Though the stated purpose of the HPCL takeover by ONGC was to create an oil behemoth—IOC is rumoured to be merging with OIL, and BPCL with GAIL as part of this process—the jury is out on whether ONGC will be able to pull it off since its track record for its core business remains middling. Between FY07 and FY17, its gas production has risen from 22.4 bcm to 23.3 bcm and crude oil production fell from 26.1 million tonnes to 25.5 million. While ONGC claims to have increased gas reserves from 540 bcm in FY07 to 788 bcm in FY16 and oil from 561 mt to 578 mt, the long delays in commissioning cast a doubt over the recoverability of the reserves. Indeed, while it is embroiled in a fight with Reliance Industries Limited (RIL) on the latter ‘stealing’ its gas, had it started working on its fields at the time RIL had, this would either not have happened or would have been discovered a long time ago.
To be sure, there are obvious synergies between HPCL and MRPL which ONGC owns, and the different price cycles for crude oil/gas and petrochemicals will even out revenue fluctuations for the combined ONGC-HPCL, but real value will be got from being able to both source crude very cheaply as well as to constantly increase gross refining margins—RIL’s stunning numbers on Thursday, beating all expectations, were a result of precisely this. Indeed, in most such mergers/takeovers, managements typically give investors estimates of the value that will be created—a recent case being the proposed Vodafone-Idea merger—but in this case, apart from vague statements about the deal creating value, there is little ONGC has put out on what the takeover will bring to its shareholders. Though opinion is split on whether an open offer should have been made—it was when IOC bought IBP in February 2002, though like ONGC and HPCL, both were PSUs—the fact that this has been ruled out by the government in this case is good news since ONGC will have to spend that much less on the acquisition.
While the need of the hour was to create more competition in the downstream retailing business, the government’s plan to push for more PSU consolidation looks decidedly odd, certainly not in keeping with its philosophy of the government not being in the business of running businesses. It would, however, do well to keep in mind that, in the long run, unless there is a dramatic change in how PSUs are run, real value creation lies in the private sector. The markets are currently assigning a 17.16 forward PE multiple for RIL vs a much lower 8.78 for ONGC, 11.84 for BPCL, 9.58 for IOC and 8.7 for HPCL. Unless ONGC is able to raise that multiple significantly, it will be clear privatising HPCL would have been the better option.