India's PetroChina Envy Has Only One Problem -- Shareholders

(Bloomberg Gadfly) -- Everything China has, India wants -- except perhaps its communist rulers.

Right now, the object of the southern neighbor's envy is oil. Or, to be precise, very large energy gorillas. Beijing possesses three, and New Delhi none. So the latter wants to merge its smaller companies into bigger groups.

There's only one problem with the plan: shareholders.

When China reconfigured its energy industry in the late 1990s, the government had full control over the assets. The Hong Kong listings of PetroChina Co., China Petrochemical Corp. (a.k.a. Sinopec) and Cnooc Ltd. came later.

However, India already has 16 publicly traded energy companies, including the ones that are being considered for marriage, and it's not clear what benefit minority investors in a refiner like Hindustan Petroleum Corp. would see in a merger with Oil & Natural Gas Corp., a producer.

Number of listed energy companies in India

16

The government's motivation is easier to fathom. In the energy world, scale creates a currency of acquisition. The Chinese demonstrated that amply when their three Hong Kong-listed oil majors -- and their Beijing-based parents -- went around spending as much as $158 billion, including a five-year worldwide shopping trip worth $117 billion. Indian companies had to settle for crumbs.

Waking up, India wants to copy the PetroChina and Sinopec model. The idea is to combine oil exploration and production with refining and retail. That would allow these new, integrated oil majors to make money even when crude prices are low, but refining margins are high. Bigger balance sheets and more stable earnings would make it cheaper for bulked-up companies to borrow.

Still, shareholders are going to get in the way. Investors in Hindustan Petroleum, or HPCL, will balk if they're given shares in Oil & Natural Gas, or ONGC, instead. After all, as Jefferies Group says, they would be swapping a "higher quality marketing business" for a "relatively less efficient upstream business." Meanwhile, a 22 percent dilution in the equity base of ONGC could mean an 8 percent decline in earnings per share, according to Elara Securities.

The other approach would be for ONGC to buy out, say, 51 percent of the government's 68 percent stake in HPCL. The change of control would force the producer to make an open offer to minority shareholders of the refiner for another 26 percent. The not-so-cool $6 billion dent would end up pushing the company's net debt higher by $4 billion. So this idea would probably get a thumbs-down.

India began talking about recasting its energy companies almost two decades ago, just when China was busy creating its behemoths. The dithering has been expensive. While it may still make sense for New Delhi to emulate Beijing from an energy security perspective, shareholders are unlikely to warm to the plan. Even if investors failed to block a major merger, employee unions would gladly do the job for them.

India's would-be energy gorillas are likely to remain garden-variety apes for some time to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.