Cairn Energy shares were performing well on Tuesday morning, helped by a ratings upgrade by UBS from ‘neutral’ to ‘buy’.

The stock has fallen around 12% in the year to date, as UBS explains: ‘The market usually discounts development projects, and Cairn’s early-phase exploration offered limited potential for abnormal returns. Competition for capital in this sector is fierce and, in short, investors saw no urgent need to own the stock.’

However, the broker now says that, with time, the things will become more exciting at Cairn.

UBS said it sees an ‘excellent entry point’ on a longer-term horizon with downside looking well protected.

‘Cairn drills a series of E&A wells in the UK and Norwegian North Sea which, whilst not individually ‘game-changing’, can incrementally de-risk up to ~500Mmbbl (upside of ~£0.65/sh).

‘The Moroccan drilling campaign, chasing over 1.0Bnbbl of high-margin
resource, commences 2H13. This remains high-risk frontier exploration but, in light of the known hydrocarbon system in Cairn’s Tarfaya Basin, we are excited by the transformational potential.’

The broker has raised its target price for the shares from 300p to 325p.

BC