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Published:May 9, 2017 11:22 AM
State owned upstream oil major ONGC is eyeing upon country’s third biggest oil marketing and fuel retailers HPCL in an about USD 6.6 Billion following to the government’s idea of creating an oil behemoth. As per the interest, ONGC may buy all of government’s 51.11 percent stake in HPCL and thus must be followed up by an open offer to acquire additional 26 % from other stakeholders of HPCL. The idea is to create a giant that will mitigate risks generated from fluctuations in the crude oil prices. Key Benefits from the Deal: 1.Volatility in the Crude prices will have less impacts on the combined company 2.ONGC will add another 23.8 MT of HPCL’s annual refining capacity to its existing 15 MT(MRPL) creating it the third largest refiner of India after IOCL and Reliance 3.The combined company will be better placed in competing with global oil majors 4.The combined company will be one of its own kind having both forward and backward integration in the operations 5.The combined company will be able to manage funds more strategically Majorly, there are 6 Public sector oil companies operating in India- ONGC, OIL tops the oil production in the country IOCL, BPCL and HPCL holds key responsibilities in refining and marketing whereas GAIL is effluent in midstream gas transportation and retailing business with multiple other joint ventures. Rest of the companies-CPCL, NMRL, OVL and MRPL are existing subsidiaries of one of the 6 PSUs. Few options for integration which are in line with the announcement by Mr. Jaitley for Union Budget 2017-18. 1.Allow ONGC and HPCL merger or ONGC and BPCL merger creating a vertically huge integrated oil company. 2.OIL with IOCL merger as proposed in option 1, since OIL has lesser upstream operations compared to ONGC whereas IOCL leads the downstream segment. This will create a balance for both the companies and subsequently funds can be rotated strategically. 3.Since BPCL already have an existing arm in upstream as Bharat Petro Resources Ltd (BPRL), so its needless for it to be integrated with any of the upstream major rather BPRL can be strengthened further. 4.Letting OIL and IOCL to continue to operate with their respective businesses without integration and see proposed merger of ONGC-HPCL, IOCL and BPCL function their respective operations. As per the sources, ONGC amidst acquiring HPCL will need to clear 2 sets of approval: 1.The government approving the sale of its 51.11% stake of HPCL to ONGC. 2.Letting ONGC to spend the funds on buying the stake, assessing the trading price of HPCL at Rs 561, ONGC will need to pay Rs 29,128 Crore for 51.11% stake and Rs 14,817 Crore for another open market stake, making it to be an acquisition of worth Rs 44,000 Crore. After the announcement of creating a mega merger in the Union Budget 2017-18, Infraline Energy believes that ONGC-HPCL merger seems to be an experimenting move by the Government of India. It will be soon to predict the outcome of the deal but by and large the deal looks quite promising in context to the Industry structure in India. InfralineEnergy Disclaimer: The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the InfralineEnergy (Technologies India Pvt. Ltd.). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.
State owned upstream oil major ONGC is eyeing upon country’s third biggest oil marketing and fuel retailers HPCL in an about USD 6.6 Billion following to the government’s idea of creating an oil behemoth.
As per the interest, ONGC may buy all of government’s 51.11 percent stake in HPCL and thus must be followed up by an open offer to acquire additional 26 % from other stakeholders of HPCL. The idea is to create a giant that will mitigate risks generated from fluctuations in the crude oil prices.
Key Benefits from the Deal:
1.Volatility in the Crude prices will have less impacts on the combined company
2.ONGC will add another 23.8 MT of HPCL’s annual refining capacity to its existing 15 MT(MRPL) creating it the third largest refiner of India after IOCL and Reliance
3.The combined company will be better placed in competing with global oil majors
4.The combined company will be one of its own kind having both forward and backward integration in the operations
5.The combined company will be able to manage funds more strategically
Majorly, there are 6 Public sector oil companies operating in India- ONGC, OIL tops the oil production in the country IOCL, BPCL and HPCL holds key responsibilities in refining and marketing whereas GAIL is effluent in midstream gas transportation and retailing business with multiple other joint ventures. Rest of the companies-CPCL, NMRL, OVL and MRPL are existing subsidiaries of one of the 6 PSUs.
Few options for integration which are in line with the announcement by Mr. Jaitley for Union Budget 2017-18.
1.Allow ONGC and HPCL merger or ONGC and BPCL merger creating a vertically huge integrated oil company.
2.OIL with IOCL merger as proposed in option 1, since OIL has lesser upstream operations compared to ONGC whereas IOCL leads the downstream segment. This will create a balance for both the companies and subsequently funds can be rotated strategically.
3.Since BPCL already have an existing arm in upstream as Bharat Petro Resources Ltd (BPRL), so its needless for it to be integrated with any of the upstream major rather BPRL can be strengthened further.
4.Letting OIL and IOCL to continue to operate with their respective businesses without integration and see proposed merger of ONGC-HPCL, IOCL and BPCL function their respective operations.
As per the sources, ONGC amidst acquiring HPCL will need to clear 2 sets of approval:
1.The government approving the sale of its 51.11% stake of HPCL to ONGC.
2.Letting ONGC to spend the funds on buying the stake, assessing the trading price of HPCL at Rs 561, ONGC will need to pay Rs 29,128 Crore for 51.11% stake and Rs 14,817 Crore for another open market stake, making it to be an acquisition of worth Rs 44,000 Crore.
After the announcement of creating a mega merger in the Union Budget 2017-18, Infraline Energy believes that ONGC-HPCL merger seems to be an experimenting move by the Government of India. It will be soon to predict the outcome of the deal but by and large the deal looks quite promising in context to the Industry structure in India.
InfralineEnergy Disclaimer:
The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the InfralineEnergy (Technologies India Pvt. Ltd.). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.
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