IOC-OIL merger plan to create behemoth gathers steam
May be the second integrated oil major after proposed ONGC-HPCL convergence

The government has put its plans to create a large integrated public sector ‘oil major’ in full gear. It has begun discussions to sell its entire stake in upstream company Oil India Limited (OIL) to the country’s largest state-owned refiner, Indian Oil Corporation (IOC). Once approved, the proposal may entail IOC spending about Rs 14,500 crore to buyout the entire 66.13 per cent stake that government owns in OIL at current share prices.

OIL shares closed 2.01 per cent higher on BSE at Rs 274.50 apiece, while IOC shares rose 0.11 per cent to Rs 373.50 a share. The vertical integration of IOC with OIL will create a large integrated oil company with combined market capitalisation of over Rs 2 lakh crore and presence in the entire value chain such as exploration and production, refining and marketing and petrochemicals. This would be the second integration of oil PSUs being considered by the government. This year’s Union budget had indicated the creation of an integrated public sector ‘oil major’, which will be able to match the performance of international and domestic private sector oil and gas companies.

A cabinet note is already being finalised to allow sale of entire government equity in Hindustan Petroleum Corporation Ltd (HPCL) to upstream major, Oil and Natural Gas Corporation (ONGC). Financial Chronicle first reported about the move to create not one but two or more large integrated oil companies by merging various state-owned oil companies in its edition dated February 10, 2017.

An IOC spokesperson denied any knowledge about the proposed government move while an OIL official said that no such proposal has yet come to their table. Government sources accepted that various options were being looked at to strengthen state-owned oil companies, but said that the new proposal was too premature to comment.   Sources said that like the proposed ONGC-HPCL merger, the government might not tinker with the existing operations of OIL while selling its stake in the company. Post share sale, OIL may become a subsidiary of IOC and maintain its focus on oil and gas exploration activities. As against ONGC that has cash reserves of about Rs 13,000 crore that could be used to part finance its HPCL buy, IOC will have to resort to borrowing if it has to spend close to Rs 14,500 crore to take control of OIL.

IOC had cash and bank balance of just about Rs 513 crore as on March 31, 2016, which sources said is unlikely to have increased much in FY17 due to higher working capital requirements. But it is sitting on special oil bonds (liquid holdings) of value about Rs 10,000 at the end of FY17, which could be used to part finance OIL buy.

The IOC purchase of government equity in OIL will help the integrated entity not only have the largest refinery operations in the country (11 refineries) with 80.7 million tonnes per annum mtpa capacity or 35 per cent of domestic refining capacity, but also more than 81 million tonnes of oil and 120 billion cubic metre (BCM) of gas reserve to the company. The total revenue of both the companies would be over Rs 4,60,000 crore while net profit is pegged to be over Rs 24,000 crore.

IOC, which is already looking at expanding its exploration and production (E&P) business, will get a leg up with this acquisition. IOC has stake in 17 exploration blocks — 8 domestic and 9 international. Besides, it has taken stakes in Vankor and Taas Yuryakh (Roseneft’s Russian Assets). Both are producing assets.

The IOC acquisition of government stake in OIL is part of a plan to create not one but two or more such companies with presence in the entire value chain of the oil business. Taken the ONGC merger with HPCL, the proposed two companies would have a market cap of over $80 billion that will rival global oil and gas giants such as BP, Chevron, ExxonMobil, CNPC and would make them larger than Rosneft of Russia (market cap $ 60 billion) and RIL. The top eight listed state-owned oil and gas companies have a combined market capitalisation of about $80 billion, making it the world’s ninth largest entity.