IOC selloff talks back as global oil slips
New Delhi   11-Aug-2011

The government is likely to bring the divestment of oil sector major IndianOil back on the table if international crude prices continue to decline, as a result of a sharp deceleration in global growth.

According to a report by Bank of America Merrill Lynch, Brent crude oil may fall to $80 a barrel from the current $105 a barrel in a 'mild' recession. "In the current situation, there is little scope for bringing out issues of non-oil companies such as SAIL or BHEL.

But if the oil prices continue to decline, investors, both global and domestic, will find value in scrips of both IOC and ONGC," a finance ministry official said. While the benchmark indices have dropped nearly 10% in the last one month, oil marketing companies have escaped the carnage because of reduced burden of subsidies and better margins.

IOC shares are down 2% over the last 30 days while ONGC has been flat. "If oil prices remain low for long, these companies will recover their losses, and investors will like to participate in their issues," said Dipen Shah, head of private client group research, Kotak Securities.

"But it is vital that the government clears the issue of oil subsidy burden and decontrol the prices of diesel and kerosene," he added. Energy and infrastructure sector expert and partner with BMR Advisors Gokul Chaudhri shares the same view.

"Royalty issue of ONGC has been resolved. So investors will no longer discount the stock for that risk," he said. The finance ministry had budgeted Rs 40,000 crore from disinvestment this fiscal but has so far raised only Rs 1,162 crore through stake sale in Power Finance Corporation.

The choppy market has made the disinvestment department's task more difficult. The oil sector could be a good contrarian bet if the crude prices continue to soften. An IOC official however, said that there is no scope for a public offer in the current situation.