FREE

MOSL: OIL & GAS-Mega-merger mania gripped by uncertainties-No major improvement in value proposition expected

​Oil & Gas: 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.

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%.