Sector Update | 23 February 2017
Oil & Gas
Refer to our report
on Oil & Gas, February 2017
Another cocktail: ONGC + BPCL or HPCL
We do not see much concern
The recent Union Budget had announcement the creation of an ‘integrated oil and gas
company’ to take on international as well as large domestic private players. Of late,
there have been news reports suggesting that while IOCL might be left independent,
ONGC might be merged with BPCL or HPCL.
Given that the government’s aim is primarily to boost the E&P strength of the nation,
we see greater probability of ONGC merging with BPCL than with HPCL.
BPCL has been pretty successful in its E&P segment, with significant discoveries in
Brazil (3b bbl) and a very large gas discovery in Mozambique (75tcf). HPCL is just
entering into a large capex cycle and we estimate that it would have an outflow of
~INR100b each year for the next 3-4 years.
We are not unduly concerned on the possible merger of ONGC with BPCL, provided
the subsidy regime does not return and integration does not create cultural and
operational issues. We do not see HPCL as a candidate for merger with ONGC due to
its large pending capex.
Merger of ONGC and BPCL would strengthen India’s E&P capabilities…
Given that the aim is to boost E&P capabilities, we assume that BPCL would
curtail its capex plans (INR1t for the next 5-7 years). This would add USD1.2b of
free cash flow to ONGC’s USD2.7b free cash flow each year, translating into total
free cash flow of USD3.9b per year, assuming no dividend outflow!
A field like Rajasthan of Cairn India had an initial estimate of USD5b for its
development throughout the life cycle. The field currently produces ~170kbopd.
India consumes ~4,000kbopd.
A couple of years down the line, ONGC and BPCL’s combined free cash flow
would help strengthen India’s E&P capabilities and decrease dependence on
imports (or through equity participation in overseas blocks).
…but there are challenges as well
However, there is no synergy between downstream and upstream; so operating
cost just adds up. Then, there are cultural issues. BPCL has an MNC lineage,
while ONGC has been an “Indian” PSU all along.
There would be marginal value destruction for BPCL, as the combined entity
would result in reduced return ratios (see exhibit 1). More problematic would
be if the government reverts to the dark days of subsidies.
Swarnendu Bhushan
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Abhinil Dahiwale
(Abhinil.Dahiwale@motilaloswal.com); +91 22 3980 4309
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
8 August 2016
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Utilities
Exhibit 1: Merger of ONGC & BPCL may not be that bad!
Annualized
BPCL
EBITDA (INRb)
Depreciation (INRb)
EBIT (INRb)
PBT (INRb)
PAT (INRb)
Operating cash flow (INRb)
Capex (INRb)
Free cash flow (INR b)
Free cash flow (USD b)
Equity (INRb)
Capital employed (INRb)
RoE (%)
RoCE (%)
128
21
107
107
70
92
10
82
1 .2
426
700
16.5
10.1
Actual RoE of BPCL would be higher due to other income
Same as above
The aim is primarily to build E&P strength, so assuming
minimal capex for BPCL and continued capex for ONGC
without M&As
Assuming no net interest cost/ income; basically assuming
all extra cash is deplyed for capex, which is basically the aim
of government
Using USD60/bbl of realization for ONGC
Remarks
Annualized
ONGC
757
328
429
429
283
611
430
181
3
1,900
2,900
14.9
9.8
Annualized
ONGC + BPCL
885
349
536
536
353
703
440
263
4
2,326
3,600
15.2
9.8
23 February 2017
2

THEMATIC/STRATEGY RESEARCH GALLERY

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