Don’t bleed ONGC PDF Print E-mail
Friday, 05 January 2018 04:06
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Asking it to pay 45% extra to buy HPCL is a bad idea

Even when the petroleum ministry first suggested it, the logic behind mega oil PSUs was never clear. Certainly, the price cycles of crude oil/gas and refinery products are different and that helps defray risks and many of the world’s oil majors are integrated companies, but merely merging PSUs wasn’t going to add to their efficiency. Apart from the fact that large mergers are tricky the world over and the number that have failed are quite large, the merger would have made sense if either ONGC or HPCL—two firms chosen as part of this mega oil PSU strategy—were very efficient in comparison with their private sector rivals; whatever the quality of their managements, as with all PSUs, they are bound by various rules and procedures that restrict their performance. Indeed, since there is very little competition in the oil marketing space, privatising HPCL would have been a much better idea. The government, however, was not persuaded and it helped that the money from ONGC buying HPCL would ensure the government bridged its disinvestment programme as well. But now, according to a report in this newspaper, ONGC has done an internal evaluation of HPCL that values it at 45% more than what its market capitalisation is.

How ONGC arrived at this is not clear, but it is odd that its valuation experts believe they understand HPCL better than the stock markets do. The markets are valuing HPCL at an earnings multiple of 12 in 2018 versus 16.1 for Reliance Industries—given that Reliance had a refining margin of $12 per barrel ($3.7 over Singapore margins) versus $5.6 for HPCL ($2.7 under Singapore), the new valuation means HPCL is more valuable than Reliance. Apart from its more modern refineries that have better processing capabilities, Reliance has a very aggressive strategy in sourcing crude and allocation of expenditure.

PSUs like HPCL or ONGC, by contrast, cannot even place an order without going in for public tenders and are hamstrung by L-1-itis. Ironically, at a time when the government is asking ONGC to acquire HPCL, it wants to take away some of ONGC’s fields and give them to private sector firms that it feels will do a better job at producing or finding new oil/gas—so while the government hopes ONGC will be able to do a great job in boosting HPCL’s profitability, it doesn’t seem to think ONGC has the ability to run even the oil/gas fields it has. The acquisition was always a bad idea, let’s not make it worse by getting ONGC to value HPCL even more than what the stock markets do.


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