities classified as held-for-sale as at 31 December 2010 are as follows:


Cairn

India

Limited

Other

Total


$m

$m

$m

Assets




Intangible exploration/appraisal assets

376.5

1.5

378.0

Property, plant & equipment - development/producing assets

2,402.2

-

2,402.2

Property, plant & equipment - other

6.6

-

6.6

Intangible assets - other

4.8

-

4.8

Deferred tax asset

524.8

-

524.8

Inventory

10.8

-

10.8

Trade and other receivables

504.4

-

504.4

Bank deposits

452.6

-

452.6

Financial instruments

2.9


2.9

Cash and cash equivalents

438.5

-

438.5

 

Assets held-for-sale

4,724.1

1.5

4,725.6





Liabilities




Trade and other payables

408.2

-

408.2

Obligations under finance leases

2.0

-

2.0

Provisions

242.8

-

242.8

Income tax liabilities

35.8

-

35.8

Loans and borrowings

673.7

-

673.7

 

Liabilities related to disposal unit held-for-sale

1,362.5

-

1,362.5

 

Net assets directly associated with disposal unit and assets held-for-sale

3,361.6

1.5

3,363.1





 

Foreign currency translation reserves of $95.5m relate to discontinued operations.

 

Other assets held-for-sale represents intangible exploration/appraisal assets of $1.5m on the proposed sale of the Group's Nabeul permit in Tunisia.

 

Included in loans and borrowings of $673.7m are debenture and loan balances. In October 2010 Cairn India raised $500m through INR Unsecured Non-convertible Debentures, at competitive commercial terms. $301.9m was drawn at the year end and the balance is available to drawdown subject to certain conditions.

 

In October 2009, the Cairn India Group completed a $1.6bn re-financing for the Rajasthan project through a combination of $750m international US dollar borrowings ("USD Facility") and a domestic borrowing ("INR Facility") of INR 40,000m ($850m). The domestic borrowing programme was given "AAA" by CARE.

 

The USD Facility of $750m was provided by a consortium of overseas commercial banks led by Standard Chartered Bank and the International Finance Corporation, a member of the World Bank Group. Of the full $750.0m facility $371.8m was drawn at 31 December 2010. Cairn India may cancel and repay the facility at any time. Under the terms of the facility agreement, security in terms of share pledge over the shares in Cairn Energy Hydrocarbons Limited (a 100% indirect subsidiary of Cairn India Limited which holds 50% of the Group's interest in Rajasthan) has been provided.

 

The INR Facility was underwritten by the State Bank of India, who syndicated to other banks and financial institutions, including Canara Bank, Bank of India, Oriental Bank of Commerce, Bank of Baroda, HDFC Bank and Infrastructure Development and Finance Corporation. Cairn India settled and cancelled the INR facility of INR 40,000m ($850m) following the Debenture issue.

 

 
 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

5.     Discontinued Operations and Assets Held-for-sale (continued)

Assets held-for-sale as at 31 December 2009 were as follows:

2009


$m



Intangible exploration/appraisal assets held-for-sale

10.1

 

 

As part settlement of the minority buy-back from Dyas in 2009, Cairn agreed to transfer to Dyas a 15% interest in the Louza licence and a 7.5% interest in the Nabeul licence, both offshore Tunisia, and a 15% interest in the Joni-5 block offshore Albania.  The three transfers were subject to approval from the respective Governments which were received during 2010.

 

On 31 December 2009, Cairn entered into an agreement with Oil Search Limited for the sale of the Group's 12.73% interest in Block PRL-1, Papua New Guinea.  This transaction was subject to Government approval which was received during 2010 and a gain on sale was recognised in the current year.

 

As none of the required approvals in the above transactions had been received at 31 December 2009 the assets were classified as held-for-sale.

 

The cash flows attributable to discontinued operations were as follows:

 


Cairn

 India

Limited

Cairn

Energy

Sangu

Field

Limited

Total

Cairn

India

Limited

Cairn

Energy

Sangu

Field

Limited

Total


2010

2010

2010

2009

2009

2009


$m

$m

$m

$m

$m

$m








Operating

874.7

(1.6)

873.1

93.8

(2.9)

90.9

Investing                                                                           

(1,013.9)

-

(1,013.9)

(559.3)

(3.5)

(562.8)

Financing                                                                          

(20.7)

-

(20.7)

150.3

6.0

156.3

 

Net cash outflow 

(159.9)

(1.6)

(161.5)

(315.2)

(0.4)

(315.6)

 

 

In addition to the assets and liabilities of the Cairn India disposal unit held-for-sale, the following contingent liabilities are not recognised in the financial statements:

 

Indian Service Tax

One of the subsidiary companies of the Cairn India Group has received five show cause notices from the tax authorities in India for non-payment of service tax as a recipient of services from foreign suppliers.

