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Bolt from the blue as dynamic duo step down at Cairn Energy

SAY what you like about Cairn Energy, but things are rarely boring at the Edinburgh-based oil and gas independent.

It has been quite an adventure so far.

However, while we have become used to anticipating the unexpected from Cairn Energy, yesterday's announcement that two senior veterans of the company were departing was a bolt from the blue.

Deputy chief executive Mike Watts, who was previously exploration director, and managing director and chief financial officer Jann Brown are stepping down as part of what Cairn Energy describes as long-term succession planning.

The pair will not seek re-election to the Cairn Energy board at the annual meeting on May 15. However, they will subsequently be working for the company in "senior roles" during their notice periods and dedicating their time to seeking to resolve a tax dispute with the Indian authorities.

Cairn Energy founder and former Scotland rugby winger Sir Bill Gammell announced last month that he would retire as chairman at the annual meeting.

The company has come a long, long way since he talked enthusiastically to The Herald about its prospects in Bangladesh in the old head office on Castle Street in Edinburgh in 1995.

In the spring of 1995, Cairn Energy's stock market worth was about £50 million. That was long before its giant Mangala oil find at Rajasthan in India in 2004, which transformed the company.

In 2011, the company raised $5.5 billion by selling 40% of Cairn India to Vedanta Resources. On the back of this deal, which gave Vedanta control of this Indian business, Cairn Energy returned $3.5bn to shareholders.

Cairn Energy has tried to add to its reputation as a fleet-of-foot player with big ambitions and a willingness to put its money where its mouth is, an image hard won through its impressive efforts in India, with a major drilling programme in Greenland.

This project attracted the attention of the environmentalists. At one stage, people dressed as polar bears targeted Cairn Energy's modern headquarters in Edinburgh's Lothian Road.

Cairn Energy spent more than $1bn drilling off Greenland in 2010 and 2011 without making a commercial find. It has not appeared in recent times to be in any rush to get back to this territory.

Since Simon Thomson succeeded Sir Bill as chief executive in July 2011, when the founder became chairman, Cairn Energy has plotted a different course. Mr Thomson, while targeting fresh "frontier" territories including Morocco, has added significant North Sea assets. The plan is that these assets, including interests in the Catcher and Kraken areas, will in coming years provide cash to fund exploration, taking some of the volatility out of the business.

But Mr Thomson is having to be patient. After the disappointing Greenland programme, Cairn Energy's recent drilling campaign in Morocco ended without any discovery viewed at this stage as commercial.

As if all of that were not enough, Cairn Energy has found itself embroiled in a tax dispute with the Indian authorities.

The experience of Mr Watts and Ms Brown, who are on respective notice periods of six months and one year, means they are well placed to undertake the task of trying to settle the Indian tax dispute. Ms Brown served on the board of Cairn India, and Mr Watts was key to the exploration success in Rajasthan.

News of the Indian tax authorities' request for information has taken a heavy toll on Cairn Energy shares. They have fallen by more than one-third since news of the dispute emerged in late January. In spite of all this, Cairn Energy still had a stock market worth of £965m last night.

Cairn Energy has become used over the years to having to deal with a few bumps along the way. These have included an uproar over its plans to award Sir Bill a £3.5m incentive to seal the Cairn India stake sale, in the form of a £2.5m share award and a £1m charitable donation.

While Cairn Energy backed down on the award, it suffered a 67% vote against its directors' remuneration report at its shareholder meeting in 2012. At this meeting, a separate £1.4m compensation payment to Sir Bill for "loss of office" as a result of the company asking him to move from the chief executive to chairman post in summer 2011 was in focus.

It remains to be seen what the impending changes to Cairn Energy's board will mean for the company. They certainly herald the end of an era, with the finance director post being taken up by 37-year-old James Smith, recruited recently from investment bank Rothschild.

As Cairn Energy moves its drilling rig on to Senegal, Mr Thomson has a lot to live up to, given the success of Sir Bill and Mr Watts in India.

It is important to emphasise the type of discoveries made by Cairn Energy in India do not come along very often, and to recognise the returns the company has produced for investors over the years. And Mr Thomson appears to be making sure he does not put all his drill bits into the one territory as he aims to land another big find for Cairn Energy.

However, as the Indian tax issue continues to weigh on the share price, Mr Thomson could do with some success with the drill bit.

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