Policy Watch Episode: ONGC-HPCL Merger

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Policy Watch Episode:  ONGC-HPCL Merger


 

 

The Cabinet recently gave an in-principle nod to the merger of state owned Oil and Natural Gas Corporation and Hindustan Petroleum Corporation Limited. A committee for the deal will soon be formed and the merger is likely to be completed within this financial year. HPCL will remain listed as a subsidiary of ONGC post the merger. The Finance Minister, Road and Transport Minister and Oil Ministers will be a part of the merger panel. The government will ensure that there is no open offer. ONGC has sent a proposal to acquire HPCL. The government owns 51.1% of the stake in HPCL. The deal could be valued near 28,000 crores rupees.

Analysis:

This is a reflection of government’s determination to actually go ahead cautiously with the big plan that was enunciated by the Finance Minister of creating a global giant by bringing all the oil PSUs under one umbrella. This is a major challenge and difficult as well because India had different companies working separately. Government will get a heavy sum as a part of its disinvestment target.

ONGC started this journey many years ago when it acquired MRPL. After this merger, it was expected that the focus of ONGC on oil and gas will continue because ONGC showing profit and turnover from refining does not take into account explorations. Even after the present HPCL merger, the combined market cap will be around 42 billion dollars which is far too less as compared to other foreign giants in oil and gas. Indian market itself is getting very liberal. BP and Reliance are heavily invested into retailing.

However, the long term issues are complex such as:

  1. How there will be synergy between the two companies operating independently.
  2. Will there be an actual merger in a future date because of HR issues like differences in work culture and ethos need to be resolved.
  3. What will be subsequent acquisitions.

Structure of this transaction leaves ONGC looking more like a holding company rather than a fully integrated oil and gas major. While HPCL’s finances will be consolidated with ONGC, it may suffer a holding company discount. For integrated oil companies, a lot depends on oil price levels and how best companies are able to hedge against price movements.

Through consolidation, mergers and acquisitions, the central public-sector enterprises can be integrated across the value chain of an industry. It will give them:

  1. Capacity to bear higher risks
  2. Avail economies of scale
  3. Take higher investment decisions
  4. Create more value for stakeholders

Creating a large giant is easier as compared to creating an efficient and competent one. ONGC has failed in the past to ramp up domestic crude and gas production due to the lack of any major success in exploration and production despite consistent investments. Oil companies are sitting on large reserves and are not able to invest those reserves adequately. Government desperately needs resources for its other needs. Therefore, this is an easy way of getting resources, meeting the disinvestment targets and yet not confronting the more complex issues like privatizing the sector.

Conclusion:

These steps will lead to strengthening of public sector which weakened during the globalization including the oil PSUs. This is expected to reverse in the coming years. Government sees public sector as a key instrument of economic intervention also. Private industrial houses also leverage surpluses of one business to finance diversification, growth and expansion. So, government is doing its best towards more intelligent use of reserves as well as the management abilities of the public sector to accelerate economic growth.