 

These notices cover periods from 16 August 2002 to 31 March 2010.  A writ petition has been filed with Chennai High Court challenging the liability to pay service tax as recipient of services in respect of first show cause notice (16 August 2002 to 31 March 2006) and another challenging the scope of some services in respect of second show cause notice (1 April 2006  to 31 March 2007).  Writ petitions for the first show cause notice was decided in favour of the subsidiary company resulting in a quashing of the demand notice of $10.6m (INR 475m). The writ petition for the second show cause notice is expected to come up for hearing in 2011.

 

The reply for the third and fourth show cause notice has also been filed before the authorities. The reply to the fifth show cause notice is in process and will be submitted shortly.

 

Should future adjudications go against the Cairn India Group, it will be liable to pay the service tax of approximately $28.7m (INR 1,282m) plus potential interest to date of approximately $9.5 m (INR 425m), although this could be recovered in part where it relates to services provided to the Joint Venture of which Cairn India is operator.



 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

5.     Discontinued Operations and Assets Held-for-sale (continued)

Indian Tax Holiday on Gas Production

Section 80-IB(9) of the Income Tax Act, 1961 allows the deduction of 100% of profits from the commercial production or refining of mineral oil. The term 'mineral oil' is not defined but has always been understood to refer to both oil and gas, either separately or collectively.  The 2008 Indian Finance Bill appeared to remove this deduction by stating without amending section 80-IB(9) that "for the purpose of section 80-IB(9), the term 'mineral oil' does not include petroleum and natural gas, unlike in other sections of the Act".  Subsequent announcements by the Finance Minister and the Ministry of Petroleum and Natural Gas have confirmed that the tax holiday would be available on production of crude oil but have continued to exclude gas.

 

Cairn India filed a writ petition to the Gujarat High Court in December 2008 challenging the restriction of section 80-IB to the production of oil.  Gujarat High Court did not admit the writ petition on the ground that the matter needs to be first decided by lower tax authorities. An SLP has been filed before the Supreme Court against the decision of the Gujarat High court.

 

In the event this challenge is unsuccessful, the potential liability for tax and related interest on tax holiday claimed on gas production for all periods to 31 December 2010 is approximately $53.5m. A demand was raised against one of the Group's subsidiaries which included $11.2m of this amount and this has been provided for in the results for the year.  Cairn does not expect demands to be raised on the remaining $42.3m prior to a Supreme Court ruling.

 

Further, the tax office in India has disallowed the tax holiday claimed by Cairn India relating to condensate production for the fiscal year ending March 2007 on the basis that it is obtained from natural gas through condensation or extraction thus not included in the definition of mineral oil.  The Company will appeal against this disallowance.  The maximum tax exposure to the Group is $47.4m including related interest.  Similarly, the demand against on of the Group's subsidiaries included $2.9m of this amount which has been provided in the accounts.  The remaining $44.5m remains contingent.

 

6.     Segmental Analysis

Operating Segments

For management purposes, the Group is organised into two business units; the Capricorn Group, being Capricorn Oil Limited and its subsidiary undertakings, and the Cairn India Group, each reporting internally to its own chief executive.  There are two reportable operating segments as follows:

 

Cairn India Limited Group's operations are primarily within India.

 

Capricorn Group's operations focus on new exploration activities in Greenland and the Mediterranean.  The Capricorn Group also includes the Group's interests in Nepal and a share in certain North Indian assets operated by Cairn India Limited. This segment also included the results of the Group's Sangu asset, operating in Bangladesh which was sold during the year.  Operating segments based on the geographical locations of the Capricorn Group's Greenland, Mediterranean and South Asia operating segments have been aggregated to form the Capricorn reportable segment. No one individual segment accounts for more than 10% of total segmental assets of the Group.  As a whole, the Capricorn Group accounts for less than 1% of total Group external revenues.

 

Cairn Energy PLC, is disclosed and exists to accumulate the activities and results of Cairn UK Holdings Limited, an intermediate holding company and direct parent of Cairn India Limited, and Cairn Energy PLC company results. Unallocated expenditure and net assets/(liabilities) including amounts of a corporate nature, not specifically attributable to one of the sub-Groups, are also included within this segment.

 

Management monitors the results of its business units separately for the purposes of making decisions about resource allocation and performance assessment.

