Oil 2017
Sector Update | 2 February& Gas
Oil & Gas
Integrated oil and gas major
Possible options, benefits and concerns
Yesterday’s announcement finally
gives credence to an idea which we are
told was first mooted when Mani
Shankar Aiyar was the Minister of
Petroleum and Natural Gas during
2004-06. While the intentions may be
right, whether we will have a T Rex
which is largely destructive, both for
the industry and the investors or a
herbivore and more social
Brachiosaurus, only time will tell. We
look at few options that come to our
mind and their implications, all
imaginary of course!
Tyrannosaurus
or T Rex, is the largest
known land predator and most
ferocious among all terrestrial animals.
Brachiosaurus,
a herbivore, has been
described as harmless and largely a
more social animal.
Option 1: Create a large ‘integrated’ downstream player; definitely a Brachiosaurus
Value Chain
Refineries, product pipelines and naphtha based petrochemical all form a downstream value
Companies that
may be merged
Market Cap
(INR b)
chain.
Merge Indian Oil (IOCL IN), Bharat Petroleum (BPCL IN), Hindustan Petroleum (HPCL IN),
Mangalore Refinery & Petrochem (MRPL IN) and Chennai Petroleum (MRL IN)
Company
IOCL
BPCL
HPCL
MRPL
CPCL
Total
MCap (INRb)
1,800
998
541
178
49
3,510
Remarks
Benefits
HPCL has 17% stake in MRPL
IOCL has 52% stake in CPCL
Excluding the above mentioned cross-holdings
Concerns
Synergies could be there through rationalization of retail outlets, thereby improving
profitability
Huge benefits in procurement of crude oil because of the combined bargaining strength
Rationalization of other marketing infrastructure like terminals, depots etc
Larger availability of naphtha for petrochemical projects
Although ROEs of the OMCs appear to converging in our forecasts, IOCL is still ~1-2% lower
than that of BPCL but 1-2% higher than that of HPCL. The merger with removal of
redundancies would result in better return ratios
IOCL and BPCL would turn free cash flow positive in next 3-4 years while HPCL would burn
cash. The merger would give better balance sheet strength for future expansions.
Integration issues could crop up. Remember that although all are PSUs, BPCL and HPCL have
been built on MNC lineage (HPCL was formed with assets of Esso & Caltex); BPCL was formed
from assets of Shell. However, IOCL has been primarily an Indian PSU. Efficiencies &
corporate governance have also been better in BPCL & HPCL.
Removal of redundancies, especially in marketing would mean job cuts and strong employee
unions may create obstacles, thus reducing the benefits of merger
OPaL and BCPL may also be transferred to these entities, which might be a drag in initial
years due to stabilization issues
May result in poor capital allocation like expansion of NRL or Rajasthan refinery
Swarnendu Bhushan
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Abhinil Dahiwale
(Abhinil.Dahiwale@motilaloswal.com); +91 22 3980 4309
02 February 2017
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Oil & Gas
Total capacity of 134mmt
IOCL
70.0
BPCL
22.5
HPCL
14.8
MRPL
15.0
CPCL
11.5
Total
133.8
Combined capacity would build a total
refining capacity of 134mmt. One could
even add capacity of 15mmt of Bina
and Bhatinda together. At this, the
behemoth would still be a global
competitor.
Some competition indeed!
ExxonMobil
315.0
Shell
140.3
Option 2: Create a large ‘integrated’ upstream player, probably a Tyrannosaurus
Value Chain
Services (seismic studies, drilling etc), exploration and production
Companies that
ONGC (ONGC IN), Oil India (OINL IN)
may be merged
Company
MCap (INRb)
Market Cap
ONGC
2,620
(INR b)
Oil India
Total
269
2,889
Benefits
Concerns
Better utilization of assets like rigs etc
Integrated data bank could be of help in prioritizing monetization of assets and capex plans
ONGC has vast expertise in offshore while Oil India is largely onshore. Integration could help
in imbibing better practices for various fields.
Oil India has presence mainly in the North East. There could be cultural issues.
With hardly any presence of private players, any comparison with respect to profitability and
efficiency would be difficult
In most of the bids held so far, ONGC & Oil India have been participating independently.
Post-merger, there may be more of single bids.
The behemoth would probably be
comparable with likes of Anadarko
rather than the largest players
Far away from largest players!
ExxonMobil
320.0
Shell
147.0
Production of 51.6mmtoe of oil & gas
ONGC
45.6
OIL
6.0
Total
51.6
Option 3: Create a large ‘integrated’ upstream & downstream player, definitely a Tyrannosaurus
Value Chain
All downstream and upstream including GAIL
Companies that
ONGC, Oil India, IOCL, BPCL, HPCL, GAIL, MRPL, CPCL
may be merged
Company
MCap (INRb) Remarks
Market Cap
IOCL
1,800 ONGC has 13.77% stake, Oil India has 5% stake
(INR b)
BPCL
HPCL
MRPL
CPCL
ONGC
Oil India
GAIL
Total
998
541
178
49
2,620
269
611
7,066
HPCL has 17% stake in MRPL
IOCL has 52% stake
IOCL has 7.69% stake, GAIL has 2.4% stake
IOCL has 4.45%, BPCL & HPCL have 2.23% each
ONGC has 4.83% stake, IOCL has 2.41% stake
too complex, just adding all above
Benefits
Concerns
Some protection against volatility in crude oil prices
Free cash flow from IOCL and BPCL could help in upstream acquisitions
Synergies of refining assets as mentioned in Option 1
Much larger balance sheet to compete for bids overseas
Upstream companies have ROEs 4-5% lesser than that of the OMCs. It could be value erosion
for the OMCs.
It would be difficult to manage a behemoth like this and overall efficiencies may come down
Government would have better handle to manage 'subsidies' if crude oil prices were to rise
higher; investors being at a loss
Too many parts in the value chain could result in poor allocation of capital
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02 February 2017
 Motilal Oswal Financial Services
Oil & Gas
NOTES
02 February 2017
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