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PSU Explorer’s FPO is Mixed Bag for Investors In the backdrop of Oil and Natural Gas Corporation (ONGC) going ahead with its follow-on public offer (FPO) of shares without a definitive subsidy sharing formula, we are changing our methodology for calculation of subsidy per barrel in respect of nomination fields to absolute basis from our earlier assumption of upstream contribution of 39%, as reflected in our initiating coverage report dated 2 August 2011. We believe ONGC’s subsidy burden would be $55/bbl for FY12 as against our earlier estimate of $48/bbl. This leads to a fall in FY12 net realisation to $55/bbl from $62/bbl estimated earlier. We maintain our Buy rating on ONGC, but cut target price to Rs322 from Rs360 set earlier to reflect lower net realisation from nomination fields. We believe the FPO will turn out to be a mixed bag for investors. On the positive side, it would finally wipe off the discount generated on account of FPO overhang and the market will again value the stock based on fundamentals. However, on the flip side, the FPO without having a transparent subsidy sharing mechanism will limit the upside for the stock. Change in subsidy/bbl methodology Earlier, the government had maintained its stance of going ahead with ONGC’s FPO only when clarity emerged on the subsidy sharing mechanism. But in the wake of the offer opening on 20 September 2011 without a proper and sustainable framework for subsidy sharing, we changed our methodology for calculating subsidy per barrel to absolute basis as against the earlier 39% upstream contribution. We believe the market continues to discount higher upstream subsidy burden because of increased risk of the government’s vacillating approach on upstream contribution to total under-recovery. We believe total under-recovery in FY12 will be around Rs1,082bn, with the government budgeting Rs223bn towards petroleum subsidy for the year. We assumed subsidy per barrel of $48/bbl for FY12 based on 39% upstream formula, but on absolute basis the subsidy will now increase to $55/bbl, which effectively implies 44% upstream contribution. To factor in higher subsidy per barrel on absolute basis, we believe the government will allow a maximum up to $55b/bbl of realisation in FY12 and up to $62/bbl in FY13, as we build a case of softer global crude oil prices in FY13 compared to FY12.
The government earlier planned to mop up Rs150-160bn from the FPO on the back of clarity in subsidy sharing, but in the absence of such a mechanism it will able to mop up only Rs100-110bn at the current market price. We lowered our net realisation estimates for FY12 and FY13 to $55/bbl and $62/bbl from our earlier estimates of $62/bbl and $68.2/bbl, respectively, on increased risk of the government coming up with another ad hoc formula before 4QFY12 if crude oil prices do not soften from current levels and total under-recovery tops the Rs1trn-mark for FY12. Lower realisation from nomination fields leads to a cut in our EPS estimates by 10% and 9% for FY12 and FY13, respectively. We lower our EPS estimates for FY12 and FY13 to Rs31.46 and Rs34.47 from earlier estimates of Rs35.10 and Rs37.90, respectively.
FPO overhang finally dissipates The ONGC stock bore the brunt of the FPO overhang since the past nine months. It plunged ~22% from December 2010 to February 2011 on announcement of the FPO plan and nose-dived ~19.5% during April-June 2011 on prospects of the offer hitting the capital market. Post deferment of the FPO in February 2011, the stock appreciated by about 16.9% until April 2011. Historically, a stock slips during an impending FPO as arbitrage opportunities develop in cash and futures markets. Traders short futures with the hope that they can buy the stock at a lower price via the FPO.
FPO details The government will offer for sale 427.77mn shares of ONGC through the FPO and out of this 8.55mn shares (2% of total offering) will be reserved for employees. Excluding reservation for employees, the net offer comprises 419.22mn shares. The offer constitutes 5% of the paid-up equity share capital of the company. At the CMP, the government will garner Rs111bn by divesting 5% equity and after considering 5% discount to the CMP, the mop-up from the FPO will be Rs106bn
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PSU Explorer’s FPO is Mixed Bag for Investors In the backdrop of Oil and Natural Gas Corporation (ONGC) going ahead with its follow-on public offer (FPO) of shares without a definitive subsidy sharing formula, we are changing our methodology for calculation of subsidy per barrel in respect of nomination fields to absolute basis from our earlier assumption of upstream contribution of 39%, as reflected in our initiating coverage report dated 2 August 2011. We believe ONGC’s subsidy burden would be $55/bbl for FY12 as against our earlier estimate of $48/bbl. This leads to a fall in FY12 net realisation to $55/bbl from $62/bbl estimated earlier. We maintain our Buy rating on ONGC, but cut target price to Rs322 from Rs360 set earlier to reflect lower net realisation from nomination fields. We believe the FPO will turn out to be a mixed bag for investors. On the positive side, it would finally wipe off the discount generated on account of FPO overhang and the market will again value the stock based on fundamentals. However, on the flip side, the FPO without having a transparent subsidy sharing mechanism will limit the upside for the stock. Change in subsidy/bbl methodology Earlier, the government had maintained its stance of going ahead with ONGC’s FPO only when clarity emerged on the subsidy sharing mechanism. But in the wake of the offer opening on 20 September 2011 without a proper and sustainable framework for subsidy sharing, we changed our methodology for calculating subsidy per barrel to absolute basis as against the earlier 39% upstream contribution. We believe the market continues to discount higher upstream subsidy burden because of increased risk of the government’s vacillating approach on upstream contribution to total under-recovery. We believe total under-recovery in FY12 will be around Rs1,082bn, with the government budgeting Rs223bn towards petroleum subsidy for the year. We assumed subsidy per barrel of $48/bbl for FY12 based on 39% upstream formula, but on absolute basis the subsidy will now increase to $55/bbl, which effectively implies 44% upstream contribution. To factor in higher subsidy per barrel on absolute basis, we believe the government will allow a maximum up to $55b/bbl of realisation in FY12 and up to $62/bbl in FY13, as we build a case of softer global crude oil prices in FY13 compared to FY12.
The government earlier planned to mop up Rs150-160bn from the FPO on the back of clarity in subsidy sharing, but in the absence of such a mechanism it will able to mop up only Rs100-110bn at the current market price. We lowered our net realisation estimates for FY12 and FY13 to $55/bbl and $62/bbl from our earlier estimates of $62/bbl and $68.2/bbl, respectively, on increased risk of the government coming up with another ad hoc formula before 4QFY12 if crude oil prices do not soften from current levels and total under-recovery tops the Rs1trn-mark for FY12. Lower realisation from nomination fields leads to a cut in our EPS estimates by 10% and 9% for FY12 and FY13, respectively. We lower our EPS estimates for FY12 and FY13 to Rs31.46 and Rs34.47 from earlier estimates of Rs35.10 and Rs37.90, respectively.
FPO overhang finally dissipates The ONGC stock bore the brunt of the FPO overhang since the past nine months. It plunged ~22% from December 2010 to February 2011 on announcement of the FPO plan and nose-dived ~19.5% during April-June 2011 on prospects of the offer hitting the capital market. Post deferment of the FPO in February 2011, the stock appreciated by about 16.9% until April 2011. Historically, a stock slips during an impending FPO as arbitrage opportunities develop in cash and futures markets. Traders short futures with the hope that they can buy the stock at a lower price via the FPO.
FPO details The government will offer for sale 427.77mn shares of ONGC through the FPO and out of this 8.55mn shares (2% of total offering) will be reserved for employees. Excluding reservation for employees, the net offer comprises 419.22mn shares. The offer constitutes 5% of the paid-up equity share capital of the company. At the CMP, the government will garner Rs111bn by divesting 5% equity and after considering 5% discount to the CMP, the mop-up from the FPO will be Rs106bn
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