 

Following the announcement of the Vedanta transaction on 16 August, the results of the Cairn India Limited Group segment are classified as discontinuing and assets and liabilities classified as held-for-sale. Under IFRS certain presentational changes and adjustments are required to reflect that the assets and liabilities are classified as held-for-sale at the Balance Sheet date.

 

Throughout the year, the Board monitored the performance of the Group by reference to the combined results of its separate operating segments, Cairn India and Capricorn, following accounting policies which did not reflect the classification of assets and liabilities of Cairn India as held-for-sale.  The Board does not receive any allocation of assets or liabilities by segment. Segmental results are therefore disclosed on this basis.  A summary of the adjustments made to reconcile the segmental results to those reported under the Group's accounting policies are included within the segmental information provided.  These adjustments include the reversal of the depletion, depreciation and amortisation charges for the period after the date the transaction was announced and a deferred tax position prepared on the basis that Cairn India was held-for-sale as at the Balance Sheet date.  The combined impact of these adjustments is to increase profit after tax by $638m.

 

Segment accounting policies have been amended in 2010 to reflect the change in the Group's accounting policy for the valuation of inventory as per note 12.  Prior year comparatives have been adjusted to reflect this change in policy.

 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

6.     Segmental Analysis (continued)

The segment results for the year ended 31 December 2010 are as follows:

 


 

Cairn

India

Group

Capricorn

Group

 

Cairn

Energy

 PLC

 

Total

2010


$m

$m

$m

$m






Revenue from external customers

1,594.2

7.1

-

1,601.3






Production costs

(252.5)

(6.3)

-

(258.8)

Pre-award costs

(1.9)

(12.7)

-

(14.6)

Unsuccessful exploration costs

(23.1)

(211.9)

-

(235.0)

Depletion and decommissioning charge

(351.4)

(0.9)

-

(352.3)






Gross profit/(loss)

965.3

(224.7)

-

740.6






Depreciation

(3.4)

(0.5)

-

(3.9)

Amortisation

(3.7)

(2.1)

-

(5.8)

Other income and administrative expenses

(48.9)

(22.3)

(12.1)

(83.3)

Exceptional administrative expenses

-

(37.9)

-

(37.9)

Impairment

-

(16.0)

-

(16.0)

Gain on sale of oil and gas assets

-

3.3

-

3.3






Operating profit/(loss)

909.3

(300.2)

(12.1)

597.0






Interest income

24.3

1.2

0.5

26.0

Interest expense

(46.8)

-

-

(46.8)

Other finance income and costs

(30.7)

1.3

(7.6)

(37.0)






Profit/(loss) before taxation

856.1

(297.7)

(19.2)

539.2






Taxation (charge)/credit

(94.1)

0.3

-

(93.8)






Profit/(loss) after taxation

762.0

(297.4)

(19.2)

445.4






Adjustments to reconcile to the financial statements





Inventory

(17.9)

-

-

(17.9)

Depletion, depreciation and amortisation

211.0

-

-

211.0

Deferred taxation

444.7

-

-

444.7






Reported  profit/(loss) after taxation

1,399.8

(297.4)

(19.2)

1,083.2






Attributable to:





Equity holders of the parent

1,110.9

(297.4)

(19.2)

794.3

Non-controlling interests

288.9

-

-

288.9






Capital expenditure

784.5

464.4

-

1,248.9






 



Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

6.     Segmental Analysis (continued)

The segment results for the year ended 31 December 2009 are as follows:

 


 

Cairn

India

Group

(restated)

Capricorn

Group

 

Cairn

Energy

 PLC

 

Total

2009

(restated)


$m

$m

$m

$m






Revenue from external customers

220.7

13.2

-

233.9

Exceptional revenue provision

(64.0)

-

-

(64.0)







156.7

13.2

-

169.9






Production costs

(48.6)

(3.9)

-

(52.5)

Pre-award costs

(4.7)

(14.0)

(3.7)

(22.4)

Unsuccessful exploration costs

(50.2)

(7.2)

-

(57.4)

Depletion and decommissioning charge

(55.0)

(5.1)

-

(60.1)






Gross loss

(1.8)

(17.0)

(3.7)

(22.5)






Depreciation

(3.4)

(0.3)

-

(3.7)

Amortisation

(3.2)

(1.5)

-

(4.7)

Other income and administrative expenses

(33.9)

(4.4)

(29.7)

(68.0)

Exceptional administrative costs

-

(29.9)

-

(29.9)

Impairment

-

(3.2)

-

(3.2)

Exceptional impairment

-

(135.6)


(135.6)

Exceptional gain on sale of oil and gas assets

-

15.0

-

15.0






Operating loss

(42.3)

