OIL AND GAS SECTOR TO THE FORE
With the Oil India IPO hitting the markets today, the oil and gas stocks are likely to be in the limelight this week.
There are other reasons as well. The Government has proposed a 44% hike in the APM gas price. The new price will be USD 2.6 per million British thermal unit as against about USD 1.8 per unit currently. This will benefit ONGC and Oil India. APM is an acronym for administered price mechanism.
This news came on Friday , during market hours. So the news is already priced in. However, the fact that the price hike, if it happens, will add something like Rs 2,000 Cr to the PBT of ONGC, by the admission of its own Chairman.
Indian Oil has also announced a board meeting to consider bonus issue. The announcement came in after market hours Friday. This leaves room for the stock to do well this morning.
Are the two aforesaid announcements a mere coincidence or the Government is playing its cards deftly? Whatever the objective, these should help the concerned stocks do well and make Oil India IPO look a lot cheaper .
The offer is priced in the band of Rs 950-1050. The pricing leaves something on the table for the investor, as compared to the relatively stiff pricing of power IPOs. On a PE basis, Oil India is being made available at 10 as compared to ONGC at 16. In terms of EV by EBITA, Oil India at 5 times is cheaper than ONGC’s 7.
However, the most redeeming feature of Oil India is that it has been adding twice the amount to its reserves as much as it takes out. This is not something which even ONGC or other large companies in the world do. Another feature is that its success ratio of drilling and finding oil is much better than ONGC and the cost is also low.
Investors, however, will need to keep in mind, that Oil India is a tiger only in Assam. And Assam is a proven and explored area. Oil is available at a lesser depth and many oil wells are self flowing. Things become difficult, when you start going outside Assam and off-shore as well. The kind of productivity, which OIL India has shown in Assam, even half of that outside the state will be considered as great. So Oil India will have a thing or two prove to the markets.
My sense is that going public will wake up this sleeping little company. The discipline of quarterly report cards will shake up the babudom in the company and help shed its characteristic lethargy. There is a good aptitude in this junior PSU, what it needs is a good task master. And the market is known to wield the hunter.
Oil India is rich in gas also. But the area in which it has gas , there is no demand for the fuel. So it will have to transport its gas to where the demand is. Investment in pipelines is something that will reap good dividends and for which the Rs 6,000 cr cash kitty in the company will come in handy.
From a retail investor’s viewpoint , the four digit issue price will be a big dampener. But those who understand valuations will make a beeline for this offering. |
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