Finance Minister Arun Jaitley in his budget speech proposed to merge the existing state-owned oil and gas firms to form a global giant that would be able compete with likes ExxonMobil Corp and Royal Dutch Shell Plc.
Mumbai-based brokerage Motilal Oswal Securities has come up with three options on how the integration would work out, highlighting possible benefits and concerns:
#1. Integration Of Downstream Players
Companies that may be merged: Indian Oil, Bharat Petroleum, Hindustan Petroleum, Mangalore Refinery & Petrochemicals and Chennai Petroleum.
Combined market capitalisation: Rs 3.51 lakh crore
Combined total capacity: 134 million metric tonnes (mmt) versus ExxonMobil's 315mmt and Royal Dutch Shell's 140.3 mmt.
Benefits:
- Combined synergies could improve profitability
- Combined bargaining strength benefits in procurement of crude oil
- Larger availability of naphtha for petrochemical projects
- Merger with removal of redundancies would result in better return ratios
- Merger would give better balance sheet strength for future expansions.
Concerns:
- Integration issues could crop up
- Removal of redundancies would mean job cuts and strong employee unions may create obstacles, thus reducing the benefits of merger
- ONGC Petro additions Ltd and BCPL may also be transferred to these entities, which might be a drag in initial years due to stabilization issues
- May result in poor capital allocation
#2. Integration Of Upstream Players
Companies that may be merged: Oil & Natural Gas Corp, Oil India
Combined market capitalisation: Rs 2.88 lakh crore
Combined production: 51.6 million metric tonne of oil equivalent (mmtoe) versus ExxonMobil's 320 mmtoe and Royal Dutch Shell's 147 mmtoe
Benefits:
- Better utilisation of assets like rigs etc.
- Integrated data bank could be of help in prioritising monetisation of assets and capex plans
- Integration could help in imbibing better practices for various fields
Concerns:
- Oil India's presence in the North East could create cultural issues
- With hardly any presence of private players, any comparison with respect to profitability and efficiency would be difficult
- In most of the bids held so far, ONGC & Oil India have been participating independently. Post-merger, there may be more of single bids.
Also Read: Modi To Spend $59 Billion To Upgrade India's Infrastructure
#3. Integration Of Both Upstream And Downstream Players
Companies that may be merged: ONGC, Oil India, Indian Oil Corp, Bharat Petroleum Corp, Hindustan Petroleum Corp, Gas Authority of India, Mangalore Refinery & Petrochemicals and Chennai Petroleum Corp
Combined market capitalisation: Rs 7.06 lakh crore
Benefits:
- Some protection against volatility in crude oil prices
- Free cash-flow from Indian Oil and Bharat Petroleum could help in upstream acquisitions
- Synergies of refining assets
- Much larger balance sheet to compete for bids overseas
Concerns:
- Value erosion for the oil marketing companies
- It would be difficult to manage a behemoth like this and overall efficiencies may come down
- Government would have better handle to manage 'subsidies' if crude oil prices were to rise higher; investors being at a loss
- Poor allocation of capital
Also Read: What India Inc Made Of Budget 2017
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