(176.9)

(33.4)

(252.6)






Exceptional gain on disposal of non-controlling interest

-

-

199.5

199.5

Interest income

42.6

0.4

0.2

43.2

Interest expense

(2.1)

(0.1)

(4.4)

(6.6)

Other finance income and costs

(8.2)

1.4

(18.3)

(25.1)

Exceptional finance costs

(31.6)

-

-

(31.6)






Loss before taxation

(41.6)

(175.2)

143.6

(73.2)






Taxation credit

70.1

-

-

70.1

Exceptional taxation credit/(charge)

40.4

33.6

(17.5)

56.5






Profit /(loss) after taxation

68.9

(141.6)

126.1

53.4






Attributable to:





Equity holders of the parent

32.5

(139.6)

126.1

19.0

Non-controlling interests

36.4

(2.0)

-

34.4






Capital expenditure

796.5

52.2

62.8

911.5






 



 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

6.     Segmental Analysis (continued)

Geographic Information

 

Non-current assets


2010

2009


$m

$m




Greenland

261.3

            16.8

UK

64.9

            66.2

Other

2.6

             3.5

India

-

2,176.0

Tunisia

-

            19.4

Bangladesh

-

            2.7




328.8

2,284.6

 

Non-current assets for this purpose consist of intangible exploration/appraisal assets; property, plant & equipment - development/producing assets; property, plant & equipment - other; and, intangible assets - other.

 

 

7.     Exceptional items



2010

 

2009



$m

$m





Administrative expenses


(35.6)

(27.8)

Impairment of intangible exploration/ appraisal assets


-

(135.6)

Gain on sale of intangible exploration/ appraisal assets


-

15.0

Gain on disposal of non-controlling interest in Cairn India Limited


-

     199.5

Taxation


-

16.1



 

(35.6)

 

67.2

 

Administrative expenses - Share-based payments

At an EGM held on 21 December 2009, Cairn's shareholders approved the conversion of 'phantom options' awarded in 2007 and 2008 based on notional 'Units' in the Group into Cairn Energy PLC Share options and Long Term Incentive Plans (LTIP's).  In accordance with IFRS 2, the incremental fair value of the modified awards, calculated at the date of modification, is charged over the remaining vesting period.  A net charge of $35.6m is therefore recognised in the Income Statement as a result of this modification and in order to be comparable with 2009 this has also been included as an exceptional charge.   A charge of $27.8m was generated in 2009.

 

Gain on disposal of non-controlling interest in Cairn India Limited and Farm-out of exploration/appraisal assets

On 14 October 2009, Cairn entered into an agreement with Petronas to dispose of a further 2.29% of the Group's holding in Cairn India Limited and farm-out a 10% interest in each of the six Cairn operated Greenland exploration licences.  Total consideration receivable from Petronas was $310.0m of which $241.4m related to the Cairn India Limited shares with the remaining $68.6m allocated across the Greenland assets.  At 31 December 2009 a balance of $63.5m was due to Cairn.

 

The disposal of the Cairn India Limited shares resulted in a gain of $199.5m and reduced the Company's indirect percentage shareholding in Cairn India Limited to 62.39% at 31 December 2009.  Capital gains tax on the sale of $17.5m was charged to the Income Statement.  Under the Group's accounting policy proceeds on the disposal of intangible exploration/appraisal assets were initially credited against previously capitalised costs in the Balance Sheet.  Surplus proceeds remaining were credited to the Income Statement recognising a gain of $15.0m.

 

Petronas has an option to increase its interest to 20% in any development in these blocks, in return for payment of further consideration to reflect a market valuation of the additional 10% interest at that time

 

Impairment of intangible exploration/appraisal assets

On 30 November 2009, Cairn announced the acquisition of the 9.99% non-controlling interest held by Dyas in Capricorn Oil Limited.  Total consideration for the purchase of the Capricorn shares was $103.0m payable in $91.3m PLC shares, $3.7m cash and the transfer of 15% of Capricorn's working interests in the Tunisian and Albanian licences.  Prior to the transfer, an impairment test was performed based on fair value less cost to sell resulting in an impairment charge of $135.6m with an associated deferred tax credit of $33.6m.

