India's ambitious move to allow state-owned Oil and Natural Gas Corp to take a majority stake in state-owned Hindustan Petroleum Corp Ltd will create the country's first integrated state-owned oil major, giving the combined entity an edge when competing in international markets.
With ONGC firming up plans to aggressively push oil and gas production at home, analysts said that the move made sense as it would help the combined entity to have a better grip across the entire value chain, from exploration to retail, at a time when domestic demand is set to grow rapidly.
"Effectively, the Indian government is endorsing a model of 'bigger is better' as it seeks to create companies which can champion Indian energy needs both domestically and globally," Bernstein Research said in a domestic paper.
"The objective is to create bigger companies with more stable cash flow profiles which can better meet India's long-term energy needs," it added
ONGC said earlier in January that it had agreed to buy the government's entire 51.11% stake in HPCL and the transaction would be completed by the end the month. The strategic sale requires ONGC to pay around Rupees 370 billion ($5.8 billion) for the stake
Both ONGC and HPCL are listed on the Bombay Stock Exchange and the deal has been exempted from open offers as both companies are state-owned
"The integrated entity will have the capacity to neutralize the impact of volatility in global crude oil prices," said oil minister Dharmendra Pradhan. "The integrated entity will have the advantage of having enhanced capacity to bear higher risks and take higher investment decisions.
HPCL will continue to be listed as a separate entity on BSE for some time even after the acquisition is completed. In addition, HPCL's management will be allowed to make commercial decisions in the initial years. ONGC will also retain the HPCL brand in the retail space
"Historically, integration has provided a natural hedge to commodity prices, with E&P providing the performance during higher oil prices and refining outperforming when oil prices fall. The logic of the model is that both segments smooth out financial performance across volatile industry cycles and provide greater financial stability," Bernstein said.