Cairn-do attitude

It's safe to assume that no FTSE 100 company has ever before included a slide on "iceberg management" in its results presentation, but welcome to Cairn Energy's latest adventure - oil and gas exploration off the coast of Greenland. If the environmental risks sound frightening, so do the financial ones. Drilling a single test hole in Greenland's water will cost up to $100m. How many holes will be needed? Nobody knows until the drilling starts - that's how oil exploration works.
You might expect Cairn's shareholders to be alarmed by the size of the potential bets. In fact, the reverse is more likely. If necessary, Cairn will probably find willing partners to join its Arctic and sub-Arctic adventure. Big finds in non-Opec territories are what everybody wants and Greenland, according to the early seismic charts, could be very big indeed. Cairn also has a good reputation. It bought Shell's unloved interests in the Rajasthan desert and discovered reserves that will be producing 80,000 barrels by the end of this year.
The Rajasthan find was not Cairn's first big discovery, as lauded investor Anthony Bolton reminds us in his latest book, Investing Against the Tide. The first "company maker" field was in Bangladesh. Bolton calls Cairn a company with an asymmetric pay-off - you make a lot of money if things go well, but don't lose much if they don't.
Bolton timed his punts on Cairn to perfection - he caught both big moves. It's not known whether he's backing the Greenland bet since he's not managing money directly for Fidelity these days - but Fidelity itself is on the register.
Nobody knows if Greenland's oil, if it's there, can be produced economically. At the current oil price of $48 a barrel, nobody will be making much money. The assumption is that, eventually, the price will rebound to $75-ish. There's an awful lot of "ifs" in the story, but that's how Cairn plays.