The proposed privatization plan of the ailing PIA has made rounds ever since the minister in-charge Daniyal Aziz unveiled plans to complete the transaction before elections. The opposition parties wasted no time to put their resolve on the table to block at any such move at any cost. We have all seen it before. The likelihood of PIA being privatized during the tenure is minimal.
But the government needs more financing avenues. And it would not mind plucking the lower hanging fruits, rather than going for another suicidal one, no matter, how much economic sense it may make. And one such easy picking is Mari Petroleum Company Limited (MPCL) – which is up for sale. Government had long been wanting to divest its 18.4 percent shares in the E&P company, but now, seems the right time to execute it.
The Privatization Commission had initially invited Expression of Interest in August 2017,only to re-invite EoI for the appointment of financial advisory consortium again in November 2017.The bids are assumed to have been received, and a leading brokerage house may well be in the race to manage the sell-off.
How much could the government fetch from the sell-off? Industry estimate ranges from Rs30-40 billion ($280-360 million). The fair value estimations for MPCL range from Rs1900-2200 per share, from various brokerage houses. Assuming that the deal is struck between the current market price and the highest fair value estimate, government could fetch $320 million of much needed external financing.
What makes the proposition well-timed, at least in terms of fundamentals is the rallying international oil prices. Recall that oil prices now sit at a three-year high, and all things point towards stronger prices in the near-term (Read: Oil market: discipline, demand and disruptions; published on January 15, 2017). The oil prices also become more vital in MPCL’s case now that the wellhead prices are linked with crude prices, as per the industry norms. It previously used to be the cost plus formula, which hindered Mari’s top-line.
The company has also made huge strides on ground, as evident from ever strengthening production from the key fields. Bulk of that will fetch the revised higher prices, offering MPCL a decent potential run of high revenue growth. That said, the returns will also be linked strongly with the rupee/dollar parity, and could shake quite a few fair value calls, should rupee not depreciate as much as predicted by most research houses.
The earnings multiples look strong between 6.5-7.5, and the stock has consistently outperformed the KSE-100 index. So far, the timing looks right, but it could all go haywire, should the fresh political crises brewing in Lahore, take an entirely different route. But for now, anything close to $300 million in the kitty looks to o good to let go.