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The Union Cabinet gave an approval to Oil and Natural Gas Corporation (ONGC) to buy the government's 51.1 percent stake in Hindustan Petroleum Corporation (HPCL) yesterday.
Both — ONGC and HPCL — are public sector enterprises. While ONGC is an upstream company, where oil is extracted and the impurities are removed, HPCL refines the oil after it is extracted, making sub-products of oil.
The deal is a step towards the government's plan to create an integrated oil giant, as proposed in Budget 2017.
However, the deal has its pros and cons. Here's a glimpse -
Why the Deal Makes Sense
> The merger will be a huge step in the direction of achieving the government's divestment target which was set at Rs 72,500 crore for FY17 in the Union Budget.
> HPCL will now be a subsidiary of ONGC giving it the wherewithal to keep a check on the operations of former.
> The merger will create a bigger oil company that can compete with its global peers. However, the merged entity would still be smaller as compared to the top ten oil giants around the world.
> The merger will help ONGC get more funds to attain more foreign products. The merged entity will stand to encourage research and development in the sector which can result in boost in production, refining and marketing of oil products.
> Merger of two state-owned entities can help improve efficiency. The merged entity can find ways of cutting costs and increasing the output.
Why the Deal might Not Work
> BPCL could have been a better pick for the merger. Motilal Oswal said in a report that "given the government's aim to boost the exploration and production strength of India, we see greater probability of ONGC merging with BPCL than with HPCL".
> There can be clashes due to difference in nature of operations. It could lead to interference from the parent (ONGC or the governemnt), the Economic Times reported quoting an Ambit Capital report.
> The Ambit Capital report also said that the long-term holders should be concerned as ONGC doesn't have a good capital allocation record. HPCL may not gain from the deal at a time when subsidies have vanished and crude prices are low.
> It will still be very difficult for the merged entity to compete with global oil majors which already have a good market position. Out of the top ten global majors, seven are state-owned.
> To enter the club of top state-owned oil majors, ONGC will have to infuse more funds, resulting in increase in costs which could eventually lead to higher prices of the oil products.
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