Reports say that Oil and Natural Gas Corporation (ONGC) may buy out government’s 51.1-percent stake in Hindustan Petroleum Ltd (HPCL) by paying Rs 29,000 crore for it. The company will also have to pay an additional Rs 15,000 crore to buy shares from the market, according to the takeover code.
Earlier talk was of the companies being merged together, but government has smartly used the opportunity to raise money and meet its divestment target. Finance Minister Arun Jaitley had set a divestment target of Rs 72,500 crore for FY18.
ONGC has around Rs 25,000 crore in cash and has a leverage of 0.30 thus putting it in a comfortable position to raise the money for the acquisition. For HPCL the price will find a support at the acquisition price level, at least till the time that the open offer is on.
Jaitley, in his Budget speech, had spoken of creating ‘oil majors’ which would be able to match the performance of international and domestic private sector oil and gas companies.
There is no doubt that an integrated oil company, extending from oil exploration and production to refining adds more value than a standalone refining and marketing company or a standalone oil exploration company.
An integrated entity is able to cushion the volatility of the crude oil market far better than a standalone company. Capturing the entire value chain from oil to fuel smoothens the earnings of the company.
Combining its 15 million tonnes in Mangalore Refineries & Petrochemicals Ltd with the 23.8-million-tonnes HPCL would make ONGC the third largest refiner in the country. ONGC produces around 26 million tonnes of oil and 22.5 billion cubic meters of gas.
All global-sized oil companies are integrated players. Generally fuel and petrochemical feedstock prices move with a lag to the crude oil price thus the loss from a drop in oil revenues can be delayed by higher prices of the finished products.
With oil prices likely to remain low given a slowdown in the global economy and excess supply, a merger with HPCL would give ONGC much-needed growth. Similarly, for HPCL it would need to lock its oil supply as it goes on an expansion spree.
The merger, however, does not mean that HPCL will consume ONGC’s production. Each refinery is designed on a range of crude oil from various oil wells across the globe. A refinery selects its oil depending on the complexity of the refinery and the products that it plans to produce. There does not seem to be any major operational benefit from the merger.
The biggest advantage from the merger will be a stronger balance sheet. Both the companies would need this to bid for larger-sized oil wells. The bigger oil fields that are up for grabs globally are often beyond ONGC’s reach.
With few oil finds in India and the huge requirement for oil in the country, the government intends to secure oil assets globally to prevent the country from any oil shocks in future. While the intentions are noble, the government will have to ensure that the merged entities are given enough freedom to take quick decisions on acquisitions and bureaucratic hurdles do not result in lost chances as was the case in the past.