Why has the Cairn Energy share price risen sharply?

Oil pipes in an oil field

The Cairn Energy (LSE: CNE) share price has had a very good week. It was up around 40%, which is an incredible rise.

Why has the Cairn Energy share price risen so fast?

India’s finance minister, Nirmala Sitharaman, introduced a taxation laws amendment bill on Thursday, which will effectively withdraw retrospective tax demands made by the Indian government to Cairn in 2014.

For context Cairn’s share price has been held back by this long-running dispute. It has cast a long shadow over the company and its share price. 

It’s expected that this development could mean a refund of around $1.7bn to the Scotland-based oil explorer. The oil and gas company was awarded $1.2 billion by an international tribunal in December.

So it’s the expectation of a final resolution to this problem that has sent the shares flying. An increase in the oil price probably has helped a little as well.

What could come next?

The recent rise is obviously very good news for current shareholders. But the dispute has meant that over the last five years the share price has fallen.

The big questions for me now are: is the future brighter and are the shares worth adding to my portfolio?

I think the answers to those questions are yes and no, respectively. Undoubtedly the future seems to be brighter for the oil explorer. The Cairn Energy share price could continue to do well in coming weeks if further progress is made. But I harbour a suspicion that there may be more twists and turns before the money lands in Cairn’s account, given what’s happened over the last seven years since this dispute started.

An improving outlook for the oil price also makes the future a little brighter as well for an oil explorer such as Cairn. A higher price for the commodity has helped Cairn’s peer, BP, to better than expected profits. BP also expects the oil price to do well over the next decade, which if correct, is good news for both companies. 

Why are the shares not a buy for me?

I’ll not be buying the shares because ultimately, I don’t want to be exposed long term to a fluctuating oil price. ESG concerns, I think, may put downward pressure on the Cairn Energy share price and that of other oil explorers.

Ultimately, there’s not much beyond the resolution of the dispute to get excited about from my perspective.

Free cash flow per share and returns on capital in 2020 were both negative, as was operating profit. If the oil price keeps improving, that might change. But if it worsens, Cairn could continue to be loss-making.

Arguably, the shares are still very cheap. Not surprising given all the challenges the oil explorer has faced. So it could be added speculatively, but I’d prefer to concentrate on green energy stocks, which I see as having far more share price growth and income potential.

The post Why has the Cairn Energy share price risen sharply? appeared first on The Motley Fool UK.

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Andy Ross owns no 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.