Oil and Natural Gas Corp (ONGC) may well be looking at a cash outgo of at least Rs 44,000 crore if the government asks the oil and gas explorer to acquire stake in oil refiner Hindustan Petroleum Corporation Limited (HPCL).
The cash outgo will go towards acquiring the government holding as well as buying an additional 26 percent stake in HPCL via an open offer.
HPCL has an equity base of 1.01 billion shares.
At today’s closing price of Rs 561.10 on the National Stock Exchange, its market capitalisation comes to roughly Rs 56,671 crore.
While the government will get Rs 29,134 crore for selling its 51.11 percent stake, ONGC will have to cough up another Rs 14,813 crores for another 26 percent share.
Financially, it should not be a difficult exercise for ONGC to service since it sits on reserves of Rs 1,47,574 crore as on March 31, 2016, as per its annual report for the financial year.
On Monday, the Economic Times reported that the government would soon move a Cabinet note for ONGC to take control of HPCL, paving the way for creation of a state-owned oil behemoth.
The challenges to the gigantic exercise will be more administrative and legal than financial. Both ONGC and HPCL were formed by Acts of Parliament and the stake sale will thus need Parliamentary approval, a not-so-easy exercise in an opposition-dominated Upper House.
In his Budget speech for 2017-18 on February 1, Finance Minister Arun Jaitley said the government proposed “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.”
Examples of such oil and gas behemoths abound. Saudi Arabia’s Aramco and Norway’s Statoil are among those.
“We see opportunities to strengthen our CPSEs through consolidation, mergers and acquisitions. By these methods, the CPSEs can be integrated across the value chain of an industry. It will give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders. Possibilities of such restructuring are visible in the oil and gas sector,” Jaitley said in his Budget speech.
The government has so far followed a policy that kept oil and gas exploration companies as separate entities from their refining and marketing counterparts.
While Oil India and ONGC explore in India and abroad for oil and gas assets (ONGC overseas through its subsidiary ONGC Videsh), refining and marketing operations are undertaken by Indian Oil Corp Ltd , Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd and GAIL India Ltd . ONGC subsidiary Mangalore Refinery & Petrochemicals Ltd has refining operations.