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
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.