The government seems to be eyeing not only long term strategic benefits, but also an immediate cash bonanza from its ambitious plan to create a giant energy company of the global scale, by asking oil producer ONGC to pay 40%-50% premium for the proposed takeover of a majority stake in refiner and marketer HPCL from it, raking in about Rs 50,000 crore, according to a TV news report. HPCL shares jumped on the news, rising 4.2% to Rs 356.25.
Finance Ministry and Oil Ministry are keen to have state-run Oil and Natural Gas Corp pay a 40%-50% premium over the current market price for buying a 51% equity stake in Hindustan Petroleum Corp from the government, ET Now reported citing unidentified sources. However, the final call on valuation will be decided in conjunction with independent valuers, the report added.
In order to fund the buyout of HPCL, ONGC will likely sell its 14% equity stake held in another state-run giant oil refiner Indian Oil Corp in block deals, ET Now report said, adding that ONGC’s 14% stake in IOC is valued at Rs 30,000 crore today. Indian Oil Corp’s shares also rose on the news, and were trading up 1.5% at Rs 393, while ONGC shares rose 1.6% to Rs 163.
Earlier last week, the Department of Disinvestment issued a Cabinet note on the proposed amalgamation of HPCL with ONGC, CNBC Awaaz reported amid news that the Prime Minister’s Office has expressed disappointment on the slow progress in the government’s quest to create a huge energy PSU of the global scale.
As is widely known now, the government is planning to combine HPCL with ONGC by December this year by selling its 51.1% stake in the former to the latter. The government will seek an in-principle approval from the Cabinet for sale of 51% equity stake in HPCL to ONGC, CNBC Awaaz report said, adding that in the process of handover of HPCL’s management control to ONGC, the disinvestment will be done via a strategic stake sale.
Further, the government is also reportedly considering forming a Group of Ministers (GoM) to frame guidelines, price and timeframe for the share sale. Finance Minister Arun Jaitley, road minister Nitin Gadkari, oil minister Dharmendra Pradhan and power minister Piyush Goyal will likely be part of the proposed GoM.
A vertically integrated oil company would be better able to absorb the fluctuations in the global crude oil prices, as when the exploration unit will suffer from falling prices, the refining unit will benefit, and vice versa. Earlier in February, Finance Minister Arun Jaitley proposed setting up an integrated oil PSU (public sector undertaking) by merging companies with synergy in order to match the scale of the global oil giants.
India’s largest oil and gas exploration and production company ONGC said then that the proposed integration of oil PSUs will be a big positive for the sector as an integrated company is well positioned to handle volatility in crude oil prices. Negotiation power of a large oil company is better with its business partners, it had said.