State-run Oil and Natural Gas Corporation Ltd (ONGC) will buy the government’s 51.1 per cent stake in public-sector oil refiner-cum-marketer HPCL and make it a listed subsidiary, with the Cabinet on Wednesday giving in-principle nod for the transaction. The plan, in line with a policy announced in last Union Budget to create oil companies of global sizes, may not really achieve that as the combined entity will still be far smaller than global energy giants, but will be a win-win for both companies as their business risks will be mitigated. The government will get close to Rs 30,000 crore or around 40 per cent of this year’s projected disinvestment revenue from the deal, given HPCL’s current share price. The transaction may not trigger the market regulator’s open offer provision as HPCL’s ownership will remain with a state-owned entity. Buying an additional 26 per cent in HPCL from the public shareholders would have cost ONGC another Rs 15,000 crore.
To raise funds for the transaction, ONGC may not have to stretch itself much. While a cash surplus of Rs 10,000 crore will come in handy, the explorer may transfer its 71.62 per cent stake in Mangaluru-based refiner MRPL to HPCL before acquiring the latter, a move that could fetch it around Rs 16,500 crore. HPCL already has around 17 per cent in MRPL so market borrowing by ONGC for lapping up HPCL may not be very large.
Public holding in HPCL is 48.89 per cent.
“It will give them (the oil PSUs which will be merged) capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders,” finance minister Arun Jaitley had said in the last Budget speech. However, even after the deal, the combined revenue of ONGC-HPCL will be around $46 billion compared with, say, $219 billion of ExxonMobil.
Following the ONGC-HPCL deal, the combined entity will have the requisite know-how, if not financial might, to compete with the large energy giants. ONGC’s vulnerability to fluctuations in global crude prices will be lessened as it extends to refining and marketing. As for HPCL, crude sourcing could become less costly. “Globally, all oil majors are integrated players. With HPCL coming in which will have refining and retailing capacity, the merged entity will have all the traits of a global player,” said RS Sharma, former CMD of ONGC, adding that the new company will be able to absorb oil price volatility.
“The stakeholders are looking forward to the to-be integrated major ONGC-HPCL-MRPL and OVL as an opportunity for value creation in global markets, in the country markets and also internally within companies. For years to come, the conglomerate will try to be better than domestic and global rivals in areas like crude, gas, products, petrochemicals, infrastructure, trading, etc, in the market, and in people, technology, finance and likes within,” said Deepak Mahurkar , leader, oil & gas, PwC India.