The Union government has shelved the follow-on public offering (FPO) of shares in state-owned Indian Oil Corp. Ltd (IOC), the country’s biggest oil refiner and marketeer, this fiscal because of a surge in the price of crude oil to the highest level in two years.
The government had planned to raise Rs 20,000 crore through the FPO, the biggest by an Indian entity, but cabinet approval for the proposed offering hasn’t been sought, an official at the disinvestment ministry said on condition of anonymity.
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Downstream oil marketing companies tend to lose sales when crude oil prices climb. The price of crude oil rose 3.3% last month on the New York Mercantile Exchange and on 7 December exceeded $90 a barrel for the first time in two years. Oil may reach $100 a barrel next year as demand from Europe and the US picks up, Goldman Sachs Group Inc. analyst Jeffrey Currie said last month.
That has prompted the government to delay the IOC offer until the next fiscal that starts on 1 April.
“Instead, we will carry out the divestment plan of Oil and Natural Gas Corp. Ltd (ONGC), which, being an upstream oil company, tends to benefit from rising crude oil prices,” said the ministry official.
IOC director finance S.V. Narasimhan declined to comment on the matter.
IOC had expected to sell shares at a price of Rs 450 apiece in its FPO by the end of January, chairman B.M. Bansal had said recently.
The government, which holds a 78.92% stake in the company, planned to divest 10% and the company was to offer investors an equivalent number of new shares to raise an aggregate Rs 20,000 crore. Most of the proceeds were to be used to revive a shelved petrochemicals project in Paradip, Orissa, and build a facility for importing gas in ships at Ennore in Tamil Nadu, according to media reports that cited Bansal.
IOC hired six banks, including Bank of America-Merrill Lynch, Citigroup, ICICI Securities, Morgan Stanley, SBI Capital Markets and UBS to handle the FPO.
The price of crude oil tends to be cyclical and the government is expected to relaunch IOC’s share sale once the cycle turns. “Considering the current cycle, it is more advisable to sell shares of ONGC as the company will benefit from rising crude,” said the ministry official cited above.
The government in June partially deregulated fuel prices to allow oil companies such as IOC to fix the price of petrol they had been selling at a government-mandated price earlier. But with crude prices spiking sharply, state-run oil companies are faced with concerns of a bigger revenue loss from having to sell diesel, kerosene and liquefied petroleum gas at below-cost price to keep inflationary pressures under check.
The price of crude oil has risen sharply in the past few weeks due to a number of factors such as the US Federal Reserve’s plan to buy $600 billion of treasury bonds to stimulate the US economy, the ramping up of new refineries in China this winter, and an unusually freezing onset of the winter in Europe and Asia.
Inflation being a key concern in the Indian economy, oil marketing companies may be unable to raise fuel prices commensurate with the rise in crude, hitting their margins.
The oil ministry, which had earlier estimated the under-recovery burden for these firms to be Rs 59,000 crore for fiscal 2011, has revised the estimate higher to Rs 65,000 crore.
However, the rise in the crude oil price is to the advantage of upstream oil companies such as ONGC and Oil India Ltd, as they can sell the crude they produce at higher prices, boosting revenue.
The government, which currently holds a 74.1% stake in ONGC, plans to sell 5% of its holding through an FPO. The issue may help the government raise Rs 11,000-13,000 crore.
The government recently approved a split of each ONGC share into two to make its FPO attractive and affordable for retail investors. On 1 December, the cabinet approved ONGC’s FPO. The company is yet to appoint merchant bankers to handle the sale.
The ONGC board will meet this week to consider a 1:1 bonus share issue and paying a special dividend out of its cash reserves of close to Rs 15,000 crore.
The company has already appointed two international auditors—DeGolyer and MacNaughton, and Gaffney, Cline and Associates—to certify its oil and gas reserves, a prerequisite for any exploration firm going for a public offering.
The government plans to raise at least Rs 40,000 crore in the current fiscal by divesting stakes in various state-run companies. According to the department of divestment, total disinvestments proceeds from the sale of shares in central public sector enterprises this fiscal stands at Rs 20,943 crore.
State-run companies in which divestments have taken place this year include Coal India Ltd, Power Grid Corp. of India Ltd, Satluj Jal Vidyut Nigam Ltd and Engineers India Ltd.
Around Rs 1,237.13 crore is expected to be raised by a 10% dilution of the Centre’s stake in the initial public offering of MOIL Ltd, and Rs.1,164.73 crore is expected to be raised from the FPO of Shipping Corp. of India Ltd.
With IOC’s FPO, the government would have easily surpassed its Rs 40,000 crore divestment target for the year. With the offering being postponed, the government may only manage to reach its target.
The proposed FPOs of Steel Authority of India Ltd (SAIL) and Hindustan Copper Ltd, too, are uncertain this fiscal.
“The Hindustan Copper issue awaits some more clarity. The SAIL FPO is likely to be launched in the first quarter of the 2012 fiscal,” added the divestment ministry official.