The total value of Pakistan's block sale in Oil & Gas Development has shrunk as a result of a 17% decline in the share price since mid-September.
The government, which is looking to reduce its stake in the company to 65% from 75%, had initially sought to raise up to $816 million by selling 323 million global depository receipts, or 7.5% of the company's total free float.
But one banker close to the deal now estimates that the total deal size will be between $600 million to $650 million.
News the government was looking to offload the 10% stake contributed to the slump.
“The market is expecting the transaction which led to the share price adjustment,” the banker told FinanceAsia. “It’s down over 10% from the time [the block] was announced.”
But other factors have weighed on Oil & Gas too.
The company's profits fell 16% year-on-year to PRs28.3 billion ($275.9 million) in the quarter ended September 30. In a statement Oil & Gas blamed higher operating expenses at its development and production units, as well as increased spending on exploration activities.
In addition, oil prices fell to a three-year low on Tuesday after Saudi Arabia unexpectedly cut prices for crude sold to the US.
Bank of America Merrill Lynch and Citi will set the floor price for the Oil & Gas offering on November 6. Books will close on November 7 with the allocations finalised on November 10. KASB Group is overseeing domestic orders.
The deal was initially scheduled to be priced mid-October but a slump in global equities led to the deal being pushed back, as billions of dollars were pulled from emerging market equity funds.
Bankers maintain that the shaky global backdrop for shares will not deter potential Oil & Gas investors, many of whom already focus on frontier markets and, as such, are used to volatile stock movements. “From our conversations, there’s good interest, particularly from frontier markets and emerging market funds,” a banker familiar with the matter told FinanceAsia. “I also understand there’s good demand from domestic retail investors.”
The government’s partial Oil & Gas divestment 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 by selling its remaining 241.9 million shares at PRs158 per share, a 7.3% discount to the June 10 close.
Barring a few small follow-on offerings, these two divestments are Pakistan’s first equity deals since Habib Bank’s $134 million initial public offering in August 2007. This latest Pakistani share sale also follows April’s sale of a $2 billion dual-tranche note, the country’s largest international sovereign bond offering 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 15% so far this year. That compares negatively with the majority of its international peers, including Russia’s Gazprom and LukOil, China's Sinopec, China National Offshore Oil Corporation (CNOOC) and PetroChina, India’s ONGC, and Thailand’s PTT Exploration & Production.
Although shares in Gazprom, CNOOC and PTT are also all in the red for the year-to-date period, dropping 6%, 15% and 8%, respectively, most other comparable companies have posted small gains. The best performer is India’s ONGC, which was 40% higher by the close on November 5.
Analysts remain optimistic about Oil & Gas, noting that the company has a number of development projects slated for next year, a diversified portfolio of production fields, and is accelerating its exploration efforts.
Some also argue that the company, which is trading around 7.88 times forecast 2015 earnings and 7.57 times its forecast 2016 earnings, is undervalued.
The Oil & Gas divestment is part of the government’s plan to kick-start its economic-revival programme.
Prime Minister Nawaz Sharif was sworn in earlier this year for a third time and controls almost half the seats in parliament. This allows his Pakistan Muslim League-N party to govern without a coalition partner and gives it more freedom to implement a reformist agenda.
Since inheriting a troubled economy, energy crisis and worsening security situation, the government continues to make steps to cut subsidies and eliminate debt from the electricity sector. It also negotiated a $6.6 billion deal with the International Monetary Fund to prevent a default.
