The decision of state-owned oil explorer ONGC to acquire government's 51 per cent stake in the petroleum refiner and retailer HPCL will help the former to step up its marketing strategy. ONGC's rational for the deal is that as an integrated oil conglomerate, its performance will be less affected by the volatility of crude prices due to diversification of its cash flows to midstream and downstream presence through HPCL, and earnings volatility will also be limited.
"HPCL and ONGC have a complementary asset portfolio and through this acquisition, ONGC is gaining a midstream and downstream presence. ONGC will also gain access to marketing network of HPCL which could be synergistically utilised," it said.
Analysts gave a thumbs up to the deal from an ONGC perspective, particularly, since it is acquiring HPCL, without paying a very high premium. However, that left HPCL investors disappointed. "ONGC will not be paying an egregious premium," said brokerage Jefferies, who expects the acquisition to boost ONGC's earnings per share by 4-6 per cent.
The acquisition price of Rs 473.97 a share was a 13.8 per cent premium to HPCL's closing price on Friday, contrary to some speculation earlier that the deal would likely be done at a very high premium. Due to this expectation, HPCL's stock had outperformed that of state-owned rivals Bharat Petroleum and Indian Oil by 20 per cent over the last twelve-months, analysts noted.
Analysts at BOB Capital Markets also point out that ONGC's consolidated debt to equity ratio will only rise to 0.4x from 0.2x now, assuming the deal is entirely funded via debt. Given that it is a related party transaction between two promoter entities—the government and a government-owned company—there won't be any open offer for minority shareholders.
However, not all convinced with the deal. Ritesh Gupta of Ambit Capital, for instance, feels the deal brings limited synergies for the two companies. "ONGC should be looking for sharpening technical competence to improve production and improving the ability to choose the right exploration and production assets. HPCL's acquisition will reduce ONGC's financial flexibility to acquire or develop upstream assets," said Gupta.
HPCL, on the other hand, is undergoing a mega capital expenditure cycle with significant expansion planned across refining and petrochemicals, expanding and upgrading marketing network and investing in LNG (liquified natural gas), he pointed out.
"The current regime could speed up the process of clearances for land acquisition and regulatory approvals; we note faster clearances and awards of initial consulting projects. This would mean full equity payments for large projects, such as Barmer refinery, West Coast refinery and Kakinada cracker (unit), within the next five years. This will create a significant strain on HPCL's balance sheet until the time cash flows from these projects start, which are at least five years away," added Gupta.
The acquisition decision has also reflected on the two oil stocks on Monday. Shares of the state-owned oil explorer ONGC surged more than six per cent, while that of Hindustan Petroleum Corp Ltd (HPCL) tumbled four per cent. The stock declined 4.3 per cent to Rs 389.40 intra-day. ONGC, meanwhile, surged six per cent intra-day to Rs 206.
As part of the deal, the ONGC board approved buyout of the entire 51.11% shareholding of the President of India, at a consideration of Rs 473.97 per share with a total acquisition cost of Rs. 36,915 crore.
The deal is part of the government's proposal in the budget last year to create an 'oil major' that can match the size and performance of international as well as domestic private sector oil and gas companies.
For the year ended March 31, 2017, ONGC reported a consolidated net profit of Rs 21,478 crore on revenue of Rs 1.42 lakh crore. On the other hand, HPCL had a consolidated net profit of Rs 8,236 crore on revenue of Rs 2.14 lakh crore.
