OGDC's overseas listing

The long awaited book building process to sell additional shares of the Oil and Gas Development Company (OGDC) to foreign and local investors was completed on Thursday evening. The Privatisation Commission termed this largest ever overseas institutional offering a success as it reflects the confidence of the international capital market in Pakistan's economy.
However, the investors in the domestic capital market are very perturbed at the pricing of the offer at Rs 115 per share, ie a 9.5 percent discount on Thursday's closing price.
There are two ways to look at this offer. Overseas investment in Pakistani bourses on the average ranges between $300 and $400 million. Therefore, getting $712 million in a single transaction would amount to doubling the overseas investors' interest in the country. It may be lower than the one billion dollar target, but then the original target was, frankly speaking, over-ambitious, to start with.
Generating overseas interest in a country located in a troubled region, its image far worse than the reality, is always difficult. Getting 120 high quality institutional investors to look at Pakistani entities itself is a challenging task.
Allocating GDR's to 80 odd among then will definitely reignite international investors interest in Pakistan. Since 1989, transforming OGDC from a government managed entity into a self-financing autonomous corporation is still under way. But after listing in London, the company needs to be further transformed into a fully-fledged multinational entity. In the present state international investors will discount OGDC for the negatives.
Further, the oil pricing policy of the government and the geo-political cum economic factors (known as country-risk) do come into play when such entities are to be valued and the share pricing offered has to be in line with what the investor is willing to pay.
The local investor definitely feels short-changed due to the discounted price at Rs 115 per share. By and large, their average purchase is much higher. When the process for the new offering started, OGDC's share price was over Rs 150. But then why did the price jump from Rs 120/121 in four days (before last Eid holidays) to over Rs 150? Who was romping up the share price? Obviously the answer lies in the huge amount of speculation in OGDC shares.
Remember the January-March 2005 behaviour of OGDC's stock. The leakage of information or misinformation from within OGDC was rampant. Everytime a well was drilled word spread within the market about a successful find. Dry wells are common. It takes weeks, though, for a proper assessment and to ascertain its commercial viability.
A major complaint from local investors relates to the sale structure of the undertaken which was devoid of a floor price and was open ended. This is despite the fact that an open transparent and well established process has been followed. Our market managers are not used to such transactions and are comparing it with the recent MCB GDR offering. Banks and oil companies are valued differently. In the case of MCB, the spread enjoyed was much more than that of the comparable institutions in the region, besides the offer amounted to only $150 million; and that too was coming into the company for its own expansion. In the case of OGDC it is the cash flow which is of utmost importance to the investor, but the sale proceeds are going to the government. Secondly, MCB is a well-managed privatised institution and OGDC is still in the realm of a state entity.
Now all this big talk about allocating shares to high quality, long term investors and geographically spreading them world-wide! We have heard this from the consultants to the issue every time an overseas transaction took place. Only time will tell how the OGDC share will trade in future. Dump and run is the norm when a major adverse outcome occurs. Remember the nuclear test! Local bourses' index is bound to feel the pinch of OGDC daily share movement in the short run. Already it has the heaviest weight in the index. Now with a float three times in existence cornering the scrip will indeed be difficult. The market players have been pressing the government to increase the market float. Well, they have it now.
But in the long run it is the performance of OGDC that will determine its share price. After all shareholders, whether overseas or local, are partners in its future earnings.