In its Budget, the Centre announced intentions to merge oil and gas PSUs to create larger vertically-integrated entities. While there are some merits in a merger, we are concerned about use of bigger balance sheet to make large value erosive acquisitions, holding company discount and dilution of marketing business for OMCs.
Even if the plan does not fructify, it could remain an overhang on PSU oil & gas companies in the near term.
Two options have dominated discourse so far, one led by ONGC including BPCL/HPCL and another led by IOC, including Oil India and ONGC acquiring government’s 51% stake in HPCL.
While we discuss the first option, we do not see much merit in the second – it would involve ONGC transferring $4 bn in cash to the Centre and require it to make an open offer for another 26%. This would hurt ONGC’s balance sheet and minority shareholder interest without much material benefit in our view if it is limited to a hold-co structure without a full fledged merger.
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Possible benefits of such a merger and integration exercise are more stable earnings and cash flow at different crude prices, economies of scale through cost rationalisation and better sourcing, higher index weight and better credit rating due to bigger balance sheet and more stable earnings.