 


 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

8.     Taxation on (Loss)/Profit

a)    Analysis of tax (credit)/expense in year



 

 

 

 

2010

$m


 

2009

(restated)

$m

Current tax:












UK corporation tax






Tax on profits at 28.00% (2009: 28.00%)



2.9


-




2.9


-







Foreign Tax






Indian Corporate Income Tax on profits for the year at 42.23% (2009: 42.23%)



 

28.5


 

6.3

Indian Regular Tax on profits for the year at 33.99% (2009: 33.99%)



 

(1.3)


 

6.4

Indian Minimum Alternate Tax on profits for the

year at 18.27% (2009: 14.53%)



 

208.8


 

17.5

Adjustments in respect of prior periods



14.4


5.8

Withholding taxes deducted at source



0.1


0.1




 

250.5


 

36.1







Exceptional current tax






Indian tax on capital gains at 21.12% (2009: 21.12%)



-


17.5







 

Total current tax



 

253.4


 

53.6

 

 

Deferred tax:












United Kingdom






Temporary differences in respect of non-current assets



(0.4)


-

 

 



 

(0.4)


 

-







India






Temporary differences in respect of non-current assets



(603.9)


(101.6)

Other temporary differences



-


(4.6)

 

 



 

(603.9)


 

(106.2)







Exceptional deferred tax






Temporary differences in respect of non-current assets



-


(33.6)

Other temporary differences



-


(40.4)




 

-


 

(74.0)







 

Total deferred tax


 

 

(604.3)


 

(180.2)

 

Tax credit on profit



 

(350.9)


 

(126.6)

 

 

The tax credit to the income statement is disclosed as follows:

Tax credit on continuing operations



 

(0.3)


 

-

Tax credit on discontinuing operations

Exceptional tax credit on continuing operations



(350.6)

-


(70.1)

(16.1)

Exceptional tax credit on discontinuing operations



-


(40.4)




 

(350.9)


 

(126.6)

 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

8.     Taxation on (Loss)/Profit (continued)

b)    Factors affecting tax (credit)/expense for year

 

A reconciliation of income tax expense applicable to profit before income tax at the applicable tax rate to income tax expense at the Group's effective income tax rate is as follows:


2010

$m

2009

(restated)

$m




Loss from continuing operations before tax

(303.6)

(26.9)

Profit /(loss) from discontinuing operations before tax

1,035.9

(46.3)




Profit/(loss) before taxation

732.3

(73.2)




Tax at the weighted average rate of corporation tax of 48.90% (2009: 55.33%)

358.1

(40.5)




Effects of:



Minimum Alternate Tax payable

56.8

17.5

Adjustments in respect of prior years - current tax

14.4

5.8

Temporary differences not recognised

(1.4)

62.3

Gain on disposal of investments

1.7

-

Gain on deemed disposal of subsidiaries

-

(55.9)

Impairment of non-qualifying assets

-

17.0

Share-based payments

15.5

11.0

Indian tax holiday

(205.4)

(164.0)

Non-deductible expenses and non-taxable income

3.3

13.6

Indian tax on capital gain

-

17.5

Withholding tax

0.1

0.1

Foreign exchange movements

(17.4)

(11.0)

Change of rate applied to assets classified as held-for-sale

(444.7)

-

Utilisation of brought forward losses

(131.9)

-




Total tax credit

(350.9)

(126.6)

 

 

The applicable tax rate was the weighted average rate for the year of the UK, Netherlands, Australian, Indian, Jersey, Swiss, Bangladeshi, Tunisian, Sri Lankan, Singaporean and Mauritian tax rates.  There were no major changes in the statutory tax rates applying in each of these jurisdictions, however, the weighted average rate is subject to fluctuations from year to year based on the level of profits and losses which arise to the Group in each jurisdiction.  The reason for the change of rate applied to assets classified as held-for-sale is disclosed in note 5.

 

c)    Factors that may affect future corporation tax charges

 

At 31 December 2010, Cairn had losses of approximately $237.1m (2009: $527.3m) available for offset against future trading profits chargeable to UK Corporation Tax.  In addition there are surplus management expenses of $192.3m (2009: $141.4m) and non-trade deficits of $19.6m (2009: $21.9m) available for offset against future investment income.  None of the trading losses, surplus management expenses or non-trade deficits has been recognised for deferred tax as it is not considered sufficiently probable that they will be used.  Under UK tax law, tax losses may generally be carried forward indefinitely.

