ICCK

India starts journey to create national oil champion

Green light for $4.6bn SOE merger marks 1st step in plan to build globally competitive group

New Delhi has kick-started the process of creating a national oil champion, giving the go-ahead for a $4.6bn sale of the government’s stake in Hindustan Petroleum Corporation to its bigger state-owned rival Oil and Natural Gas Corporation.

Ministers decided on Wednesday night to approve the sale of the government’s 51 per cent share in HPCL, which focuses on oil refining and fuel retailing, to ONGC, the country’s largest oil and gas explorer. The stake is worth $4.6bn based on Wednesday’s market valuation of HPCL.

The move is the first step along the path of creating a vertically integrated Indian oil company that can compete internationally with some of the world’s largest.

“We propose to create an integrated public sector oil major which will be able to match the performance of international and domestic private sector oil and gas companies,” Arun Jaitley, finance minister, announced in February’s Budget. 

Ministers believe that the small size of Indian oil explorers has prevented them from competing with international rivals.

Last year Dharmendra Pradhan, oil minister, said Indian oil companies were interested in buying a stake in Rosneft, the Russian state-controlled oil company. But the Rosneft shares were eventually sold to Glencore and the Qatar Investment Authority. 

Ministers also argue that a company with interests in retail and exploration will be better able to weather fluctuations in the oil price. Shares in ONGC have tumbled along with the price of crude, to Rs163 from Rs309 in June 2014.

Officials say they plan for HPCL to become a separately listed subsidiary of ONGC, meaning it will count towards the government’s ambitious target to generate more than $11bn of sales and privatisations this year. ONGC already has a refinery company called Mangalore Refinery and Petrochemicals, with which HPCL could be merged.

Last month ministers approved the privatisation of Air India, the debt-laden national airline — although any deal for that company is unlikely to be finalised this year.

Dinesh Sarraf, chairman of ONGC, welcomed the deal on Wednesday, telling the Economic Times: “It is good for all the shareholders of both companies since integrated companies are much stronger and therefore valued by the market at higher multiple than standalone companies.”

Mr Sarraf would not comment on how his company would fund the purchase, adding that the structure of the deal had not yet been decided. But he said ONGC might be able to bypass Indian rules requiring an open offer for the shares, given that they will pass from one state-owned entity to another.

As of the end of March, ONGC had about $2bn in cash reserves and $7.2bn in net debt. Its equity value by the end of trading on Wednesday was $32.5bn, according to Bloomberg.

Some analysts warn that while the move might help the government close its deficit, it could prove difficult for both companies involved.

Ritesh Gupta, an analyst at Ambit Capital, said: “There is not much synergy between ONGC and HPCL. The acquisition could mean interference by ONGC and dilution of a high-performance culture at HPCL.”

https://www.ft.com/content/6b5706d8-6cf4-11e7-bfeb-33fe0c5b7eaa