Cabinet likely to decide on merger of oil giants
The proposed move to create an integrated public sector 'oil major', which matches the performance of international and domestic private sector oil and gas companies, has gained momentum with the cabinet likely to consider the sale of government's 51 per cent stake in Hindustan Petroleum Corporation Ltd (HPCL) to state-owned oil explorer Oil and Natural Gas Corporation (ONGC) at its meeting on Wednesday
The cabinet approval for vertical integration of ONGC with HPCL will culminate the process set out by the NDA government during this year’s budget when finance minister Arun Jaitley indicated for the first time that the Centre is considering bundling of all oil public sector enterprises (PSEs) into one giant unit.
The finance minister’s statement in the budget speech started a flurry of activity in the oil ministry and among public sector oil companies exploring various avenues to create a domestic oil behemoth. Various options were put on the table.
In just about five months’ time, the first option to allow ONGC to buy out government stake in HPCL got the nod while another option to undertake a similar exercise for Indian Oil Corporation (IOC) and Oil India Limited (OIL) came under discussion.
Meanwhile, HPCL shares fell 2.32 per cent to Rs 368.75 a piece while ONGC scrips rose 1.06 per cent to Rs 161.75 a share at the close of trading hours on BSE on Tuesday.
The proposal to merge oil PSUs was earlier mooted during when Mani Shankar Aiyar was the minister concerned. It was identical to the one that is now being explored by the government: to merge HPCL and BPCL with ONGC, and OIL with IOC to create two large integrated oil and gas corporations. But Aiyar’s idea was spiked by an official committee that studied the matter in 2005 saying that a merger or formation of the holding company was not advisable at that juncture.
The proposal was again revived in 2014 by the BJP-led government, but in September 2015 a high-level panel on recast of public sector oil firms did not favour mergers to create behemoths and instead suggested greater autonomy by transferring government shareholding in oil PSUs to a professionally managed trust.
The present proposal for a vertical integration of ONGC with HPCL will not only help the upstream company fastrack its plans for an entry into oil retailing but it will also provide the government over Rs 26,000 crore for its 51.11 per cent shareholding in India's third-biggest fuel retailer.
It will also kickstart consolidation in the public sector oil companies allowing the companies to not only grow in scale but give them enough muscle to negotiate terms for sale and purchase of oil and petroleum products where India still largely depends on imports.
“The move to bring ONGC and HPCL will work to the advantage of the oil sector in India. The government should consider a similar exercise for few other PSUs to make them stronger and competitive,” said an industry expert asking not to be named due to his involvement with the ONGC-HPCL merger issue.
The exercise had become inevitable given the global oil market dynamics where pure exploration companies are suffering due to continued fall in crude prices, said a government official. The process will marry exploration and production (E&P) with marketing, refining and petrochemical businesses, an ideal mix for oil companies in current market, the official added.
ONGC has been looking at retail sales of petroleum products through its refining subsidiary Mangalore Refinery and Petrochemicals Ltd (MRPL) but HPCL with its existing network of about 14,000 retail outlets would give the oil explorer readymade entry into the lucrative segment with MRPL’s products. Besides, HPCL would also add 23.8 million tonnes of annual oil refining capacity to ONGC’s portfolio, making it the third largest refiner in the country after IOC and Reliance Industries. ONGC subsidiary, Mangalore Refinery and Petrochemcials Ltd (MPRL) already has a 15 million tonnes refinery.
Post sale of shares, HPCL will become a subsidiary of ONGC. The government initially considered complete merger of oil producer with the oil refiner to create a large integrated entity. But the idea was dropped for the fear of not repeating the Air India-Indian Airlines kind of merger. Also differences in work culture and ethos prevail in upstream and downstream firms so merger option was ruled out. ONGC also favoured acquiring shares in HPCL in its earlier communication to the petroleum ministry as buying the other state-owned refiner Bharat Petroleum Corporation Ltd (BPCL) would have been too expensive.
BPCL has a market cap of about Rs 95,500 crore and buying the government's 54.93 per cent stake would alone have entailed an outgo of approximately Rs 52,500 crore. HPCL on the other hand has a market cap of around Rs 51,800 crore and buying the government's entire 51.11 per cent stake would entail an outgo of about Rs 26,500 crore.
Sources said that post acquisition of government stake in HPCL, oil explorer ONGC may also be required to make an offer for an additional 26 per cent under the provisions of the takeover code. If this is made, ONGC may have to cough up another Rs 13,500 crore or so. But being a government-to- government transaction, the Centre could seek SEBI exemption for ONGC from the provisions of the takeover code.
ONGC has a cash reserve of Rs 13,014 crore and to fund the government stake acquisition in HPCL, it will have to borrow at least Rs 10,000 crore, sources said. It may need to more funds for the open offer, if it is required. In its earlier interactions with oil companies, oil ministry has indicated its preference for a merger between ONGC and HPCL as this will add value to the shareholders and strengthen companies.
Together the two companies would have a combined market capitalisation of over Rs 2.85 lakh crore with presence in the entire oil chain: exploration, production, refining, petrochemicals and retailing. At this size, the combined entity would still be relatively smaller than global integrated oil giants like Shell, BP and Exxon.