Shares of Oil & Natural Gas Corp. have been buoyed by a string of positive news recently. This is likely to make it easier for the government to sell part of its stake in the company to the public later this month. Rather than buy now, investors should wait for the share sale, which will likely be priced lower than the market price, say analysts.
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The government recently raised diesel and cooking fuels prices, further reducing the subsidy burden on ONGC. Above, activists protest against this price hike.
Over the past ten days, the stars are aligning for ONGC, which hit a 52-week low of 248 rupees ($5.54) as recently as June 21. First, crude oil prices tumbled, meaning that ONGC has to shell out less for fuel subsidies. Government-owned oil refiners sell products to consumers at state-controlled prices, irrespective of how much they paid for the crude. State-run oil and gas explorers such as ONGC have to chip in for the subsidies.
Then, last week, the government raised diesel and cooking fuels prices, further reducing the subsidy burden on ONGC.
The icing on the cake was the government decision’s late Thursday to approve Cairn Energy Plc.’s proposal to sell a majority stake in Cairn India Ltd. to Vedanta Resources Plc. but with stiff conditions.
Cairn India and ONGC jointly operate an oil field in Rajasthan, but ONGC has to bear the full royalty costs for the block. This stems from a rule aimed at encouraging foreign firms to invest in India’s oil and gas sector.
But this may change: The government said Cairn India will have to stump up its share of the royalty cost if the Cairn-Vedanta deal goes through.
Angel Broking estimates the royalty burden at 180 billion rupees ($4 billion) over the life of the field, and ONGC could save as much as 136 billion rupees in royalty costs if Cairn and Vedanta agree to the conditions.
As a result, shares of ONGC were up 1.5% at 278.00 rupees ($6.2) in afternoon trade Friday, compared to a 0.4% fall in the benchmark Sensex.
India plans to raise about $9 billion in the year that started April 1 by selling stakes in several companies. Although in recent months its efforts appeared to be lagging behind, the ONGC sale comes as welcome news. The government is expected to go through with its plan to sell a 5% stake in ONGC later this month.
Which is why it is might be a good idea to wait for the share sale, said Ambareesh Baliga, chief operating officer at Way2Wealth Securities. Government share sales are usually priced lower than private sector issues, because the government doesn’t want to be seen as milking investors. The lower an issue is priced, the higher the potential returns for issue subscribers when the issued stock starts trading.
Another reason why it may be worth waiting is that the government might clarify its subsidy-sharing policy before the share sale. One gripe of ONGC investors is that the government can arbitrarily set subsidy payments for upstream companies. When upstream companies have to pay a larger share towards subsidies, their profits fall and investors suffer.
Expectations of a revised upstream subsidy policy ahead of the proposed share sale are strong, according to Credit Suisse.
Via: India Real Time