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Price hike to fuel follow-on public offer for ONGC, IOC

29 Jun 10 09:46 AM
ET
oNEW DELHI: The government plans to sell shares in Oil & Natural Gas (ONGC) and Indian Oil (IOC) to capitalise on the “feel good” mood among investors after raising petroleum product prices last week.

The petroleum ministry wants the department of disinvestment (DoD) to consider stake sales in the two companies as their financial position has been weakened by years of government price control, which is set to continue for most products. The government can raise funds by selling its stake and a company may sell new shares to improve finances.

“With fuel prices now being raised, the issue of under recoveries of these firms has been addressed to some extent. So it is feasible for them to launch follow-on public offers,” said a senior government official privy to the development.

Finance minister Pranab Mukherjee facing a 5.5% fiscal deficit this year, aims to raise Rs 40,000 crore from sale of shares in government-run companies. Since follow-on offers of miner NMDC and utility NTPC did not enthuse investors, some in the government believe oil companies may be the right bet, since the outlook has brightened following announcement of freeing petrol prices and an intention to do so with diesel.

Shares of ONGC, IOC, Hindustan Petroleum and Bharat Petroleum have risen as much as 17% since Friday’s announcement compared with benchmark Sensex’s 0.2%, as traders bet their losses will narrow. But some are cautious on the prospects, given that government still holds a leash. The increase may not be enough to draw long-term investors.

“The petrol price deregulation is a welcome move, but capital markets would react to the divestment in downstream oil companies more positively if diesel prices were also freed,” said Gokul Chaudhri, partner BMR Advisers. The government could also consider a follow -on offer in Bharat Petroleum in which it holds 55%.

The increase in petrol, diesel, kerosene and cooking gas prices will cut oil companies’ losses Rs 22,000 crore, but will still leave around a Rs 53,000-crore hole in their books, to be made good by the government, or through complex transfer of funds between companies. The under recovery on kerosene and cooking gas may be Rs 16,500 crore, and Rs 21,000, respectively.

The price de-control announced last week may not be enough to draw substantial investor interest, given that cooking gas and kerosene are still under government control. The government did not disclose how it planned to compensate oil companies for the losses.

“Notwithstanding the slew of petroleum pricing reform measures announced by the eGoM, one of the key issues, subsidy sharing, was unaddressed,” said Ambit Capital in a note to clients. “Given that expectations were running high, lack of clarity is a disappointment.”

At the current price of Rs 1,304 a share, a 5% dilution in ONGC can get the government about Rs 14,000 crore , where it owns 74%. IOC is keen to raise funds with a follow-on offer to shore up its finances. The government currently owns 79% of it.

“The government shareholding in both IOC and ONGC is substantial,” oil secretary S Sundareshan said on Friday. “There can be discussions with the DoD on a possible course of action. We will take this up as we go along during the year.”