Positive news flow for ONGC before its follow-on public offer

Positive news flow for ONGC before its follow-on public offer

It looks like the stage is being set for Oil and Natural Gas Corp. Ltd’s (ONGC) upcoming follow-on public offer (FPO). On Friday, the government increased prices of petroleum products to offer some relief to state-owned oil and gas companies, which have to bear under-recoveries from selling fuel below market rates.

On Tuesday, Cairn India Ltd informed the Bombay Stock Exchange that Cairn Energy Plc and Vedanta Resources Plc have agreed to “certain adjustments" to their transaction agreement. The transaction will now take place in two tranches—first the 10% stake sale in Cairn India and subsequently the 30% stake sale subject to necessary approvals from the Indian government. Further, the non-compete fee—Rs 50 per share—has been done away with, which translates into a reduction of about 9% in the purchase price for Vedanta.

Also see | Fuelling Gains (PDF)

How is this relevant for ONGC? Last month, the group of ministers headed by the finance minister suggested that the cabinet committee on economic affairs should approve the deal only if Cairn agrees to share the royalty burden on the production from its Rajasthan fields. Currently, ONGC bears the entire royalty burden despite holding only a 30% stake in the Rajasthan fields.

The fact that Cairn has agreed to a lower sale price indicates that this is in lieu of the likely imposition of a royalty burden. Analysts point out that the fact that Cairn Energy has reduced the deal value indicates that perhaps Vedanta is willing to accept the new terms, i.e. to share part of the royalty burden. Needless to say, if that happens, it would be a big positive for ONGC.

However, ONGC’s stock barely moved on Tuesday, partly because it has already risen by around 11% in the past one week, thanks to reports of this happening, as well as the government’s decision to increase fuel prices.

ONGC’s forthcoming FPO would get a boost as a result. It must be kept in mind, however, that FPOs have typically had to be priced at a discount to the prevailing market price to attract good response from investors. That could act as an overhang on the ONGC stock. But needless to say, from a medium-term perspective, the recent developments certainly bode well for the company.

Graphic by Yogesh Kumar/Mint

We welcome your comments at marktomarket@livemint.com