SIR Bill Gammell, the founder of Cairn Energy, may trump the world’s most acclaimed investor Warren Buffett for the top slot in investing, and Indian retail investors haven’t done badly either with him. Mr Gammell’s investments has returned 28 times between 1993 and now, compared to Mr Buffett’s favourite Coca Cola that has yielded 1.64 times. Berkshire itself has returned about 10 times during the period.
Mr Gammell’s gamble with $400-million investment in Cairn India is worth $11.1 billion, including the unrealised $3.2 billion, calculations by ET Intelligence Groupshows.
Vedanta Resources on August 16 announced an agreement to buy as much as 60% of oil & gas explorer Cairn India for $9.6 billion, which included 50 a share non-compete fee to the UK parent of Cairn. The biggest take-over deal this year brought to light the returns on the investments triggered a debate whether Vedanta was justified in paying the fee.
Retail investors’ wealth has more than doubled in the past three-and-a-half years since Cairn India’s initial public offering.
Investors may have to realise that this is just a typical example in the oil exploration industry where an explorer, which takes all the risks and invests early reaps the largest dividend, leaving minority holders lesser.
Cairn Energy, which is set to walk away with at least $6.5 billion for a 40% stake in Cairn India, had earlier taken away $1.4 billion out after selling shares in Cairn India’s IPO. Its remaining 23% stake will be worth about $3.2 billion at current market price. All this for a $400 million investments in 1993.
But all this comes after years of struggle to develop these fields and financial engineering.
Cairn India’s IPO was to raise funds to buy out Cairn India Holding (CIHL), which owned the three key assets — a 22.5% stake in Ravva field in the Krishna Godavari basin, 40% in a gas field in Cambay basin and a 70% stake in a large discovery in Rajasthan, which was three years away from production. The valuation of these assets depended on the IPO pricing. The IPO with a price band of 160-190 a share was at a time when the markets were shaky. It received subscriptions for 1.6 times the offer. This valued the company — or the assets it was buying in CIHL — at a market capitalisation of a little above 28,500 crore.
Out of the $2 billion raised in this IPO (including the pre-IPO placement), around $600 million were retained in Cairn India, while the rest were paid out to Cairn Energy for a 24% stake of CIHL. The rest 76% stake was transferred to Cairn against its own shares.
It has been long since Cairn Energy started exploring for petroleum in Asia. Initially entering Bangladesh in 1993, it obtained stake in India’s Ravva field in 1996, when it acquired an Australian company. With the discovery of Sangu field off Bangladesh in 1996, the company farmed out a part of it to Halliburton and Shell to fund the development programme.
The transaction with Shell involved Cairn Energy acquiring a 10% stake in the Rajasthan block with options to increase that stake to 40% by carrying Shell through certain work programme. In 1999, a joint venture between Cairn Energy and Shell made the first oil discovery in Rajasthan named Guda. In a further transaction Cairn Energy increased its stake in the Rajasthan block to 50% and took over the operatorship from Shell while transferring the operatorship in Bangladesh to Shell. In May 2002, Cairn Energy acquired the remaining 50% interest in the Rajasthan block from Shell. In less than two years after that, the Mangala field was discovered in January 2004. The Indian government retained back-in rights to acquire 30% working interest in any commercial discoveries made in Rajasthan block, which it went on to exercise through ONGC as its nominee. This asset went on to become the largest and most valuable asset in Cairn Energy’s portfolio.
The excessive rewards for a discovery are, perhaps, the need of the petroleum exploration industry, which is highly capital intensive and risky. With the company’s project well on schedule, retail investors can stay invested to be part of the steady growth.
Mr Gammell’s gamble with $400-million investment in Cairn India is worth $11.1 billion, including the unrealised $3.2 billion, calculations by ET Intelligence Groupshows.
Vedanta Resources on August 16 announced an agreement to buy as much as 60% of oil & gas explorer Cairn India for $9.6 billion, which included 50 a share non-compete fee to the UK parent of Cairn. The biggest take-over deal this year brought to light the returns on the investments triggered a debate whether Vedanta was justified in paying the fee.
Retail investors’ wealth has more than doubled in the past three-and-a-half years since Cairn India’s initial public offering.
Investors may have to realise that this is just a typical example in the oil exploration industry where an explorer, which takes all the risks and invests early reaps the largest dividend, leaving minority holders lesser.
Cairn Energy, which is set to walk away with at least $6.5 billion for a 40% stake in Cairn India, had earlier taken away $1.4 billion out after selling shares in Cairn India’s IPO. Its remaining 23% stake will be worth about $3.2 billion at current market price. All this for a $400 million investments in 1993.
But all this comes after years of struggle to develop these fields and financial engineering.
Cairn India’s IPO was to raise funds to buy out Cairn India Holding (CIHL), which owned the three key assets — a 22.5% stake in Ravva field in the Krishna Godavari basin, 40% in a gas field in Cambay basin and a 70% stake in a large discovery in Rajasthan, which was three years away from production. The valuation of these assets depended on the IPO pricing. The IPO with a price band of 160-190 a share was at a time when the markets were shaky. It received subscriptions for 1.6 times the offer. This valued the company — or the assets it was buying in CIHL — at a market capitalisation of a little above 28,500 crore.
Out of the $2 billion raised in this IPO (including the pre-IPO placement), around $600 million were retained in Cairn India, while the rest were paid out to Cairn Energy for a 24% stake of CIHL. The rest 76% stake was transferred to Cairn against its own shares.
It has been long since Cairn Energy started exploring for petroleum in Asia. Initially entering Bangladesh in 1993, it obtained stake in India’s Ravva field in 1996, when it acquired an Australian company. With the discovery of Sangu field off Bangladesh in 1996, the company farmed out a part of it to Halliburton and Shell to fund the development programme.
The transaction with Shell involved Cairn Energy acquiring a 10% stake in the Rajasthan block with options to increase that stake to 40% by carrying Shell through certain work programme. In 1999, a joint venture between Cairn Energy and Shell made the first oil discovery in Rajasthan named Guda. In a further transaction Cairn Energy increased its stake in the Rajasthan block to 50% and took over the operatorship from Shell while transferring the operatorship in Bangladesh to Shell. In May 2002, Cairn Energy acquired the remaining 50% interest in the Rajasthan block from Shell. In less than two years after that, the Mangala field was discovered in January 2004. The Indian government retained back-in rights to acquire 30% working interest in any commercial discoveries made in Rajasthan block, which it went on to exercise through ONGC as its nominee. This asset went on to become the largest and most valuable asset in Cairn Energy’s portfolio.
The excessive rewards for a discovery are, perhaps, the need of the petroleum exploration industry, which is highly capital intensive and risky. With the company’s project well on schedule, retail investors can stay invested to be part of the steady growth.
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