Oil and Natural Gas Corporation Ltd. (ONGC) is likely to acquire the government’s 51.11 percent stake in Hindustan Petroleum Corporation Ltd. (HPCL), which in turn will trigger a mandatory open offer for an additional 26 percent stake in the company, according to news reports on PTI and The Economic Times. HPCL’s Chairman MK Surana, told BloombergQuint he would wait for more information before commenting on the issue.
Finance Minister Arun Jaitley in his 2017 Budget speech said the government plans to integrate state-run oil companies, a move that could help meet the country meet its growing energy demand. HPCL, which is one of the three state-owned oil marketing companies with a refining capacity of 14.8 million metric tonnes per annum could also benefit from ONGC’s massive oil and gas reserves.
If the deal does go through, then it will also a long way in helping the government meet its divestment target for financial year 2017-18, while retaining control over the oil marketing company.
The government currently owns 68.93 percent in ONGC, and the acquisition will make HPCL a step-down subsidiary of the government.
ONGC will have to pay close to Rs 29,061 crore for such a deal, as per the closing price of Rs 561.10 on Monday. It may be a challenge for the upstream company if its cash balance is anything to go by. As of September 30, 2016, the country’s largest energy explorer had cash and cash equivalents of Rs 14,256 crore. It has since handed out two dividend payouts worth Rs 6,738 crore in all and acquired 80 percent participating interest and operatorship of Gujarat State Petroleum Corporation Ltd.’s (GSPC) block in the Krishna- Godavari basin for Rs 8,100 crore.
The only challenge will be for ONGC to pay over Rs 28,000 crore to acquire the stake. But for such kind of expansion plans, ONGC will get credit from the market.RS Sharma, Former Chairman and Managing Director, ONGC
The upstream giant will also have to make a mandatory open offer to existing public shareholders, as acquisition of the 51.11 percent government stake will trigger Securities and Exchange Board of India (SEBI) acquisition guidelines. The additional 26 percent in HPCL can cost up to another Rs 15,000 crore.
ONGC will have to pay a lot more, if it acquires the government’s stake in any of the other two oil marketing companies -- Indian Oil Corporation Ltd. (IOC) or Bharat Petroleum Corporation Ltd. (BPCL).
Operational and cultural differences may have deterred the government from merging HPCL with ONGC, adds Sharma, in a telephonic interview to BloombergQuint. A holding company structure helps bypass that problem, while creating an integrated oil and gas player and pave the way for HPCL to capitalise on ONGC’s massive asset base.
The merger has a lot of practical difficulties; integration through a holding company makes more sense.RS Sharma, Former CMD, ONGC
Not every one is convinced about the synergies between the two companies, though. Brokerage house Motilal Oswal Securities Ltd. in a report dated February 23, had argued that it made more strategic sense for the government to merge Bharat Petroleum Corporation Ltd. (BPCL) with ONGC.
Given that the government’s aim is primarily to boost the Exploration and Production (E&P) strength of the nation, we see greater probability of ONGC merging with BPCL than with HPCL.Motilal Oswal Report On February 23
BPCL, the report said, has been successful in the E&P segment with discoveries in Brazil and Mozambique. Moreover, HPCL’s aggressive expansion plans could lead to an annual capital outflow of Rs 10,000 crore, over the next 3-4 years, adding to ONGC’s financial burdens, added Motilal Oswal.
ONGC supplies crude to oil marketing companies like IOC, BPCL and HPCL. If this acquisition goes through, ONGC will end up owning majority stake in two oil marketing companies – Mangalore Refinery and Petrochemicals Ltd. and HPCL.
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