 


 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

9.     Intangible Exploration/Appraisal Assets 

 

 

Cairn India

 Group

Capricorn   Group

 

Total


$m

$m

$m

Cost




At 1 January 2009

370.6

265.8

636.4

Exchange differences arising

(1.1)

-

(1.1)

Additions

40.3

51.2

91.5

Transfers to property, plant and equipment - development/producing assets

 

(19.0)

 

-

 

(19.0)

Disposals

-

(53.2)

(53.2)

Unsuccessful exploration costs

(50.2)

(7.2)

(57.4)

Transfers to assets held-for-sale

-

(10.1)

(10.1)

 

At 1 January 2010

340.6

246.5

587.1

Exchange differences arising

(1.8)

-

(1.8)

Additions

60.8

460.5

521.3

Disposals

-

(74.1)

(74.1)

Unsuccessful exploration costs

(23.1)

(281.1)

(304.2)

Transfers to assets held-for-sale

(376.5)

(77.2)

(453.7)

 

At 31 December 2010

-

274.6

274.6

 

Impairment




At 1 January 2009

-

73.4

73.4

Impairment

-

1.9

1.9

Exceptional impairment

-

135.6

135.6

 

At 1 January 2010

 

-

 

210.9

 

210.9

Impairment

-

11.6

11.6

Disposals

-

(65.8)

(65.8)

Unsuccessful exploration costs

-

(69.2)

(69.2)

Transfers to assets held-for-sale

-

(75.7)

(75.7)

 

At 31 December 2010

-

11.8

11.8

 

Net book value at 31 December 2010

-

262.8

262.8

 

Net book value at 31 December 2009

340.6

35.6

376.2

 

Net book value at 1 January 2009

370.6

192.4

563.0

 

 

Cairn India Group assets reclassified as held-for-sale (note 5) of $376.5m in 2010 are those assets which are being held-for-sale pending completion of the Vedanta transaction.  See note 5 for further details.  In addition $1.5m of costs net of impairment relating to the Nabeul licence were also included within assets held-for-sale.  In 2009 assets held-for-sale included intangible exploration/appraisal assets being transferred on the buy back of the non-controlling interest in Capricorn and costs relating to the Group's Papua New Guinea interest. Prior to the re-classification, these assets were tested for impairment and an impairment charge of $135.6m recognised accordingly.  Full details of the transfer of assets and resulting impairment loss can be found in note 7.

 

In April 2010, Cairn completed an exploration well offshore Tunisia in the Louza block. Although minor evidence of light oil was observed, the expected target reservoir was not developed in the well.  The well has therefore been plugged and abandoned without testing. As a result, all related costs are charged to the Income Statement as unsuccessful exploration costs. As $69.2m of these costs were previously impaired, the impairments have been released on relinquishment of the block.

 

In Greenland the T8-1 well, which encountered gas in thin sands has been plugged and abandoned. The T4-1 well, which was targeting a Tertiary objective at a different stratigraphic level to T8-1, failed to encounter any significant hydrocarbons and found only thin reservoir sands, although geochemical analyses continues on selective samples.  As the T8-1 and T4-1 wells did not result in commercial discoveries the well costs, including all associated demobilisation and other costs, of $186.1m are charged to the Income Statement as unsuccessful exploration costs.  The primary objectives of the third Greenland exploration well drilled on the Alpha prospect were not reached and the well has been suspended for future re-entry work depending on the results of further evaluation.  Costs of the Alpha well, totalling $202.6m, remain in exploration/appraisal assets.

 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

9.     Intangible Exploration/Appraisal Assets (continued)

In December 2010 Cairn disposed of its interests in the Bangladesh licences to Santos.  This triggered a release of previous impairments of $65.8m.

 

At the year end or prior to the intangible exploration/appraisal assets being transferred to assets held-for-sale, the Group reviews intangible/exploration assets for indicators of impairment. Where an indicator is identified, the asset is tested for impairment. As at 31 December 2010, indicators were found on two assets held by the Capricorn Group where uncertain future drilling plans or other facts or circumstances existing indicated that the carrying value of the assets may not be recovered.  As no development/producing assets remain in the cash generating unit of the Capricorn Group an impairment of $11.6m was identified and charged to the Income Statement in full.  In 2009, exploration/appraisal costs of $1.9m relating to Bangladesh assets have been impaired.

 

Disposals in 2009 relate to the farm-out of a 10% interest in each of Cairn's operated Greenland licences to Petronas. A gain on disposal of $15.0m is recognised in the Income Statement.  See note 7 for further details.

 

Exploration costs transferred to property, plant and equipment - development/producing assets (note 10) during 2009 of $19.0m represent general exploration costs allocated to successful exploration activities in Rajasthan in accordance with the Group's accounting policy.

