Sector Update | 18 July 2017
Oil & Gas
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Mega-merger mania gripped by uncertainties
No major improvement in value proposition expected
Since the Indian government’s announcement of creation of mega oil & gas majors
in its Union Budget 2017, the market has been rife with speculation over potential
mergers among the public sector companies (ONGC, IOCL, BPCL, HPCL, Oil India
and GAIL). The stock prices have been volatile amid limited details provided by the
government and the lack of possible synergies in the talked mergers. Starting from
ONGC-HPCL merger, the news articles
moved to the possible IOCL-Oil India and
then to BPCL-GAIL mergers. However, nothing has been clarified by the
government about this, and the least of all, valuation.
Refer to our report
on Oil & Gas, February 2017
ONGC-HPCL merger: Many questions remain unanswered
ONGC is said to be in talks to acquire the government’s stake in HPCL. Many
questions remain unanswered, though, including (i) MRPL-HPCL and OMPL-MRPL
prior to that, (ii) if HPCL will remain a listed subsidiary or be subsumed and (ii)
whether there would be an open offer. Additionally, uncertainty on valuation
remains. We do not see any synergy leading to cost reduction or improved value
proposition via the merger, except that it will give some hedge toward oil price
volatility. We estimate that, at market price, if ONGC were to acquire the
government’s 51% stake in HPCL at 8% interest cost, it would increase ONGC’s FY18
EPS by 5%.
IOCL-Oil India merger: No avenues for improved value proposition
The Indian government has 66.13% stake in Oil India. IOCL has presence in 13
domestic blocks and 10 international blocks. Merger with Oil India could give it
some expertise in E&P. However, again, there are no avenues for cost reduction or
improved value proposition. Oil India does not even provide a significant hedge
against oil price volatility to IOCL. We estimate that, at market price, if IOCL were to
acquire the government’s 66.13% stake in Oil India at 8% interest cost, it would
increase IOCL’s FY18 EPS by 4%.
BPCL-GAIL merger: Not expected to result in much cost saving
The government has 54.88% stake in GAIL. BPCL and GAIL are together in several
CGDs like IGL, MNGL and CUGL. However, their merger would not really result in
much reduction in cost as these companies are managed more or less
independently. GAIL has vast experience in gas sourcing and distribution, which
could benefit BPCL. However, it would also expose BPCL to the risk of 5.8mmtpa US
shale contracts that GAIL has signed. We estimate that, at market price, if BPCL were
to buy the government’s 54.88% stake, it would increase BPCL’s EPS by 8%.
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
(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
Investors are advised to refer through important disclosures made at the last page of the Research Report.