Here’s why the Cairn Energy share price exploded this week

The Cairn Energy share price exploded this week as £1.2bn of assets are being returned to the business. Zaven Boyrazian investigates.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Cairn Energy (LSE:CNE) share price has had a pretty rough time this year. Since the start of 2021, the stock is down roughly 39%. Or at least it was until yesterday when it surged by 26%. What caused the sudden eruption of growth? To understand what happened, I have to go right back to 1994. Let’s dive in.

A bit of background history

Cairn Energy is a Scottish oil company engaged in exploration, development and production. It began investing heavily in the Indian Oil & Gas industry back in 1994. Around a decade later, it made one of the largest oil discoveries in the country. And reorganised its Indian division before listing it on key Asian stock exchange the BSE through an IPO in 2006.

Things were going fine until 2012. A new retrospective tax law was introduced by the Indian government. Under this, income from the sale of shares in a non-Indian business whose value is derived from assets located in India will be taxed under the Indian system.  Consequently, a few years later, in early 2015, Cairn Energy was slapped with a tax bill roughly equal to £1bn due to the sale of its shares during the Indian IPO nine years prior.

And to ensure the business paid, the government seized unsold shares along with dividends, as well as blocking any tax refunds until the bill was paid. Needless to say, this was terrible news. And the Cairn Energy share price plummeted.

The Cairn share price has its risks

What’s happening to the Cairn Energy share price now?

After years of appeal, Cairn Energy finally caught a break. In December 2020, the international arbitration court at the Hague instructed India to return approximately £1.2bn to the business, which covered most of the original bill with interest. This development caused the Cairn Energy share price to jump 30% on that day. Despite this ruling, India continued to delay repayment, resulting in the stock’s decline throughout 2021.

But yesterday, a new legislative bill was presented in the Indian parliament that would withdraw all retrospective tax claims on Cairn and refund all seized assets. It seems this five-year tax debacle is finally coming to an end. And with a sudden surge in capital being returned to the business, funding for new projects worldwide may soon become available. So, I’m not surprised to see the Cairn Energy share price explode on the news.

What now?

After the recent surge in Cairn Energy’s share price, is this a business worth investing in? The company did just announce a new oil discovery in Mexico that could contain between 150 and 200 million barrels of oil equivalent. But even with that in mind, I’m personally not tempted.

Despite being a well-established player within its sector, the firm has struggled to remain profitable. In fact, in the last five years, only two of them were in the black. Perhaps that will soon change. But I think there are far more exciting and profitable growth opportunities to be found elsewhere. So, I’m keeping this stock on my watchlist for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

How I’m trying to make a million from passive income

Invest as much as possible, regularly, and use the passive income to plough back into more shares. Here's how millionaires…

Read more »

Investing Articles

I’d buy 30,434 shares of this UK dividend stock to target £175 a month in passive income

A top insider has spent over £1m buying this 9%-yielding passive income share over the last year. Roland Head explains…

Read more »

Growth Shares

Should I buy Rolls-Royce shares for 2025?

Edward Sheldon’s missed out on the huge gains that Rolls-Royce shares have generated this year. But should he buy the…

Read more »

Investing Articles

30,000 shares in this FTSE 250 REIT could earn me £559 a month in passive income

Real estate investment trusts can be great passive income investments. And Stephen Wright likes one from the FTSE 250 with…

Read more »