Oil Giant In Making: ONGC To Buy Government Stake In HPCL

Oil and Natural Gas Corporation Ltd., the country’s biggest oil explorer, will buy the government’s entire stake in refiner Hindustan Petroleum Corporation Ltd. to create a state-run oil behemoth to better compete with global rivals.

The Union Cabinet on Wednesday gave an in-principle nod to sell its 51.11 percent stake in HPCL to ONGC, Bloomberg reported citing a senior government official. The deal will be exempted from the mandatory open offer when buying more than 25 percent in a listed company, the report said quoting the official. The marker regulator’s takeover rules require the acquirer to make an offer to public shareholders to buy up to 26 percent stake.

The stake sale is expected to be completed in one year, the official said.

It’s a good move for all the three stakeholders, said RS Sharma, former chairman and managing director of ONGC.

Also Read: Will Eventually Look At HPCL-MRPL Merger, ONGC Chairman Says

The government’s stake in HPCL is valued at Rs 29,900 crore, as per Wednesday’s closing price. At current valuations, the deal can contribute more than a third of the ambitious divestment target of Rs 72,500 crore set in the Union Budget for the ongoing financial year. It’s also the first step to create a public sector oil giant to manage volatility in crude prices and compete for overseas assets, another budget proposal.

Debt Worry

The government owns 68.07 percent in ONGC, and the acquisition will make HPCL its step-down subsidiary. The oil explorer, however, doesn’t have the cash to fully fund the deal. It had Rs 16,648 crore cash as of March, leaving it short of more than Rs 12,000 crore at current valuations.

Which means, it will have to borrow more, adding to its Rs 55,682-crore debt at the end of March. Or, it could sell assets.

The upstream oil major might look to sell its 13.8 percent stake in state-run Indian Oil Corporation Ltd. valued at more than Rs 25,000 crore, CLSA had in a report earlier. The sale will impact IOC’s share price, it said. However, it will limit any incremental value leakage and minimise net negative value impact on ONGC, the brokerage said.

Refining Capacity

The buyout will add HPCL’s 15.8 million tonnes of annual crude refining capacity to ONGC’s portfolio. The explorer is a majority owner of Mangalore Refineries & Petrochemicals Ltd., which operates a 15 million-tonne refinery in southern India.

After the completion of the buyout by ONGC, HPCL will be merged with MRPL, ONGC Chairman DK Sarraf told BloombergQuint over the phone. "There would be synergies between HPCL and MRPL in consolidation of the two,” he added.