Posts Tagged ‘Cairn-Vedanta deal


Options in Cairn India

Couple of weeks back Vedanta group decided to merge Cairn India with Vedanta Ltd. It didn’t come as a surprise and it was only a matter of time before the group went along with a merger. I guess since the acquisition of Cairn India in 2010, Vedanta group had their eyes set on the cash of Cairn India.

I am not a big fan of Vedanta group corporate governance standards. But to be fair to group, sharp crude oil price fall in last 8-9 months coupled with Rs 20k crore demand from IT department had suppressed Cairn India valuations. So in the changed scenario, proposed merger might even benefit Cairn India shareholders. On the other hand, only pure play oil E&P company in India would be saddled with metal assets. Some shareholders might not like it. One of the biggest institutional shareholder LIC has opposed the merger on valuations front.

Given the sharp share price fall in Cairn India it makes sense to sell some puts of July series.

Disclaimer: These are my personal views and you should do your own due diligence before acting on anything written in this blog. Please take reasonable care while trading in options, especially while selling. I am not advising anyone to sell or buy options. My purpose of writing this blog is to highlight my trading strategies


ONGC follow up..

In one of my earlier post, I had mentioned about writing ONGC 240 puts for July series. There have been few positive developments for ONGC in terms of Cairn-Vedanta deal pre-conditions imposed by Government of India (GOI). As expected GOI has made royalty payments cost-recoverable as one of the pre-condition for approving the deal. It is difficult to say if the arm-twisting by GOI is correct and whether it would deter FDI in E&P sector in India on account of such ad-hoc policy changes. There was good article in BS on the same,

Someone on CNBC-TV18 commented, it looks like everybody in the GOI is working overtime to ensure success of ONGC Follow-on-Public Offer (FPO). One concern after other are getting resolved for ONGC and decks are being cleared for its FPO. Still one of the biggest overhang for the company, subsidy sharing formula is still pending. I think in a week or two clarity on the formula should come from GOI.

If one looks at ONGC July & August future contract prices (Rs 7 discount), it becomes quite clear that market is expecting ONGC FPO in August and not in July. I wrote some more ONGC July series 240 puts.


Petroleum products price hike

Finally, government bit the bullet and increased diesel, kerosene and LPG cylinder prices on Friday evening. It was long overdue though. Market gave big thumbs up to government oil price hike. It looks like suddenly market has woken upto Oil marketing companies (OMC), Oil PSU’s like ONGC. Lot of upgrades are coming in with buy and overweight rating. Oil prices fell sharply last week by 8%, mainly on account of release of strategic oil reserves of 60 million barrels over next 30 days by members of IEA. This sudden fall in price is also helping OMC cause. As things stand now, OMC’s are not losing any money on petrol sale. Loss on other oil products like diesel, kerosene has also been reduced by price hike and duty rationalization.

But, I feel more confident about ONGC than OMC’s. I think ONGC has seen its bottom at Rs. 248 this year. Although an irony, but its a fact that in current scenario, oil price fall benefits upstream company like ONGC more than its rise. ONGC suffers from adhoc subsidy sharing formula of government. In case, government gives some clarity on subsidy sharing, share price should easily move past Rs. 300. Follow on Public Offering (FPO) also remains overhang on the stock. Its scheduled date was July 5, but note sure if less than 300 is the fair price and government should go ahead with it.

It looks like ONGC is having its way in Cairn-Vedanta deal. Royalty payments will be made cost-recoverable which will be positive for ONGC.

I wrote few ONGC July series 240 puts yesterday. These puts will yield 5.81% in 32 days. Considering all the scenarios, I don’t think ONGC share will fall below 240 in July series.


Why did I trust this Congress government…

In one of my previous post , I had written about benefiting from this inept government.

Two weeks back, somehow I believed this government and thought, they would take decision on Cairn-Vedanta deal. Deal has been big overhang on Cairn India stock and it has under-performed in a big way, given, where crude oil prices are trading. I thought that after deal clearance, Cairn would move big way in either direction. I created long strangle (bought 320 put & 360 call). In case government approved the deal with riders and made royalty cost recoverable, valuations would come down and share price also. But if the government approved the deal without any conditions, share price would rally Rs. 30-40. In between came our Baba Ramdev, government being preoccupied with him, didn’t find time to take decision on  the deal. I was losing precious time on options bought, hence decided to sell both the options and cut my loss. Yesterday, the Oil Minister said, cabinet will take decision on Cairn-Vedanta deal in  the next week or the week after. I wonder, which week will that be and I can’t afford to take any chances. From now on, I will be doubly careful about taking positions on the basis of government decisions. Can no longer say congress government rocks…

Pay-off diagram of my long Strangle:

February 2019
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