Heavyweight broker Goldman Sachs has turned sour on Scottish oil firm Cairn Energy (LON:CNE) after Tuesday’s news of a US$1.6bn fine for unpaid tax in India.
Shares in the energy giant lost nearly a fifth of their value yesterday as it told investors it would fight the claim relating to its India business that dates back to 2006-07, though they rallied 3% today to 160p.
Today, Goldman Sachs downgraded the company to a “hold” while Deutsche Bank cut its share price target by 6% to 165p.
“After months of encouraging dialogue with the Indian government, Cairn has been blind-sided,” said Deutsche Bank analyst Tom Robinson.
The unexpected bill took investors by surprise and the amount is significantly in excess of Cairn’s 10% stake in Cairn India and just shy of the group’s entire equity value.
“If there is a positive, it is that the portfolio and capital structure has been well prepared for this eventuality,” added Robinson.
Cairn said it is strongly contesting the draft tax assessment it received from the Indian authorities, and it has now filed a formal dispute notice under the UK-India investment treaty.
If negotiations can’t find a resolution then the matter will be deferred to an arbitration process.
“It remains to be seen how binding the treaty is but management has suggested it provides for the expropriation of assets and is consistent with international law,” said Robinson.
“Nonetheless, given the track-record of prolonged tax disputes in-country, we believe visibility is likely to remain low for some time.”
Yesterday, Investec analyst Brian Gallagher said the market had come to expect that Cairn would this year see restrictions lifted over its remaining 10% stake in the Cairn India business, which is listed in Bombay.
Instead, he said the retrospective tax bill is contrary to government rhetoric since prime minister Narendra Modi was elected last year.
News of the hefty bill came a day after Cairn announced pre-tax losses of £252mln.