 

 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

10.  Property, Plant & Equipment - Development/Producing Assets

 

 

 

Cairn India

Group

Capricorn

  Group

 

Total


$m

$m

$m

Cost




At 1 January 2009

1,399.4

84.6

1,484.0

Additions

751.6

(0.2)

751.4

Transfers from intangible exploration/appraisal assets

19.0

-

19.0

 

At 1 January 2010

2,170.0

84.4

2,254.4

Additions

716.6

1.5

718.1

Disposals

-

(85.9)

(85.9)

Transfers to assets held-for-sale

(2,886.6)

-

(2,886.6)

 

At 31 December 2010

-

-

-





 

Depletion and decommissioning




At 1 January 2009

286.7

77.7

364.4

Charge for the year

55.0

5.1

60.1

Impairment

-

1.3

1.3

 

At 1 January 2010

341.7

84.1

425.8

Charge for the year

142.7

0.9

143.6

Disposals

-

(85.0)

(85.0)

Transfers to assets held-for-sale

(484.4)

-

(484.4)

 

At 31 December 2010

-

-

-

 

Net book value at 31 December 2010

-

-

-

 

Net book value at 31 December 2009

1,828.3

0.3

1,828.6

 

Net book value at 1 January 2009

1,112.7

6.9

1,119.6

 

 

Included within additions during the year is an amount of $28.5m of directly attributable borrowing costs (2009: $35.1m).

 

The net book value at 31 December 2010 included $135.3m in respect of assets under construction which are not yet subject to depletion; this has been transferred to assets held-for-sale.  The 2009 net book value includes $584.2m of assets under construction not yet subject to depletion.

 

Assets reclassified as held-for-sale (note 5) of $2,402.2m in 2010 are the assets of Cairn India which are being held-for-sale pending completion of the Vedanta transaction.  See note 5 for further details.

 

In December 2010 Cairn disposed of its interests in Sangu, the Capricorn Group's sole development/producing asset, to Santos.

 

At the year end, and prior to the Cairn India assets being transferred to assets held-for-sale, the Group reviews the carrying value of cash generating units within property, plant & equipment - development/producing assets for indicators of impairment or reversal of prior year impairment.  This review determined that there was no impairment of assets.  In 2009 the value of certain units within the Capricorn Group was below the carrying value resulting in an impairment charge of $1.3m.

 

Exploration costs transferred from intangible exploration/appraisal assets (note 9) during 2009 of $19.0m represent general exploration costs allocated to successful exploration activities in Rajasthan in accordance with the Group's accounting policy.

 

 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

11.  Net Funds




2010

2009




$m

$m






Bank deposits



-

13.2

Cash and cash equivalents



187.0

1,176.5

Loans and borrowings



-

(666.1)

 

 



 

187.0

 

523.6






Bank deposits held in discontinued operations



452.6

-

Cash and cash equivalents held in discontinued operations



438.5

-

Loans and borrowings held in discontinued operations



(673.7)

-

 

Net cash



 

404.4

 

523.6

 

 

Cash at bank earns interest at floating rates based on daily bank deposit rates.  Short-term deposits are made for varying periods from overnight deposits to three months depending on the cash requirements of the Group . At the year end the Group has no deposits (2009: $33.6m) in Sri Lanka Rupee in Sri Lanka which are not readily convertible into other currencies.

 

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprises the following:

 




2010

2009




$m

$m






Cash and cash equivalents



187.0

1,176.5

Cash and cash equivalents held in discontinued operations



438.5

-

 

 



 

625.5

 

1,176.5

 

 

 

Notes to the Preliminary Financial Statements
For the year ended 31 December 2010

12.  Prior Year Adjustments

 

In June 2010 Cairn changed its accounting policy for the valuation of inventories of oil and condensate.  Cairn now values such inventories at the lower of cost and net realisable value where previously these inventories were valued at net realisable value based on the estimated selling price.

 

Cairn's revised accounting policy aligns the Group with the majority of UK listed entities in the oil and gas sector. Given the increased volumes of inventory held in Rajasthan, Cairn believed that valuing oil and condensate at cost presented a fairer and more comparable measure of operating profit for a given period.

 

Prior period comparatives have been restated to reflect this change in policy.  The following table indicates the changes that have been made to comparative statements.  No detailed restated comparative information has been provided as there is no material impact on the results of earlier years following this change in policy, being only $0.8m impact on net assets and equity.

