ISLAMABAD: Petroleum Division has opposed divestment of Pakistan Petroleum Limited (PPL) and Oil and Gas Development Company Limited (OGDCL) shares, saying that divestment at current share price level is not feasible, sources close to SAPM on Power and Petroleum Tabish Gauhar told Business Recorder.
Sharing details, sources said, pursuant to the decision of the Cabinet Committee on Privatization (CCoP) of August 21, 2020, the Privatization Commission intended to undertake divestment of 10% shares in PPL and 7% shares in OGDCL through public offering to foreign and domestic institutional investors, high net-worth individuals and general public through the Pakistan Stock Exchange (PSE). The Ministry of Energy (Petroleum Division) maintains that both PPL and OGDCL are profitable companies and the current depressed share prices do not reflect the real worth of these companies. Furthermore, the Privatization Commission should consider the sale to a reputable Exploration & Production company (E&P).
In this regard, the Ministry of Energy, in its letter of February 14, 2020 proposed: (i) that given the current price of OGDCL’s share which is being traded at very low value, the ongoing divestment of GoP 's 7% share in OGDCL may not be processed at this stage; and (ii) that the Privatization Commission may kindly consider that the transaction is structured in a manner that instead of 7% GoP’s shareholding in OGDCL, GoP’s 10% shares may be offered to a strategic investor company preferably a well-versed in an oil and gas sector Exploration & Development (E&P) company, which Petroleum Division understands would bring best industry practices and knowledge, state of the art exploration and production techniques in the larger interest of OGDCL and E&P sector in Pakistan. However, the Privatization Commission, through its letter of January 7, 2021, sought comments from Petroleum Division on the Terms of Reference (ToRs) for appointment of Financial Adviser for finalizing the sale of GoP’s share in PPL and OGDCL.
The ToRs do not provide for attracting a relevant strategic investor which was the basic premise conveyed to the Privatization Commission by Ministry of Energy. This was communicated to the Privatization Commission through a letter dated February 22, 2021. In response, the Privatization Commission asked Ministry of Energy to either agree to the ToRs or directly take up the matter with CCoP.
The current share prices of the two companies are depressed due to the circular debt issue. A significant amount of current assets are stuck within the circular debt which is increasing over the years and restricts the ability of the companies to pay dividends thereby undervaluing the shares. As of January 31, 2021, the total receivables of OGDCL stood at Rs. 653.8 billion while the figure for PPL was Rs. 408 billion.
Further, the Price to Earnings ratio (P/E) of both the companies is also very low as compared to previous years and the current market multiples. For comparison, the P/E ratio at the time of Secondary Public Offering of PPL in 2014 was around 8.5 which is currently 4.8. In addition, the Price to Book Ratio is less than 1, indicating that the current market value of the companies is less than its book value. Both the companies hold a significant number of exploration blocks thereby providing a further upside in case of discoveries.
Petroleum Division further maintains that the sale of shares should be only to a reputable international E&P company with their representation through a Director on the respective Boards. This strategic sale to an E&P company would result in the following benefits: (i) the E&P company will bring in expertise in E&P business and further strengthen the technical base. This may also help in bringing in new technologies, synergies and insights to discover new reserves as well as maximize hydrocarbon recoveries; (ii) the representation of E&P company through a Director on the Board of the company will improve the overall governance structure, with the benefit of valuable inputs in the strategic decision making along-with better steering of the company’s vision; (iii) the sale will result in the flow of foreign direct investment in the country. The strategic sale may also fetch a premium over the market price as usually the sale of a large interest to one investor in a profitable company comes with a premium; and (iv) foreign investors’ confidence in the country will enhance after the purchase of interest by a large E&P company. It may also attract foreign investments and technological collaborations in other sectors.
In view of the above considerations, the divestment of shares in PPL and OGDCL at the current share price level is not feasible. Resolution of the circular debt issue, even partially, should help in unlocking the market price of these companies. Thereafter, the strategic sale to a reputable E&P company with its representation through a Director shall be preferred.
Copyright Business Recorder, 2021
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