Cairn IPO not to impact E&P firms

The forthcoming IPO by Cairn Energy India might not unlock values for the other listed companies in the exploration and production (E&P) universe, especially ONGC, said analysts.

They pointed out that there would be no "material change" in the valuation of the stocks of Reliance Industries (RIL) and ONGC.

Shriram Iyer, head - research, Edelweiss Securities, said, "While the valuation of RIL is well established, ONGC is trading at a discount because of the subsidies, the quality of its oil and the age of its fields.

These factors will continue to affect the stock's performance even in the future. But the Cairn stock, once listed, will set a benchmark for E&P players in India." The state-owned GSPC has also announced plans for $1 billion IPO.

With the Cairn IPO, the Indian market will, for the first time, see a pure play exploration and production (E&P) private sector company.

While the country's biggest E&P player ONGC is a public sector company and carries with it the burden of subsidies it gives to the state-owned oil marketing companies, the other major player in the Indian E&P universe, Reliance Industries, is not a pure play E&P company. RIL has interests in refining and petrochemicals as well.

A senior investment banker, who did not wish to be named, said the Cairn listing, while unlikely to affect ONGC's fortunes, might have a positive effect on the RIL stock.

"Cairn is not a sector story like DLF which unlocked values for real estate companies. It is more of a company story since ONGC has been active in the same areas with little to show for its efforts," the banker said. ONGC had explored the Rajasthan blocks where Cairn discovered oil and gas but did not report any discoveries.

Currently, the enterprise value (EV) to barrel oil equivalent (BOE) is seen in favour of Cairn with the company expected to post $8.5 a barrel, production from the Rajasthan fields begin. For ONGC, it is seen at $3.5 a barrel, said Lalit Thakkar, head - research, Angel Broking.

"This could mean that the cheaper ONGC stock will see some upward movement as investors realise that it is undervalued." Iyer too agreed that the ONGC stock could see some upward movement, post Cairn's listing.

Thakkar pointed out that by 2010, Cairn's EV to EBDITA is expected to be around 8 times by 2010 compared with ONGC's 5.5 times. Thakkar also pointed that ONGC has large cash reserves which is discounted from its valuation.

A senior ONGC official, however, pointed out that Cairn's real valuation would be known only after oil starts flowing in 2009-10.

"It is true that they have vast certified reserves, but it remains to be seen whether they can live up to the expectations of the market by producing the oil that they have forecast. Right now, their ability on that front is in the realm of speculation."