 

 Year ended 31 December 2009

December

2009

Financial Statements

Inventory valuation adjustment

Restated December 2009


$m

$m

$m





Group Balance Sheet








Inventory

                24.7

        (14.0)

           10.7

Current Assets

1,569.1

(14.0)

1,555.1

Total assets

           3,863.8

        (14.0)

 3,849.8

Deferred tax liabilities

                83.5

          (4.0)

           79.5

Non-current liabilities

781.8

(4.0)

777.8

Total liabilities

           1,176.8

          (4.0)

   1,172.8

Net assets

           2,687.0

        (10.0)

   2,677.0





Retained earnings

           1,495.0

        (6.2)

   1,488.8

Equity attributable to equity holders of the parent

           1,959.3

          (6.2)

    1,953.1

Non-controlling interests

              727.7

          (3.8)

      723.9

Total equity

           2,687.0

        (10.0)

     2,677.0





Group Income Statement








Production costs

      (40.0)

  (12.5)

   (52.5)

Pre-award costs

(22.4)

-

(22.4)

Gross loss

       (10.0)

        (12.5)

         (22.5)

Operating loss

    (240.1)

        (12.5)

  (252.6)

Loss before taxation

   (60.7)

        (12.5)

         (73.2)

Taxation credit on loss

123.3

          3.3

  126.6

Profit for the year

                62.6

          (9.2)

           53.4

Profit attributable to equity holders of the parent

                24.7

          (5.7)

           19.0

Profit attributable to non-controlling interests

                37.9

          (3.5)

           34.4





Earnings per ordinary share - basic (cents)

1.82

(0.42)

1.40

Earnings per ordinary share - diluted (cents)

1.81

(0.42)

1.39





Group Statement of Comprehensive Income








Profit for the year

62.6

(9.2)

53.4

Total comprehensive income for the year

108.8

(9.2)

99.6

Total comprehensive income attributable to equity holders of the parent

63.4

(5.7)

57.7

Total comprehensive income attributable to non-controlling interests

45.4

(3.5)

41.9

               

 

GLOSSARY OF TERMS 

 

The following are the main terms and abbreviations used in this announcement: 

 

Corporate

Board

the Board of Directors of Cairn Energy PLC

Cairn

Cairn Energy PLC and/or its subsidiaries as appropriate

Cairn India/CIL

Cairn India Limited and/or its subsidiaries as appropriate

Capricorn

Capricorn Oil Limited and/or its subsidiaries as appropriate

CESFL

Cairn Energy Sangu Field Limited

Company

Cairn Energy PLC

GoI

Government of India

Group

the Company and its subsidiaries

HSE

Health Safety and Environment

JV

Joint Venture

MBA

Mangala, Bhagyam and Aishwariya

MPT

Mangala Processing Terminal

ONGC

Oil and Natural Gas Corporation Limited

PSU

Public Sector Undertaking

Santos

Santos International Holdings Pty Limited

USGS

US Geological Survey

Vedanta

Vedanta Resources plc

 

Technical

 

2P

proven plus probable

2D/3D/4D

two dimensional/three dimensional/four dimensional

bbl

barrel

bcf

billion cubic feet

boe

barrel(s) of oil equivalent

boepd

barrels of oil equivalent per day

bopd

barrels of oil per day

EOR

enhanced oil recovery

FDP

field development plan

mmboe

million barrels of oil equivalent

mmbbls

million barrels of oil

mmscfd

million standard cubic feet of gas per day

PSC

production sharing contract



 

NOTES TO EDITORS

 

Ø Cairn Energy PLC ("Cairn") is an Edinburgh-based oil and gas exploration and production company listed on the London Stock Exchange.

Ø Following the IPO of Cairn India in January 2007, there are two separate arms to the business:

o  Cairn India limited ("Cairn India") is listed on the Bombay Stock Exchange and the National Stock Exchange of India and has interests in a total of 11 acreage blocks in India and Sri Lanka. Cairn currently retains a 62.25% interest in Cairn India.

o  Capricorn Oil Limited ("Capricorn"), a 100% subsidiary of Cairn, is focused on exploration. Capricorn has assets in Nepal, Greenland, Tunisia, Albania and Spain.

Ø "Cairn" where referred to in this release means Cairn Energy PLC and/or its subsidiaries (including Cairn India and Capricorn), as appropriate.

Ø "Cairn India" where referred to in the release means Cairn India Limited and/or its subsidiaries, as appropriate.

Ø Cairn has previously focused its activities on the geographic region of South Asia, resulting in a significant number of oil and gas discoveries.  In particular, Cairn made a major oil discovery (Mangala) in Rajasthan in the north west of India at the beginning of 2004. Cairn has now made more than 20 discoveries in Rajasthan block RJ-ON-90/1.

Ø Cairn India is headquartered in Gurgaon on the outskirts of Delhi, with operational offices in Chennai, Gujarat, Andhra Pradesh and Rajasthan.

Ø Cairn Energy PLC (including Capricorn) is run from Edinburgh with operational offices in Nuuk, Tunis and Kathmandu.

 

For further information on Cairn please go to: www.cairnenergy.com 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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