The Pakistan government will offload 10% of its stake in Oil & Gas Development and raise $816 million, the latest share sale in the country’s privatisation drive.
The government currently owns 75% of Oil & Gas, and aims to sell up to 323 million global depository receipts, or 7.5% of the total free-float, in the secondary share sale. This will bring its stake to 67.5%. One GDR equals 10 shares, according to a term sheet.
Bank of America Merrill Lynch and Citi are handling the international tranche, while Pakistani bank KASB Group is overseeing the domestic orders. Pre-investor education begins this week, with the roadshow scheduled to kick off on October 9. The deal will price on October 16.
It’s still early, but sources close to the deal expect demand will be driven mainly by hedge funds focused on frontier markets. “Believe it or not, Pakistan is one of the most liquid frontier markets,” one source told FinanceAsia, adding that this makes it an appealing option for funds focused on these markets, which are smaller and less developed than emerging markets.
Oil & Gas’s GDRs trade on the London Stock Exchange.
The company, which explores and develops oil and natural gas properties in Pakistan, has the largest exploration acreage in the country, and accounts for 31% of its total exploration acreage. Oil & Gas has 45 fields in production, including 21 oil fields, 10 gas fields and 14 condensate fields.
This divestment of the government’s 75% stake in Oil & Gas will be Pakistan’s second equity deal this year, after it sold its entire stake in United Bank in a block trade earlier in June. The government raised $387.9 million from selling its remaining 241.9 million shares at PRs158 per share ($1.60), a 7.3% discount to the June 10 close.
Barring a few small follow-ons, these two divestments are Pakistan’s first equity deals since Habib Bank’s $134 million initial public offering in August 2007. And the latest offering follows April’s sale of a $2 billion dual-tranche note, the country’s largest international sovereign bond offering to date and the biggest debt issue by a high-yield emerging Asian sovereign since 2011.
Where are the comps trading?
Shares in Oil & Gas are down 2% year-to-date. On a five-year basis, however, it has convincingly outperformed its peers, which include Russia’s Rosneft, Gazprom and LukOil; the mainland’s Sinopec, China National Offshore Oil Corporation, and PetroChina; India’s ONGC; Thailand’s PTT Exploration & Production; and Japan’s Inpex.
During the past five years, Oil & Gas’s stock price has risen 127%, compared to the peer average of 13%, according to a company prospectus. Its performance is just under that of its domestic peer, Pakistan Petroleum, which has returned 133% in the same time period.
Oil & Gas is trading at 7.88 times its 2015 earnings, in line with Pakistan Petroleum, which is trading at 7.57 times its 2015 earnings, according to Bloomberg.
Most analysts are optimistic about Oil & Gas. The company has a number of development projects slated for 2015, has accelerated its exploration efforts, and boasts a diversified portfolio of production fields, which lowers its risk, Bloomberg analysts argue. And, at 7.88 times 2015 earnings and 7.5 times its 2016 earnings, the company is undervalued, the analysts say.
This planned divestment comes three months after the government kick started its economic-revival programme.
Nawaz Sharif, who was earlier this year sworn in as the country’s prime minister for a third time, controls almost half of the seats in parliament. This allows his Pakistan Muslim League-N party to govern without a chunky coalition partner and also gives more freedom to implement a reformist agenda. Since inheriting a troubled economy, energy crisis and worsening security situation, the government has taken stapes to cut subsidies and eliminate debt from the electricity sector. It has also negotiated a $6.6 billion deal with the International Monetary Fund to prevent default.
Pakistan’s fiscal debt stood at 8% in 2012. It has since dropped to 6% and the government is targeting 4.8% by 2015.
"The support for Pakistan's on-going privatisation programme is a vote of confidence in the country's growing economy,” said Mohammad Zubair, minister of state for privatisation. “Just last month, the International Monetary Fund raised its GDP growth estimates for Pakistan to 4.3% for fiscal year 2015.”