ONGC to sell stake in IOC, GAIL to fund HPCL deal; shares gain

To meet the payments requirement of Rs 36,915 crore for the HPCL deal, Oil and Natural Gas Corporation (ONGC) is likely to sell its stake in IOC and GAIL.

Share price of IOC, Gail and ONGC surged on the stock exchanges.  At 1511 hours, share of IOC was trading at Rs 389.85 per piece on the BSE, up Rs 7.45 or 1.95% after touching the day’s high of Rs 398.50. 

While GAIL stock rose nearly 4% and touched the day’s high of Rs 474 per piece, at 1511 hours, the company was trading at Rs 469.05 per piece, up Rs 11.95 or 2.61% on the BSE.

Similar was the case of ONGC, as it's stock rose over 4% and touched the day’s high of Rs 208.45. On the BSE, the company currently was trading at Rs 207.20 per piece up Rs 7.25 or 3.63% at 1511 hours. 

On the other hand, the share price of Hindustan Petroleum Corporation Limited (HPCL) tumbled by nearly 2% and was trading at Rs 395.10 per piece on the BSE. 

Top sources with direct knowledge of the issue said in a PTI report that, the government gave nod to sell ONGC's stake in IOC and GAIL earlier this month but the company is waiting for the right price to offload the shares.

Currently, ONGC holds 13.77% stake in IOC which is valued at Rs 26,200 crore, while it has 4.86% holding in GAIL India worth Rs 3,847 crore at current market price. 

To purchase 51.11% stake in HPCL, the state-owned ONGC needs to pay about Rs 36,915 crore to the government, from which about Rs 12,000 crore will be done by cash and remaining by short-term borrowing. 

According to sources, ONGC plans to pre-pay the one-year tenure loan it is taking for HPCL buy by selling IOC and GAIL shares in due course. 

In the month of July 2017, the Union Cabinet gave in-principle nod for the sale of government's stake in HPCL to ONGC. 

After ONGC buying the government stake, HPCL will become subsidiary of India's largest oil producer but its board will continue to be in place. 

The proceeds will help the government to stay within the short distance of fiscal deficit targets for FY17-18 by selling its 51.1% stake in HPCL to ONGC at 14% premium of Rs 473.97 per share, yet keeping its control on HPCL through ONGC, a PSU."

A Stewart & Mackertich Research report said, “We believe it's the smartest move in recent history where the the government has met its fiscal objectives through a 'deal' where it has met its short-term needs, yet kept the saddle in its fold, through ONGC.”

According to them, the deal is expected to make ONGC the first integrated PSU company in oil and gas segment, as ONGC now controls both MRPL & HPCL as ONGC already controls a 15 million tonnes refinery through MRPL and would increase capacity to 40 million tons refinery.

It  would also give ONGC access to around 21% share in Indian Oil marketing space over HPCL's 14,700 filling station. This deal may lower procurement cost of HPCL. 

 Also, HPCL deal will add 23.8 million tonnes of annual oil refining capacity to ONGC's portfolio, thus making it the third-largest refiner in the country after IOC and Reliance Industries.

Mayank Maheshwari and Rakesh Sethia analysts at Morgan Stanley said, "ONGC's ownership does not affect HPCL’s operations, but we think it raises the probability that HPCL may increase its refining capacity inorganically through downward integration with another ONGC subsidiary, MRPL."

The duo further added, "For IOCL, there could be risk of a liquidity event, especially if ONGC were to monetise its  stake in IOCL, which is valued at ~$4 billion at the current market price."

IDBI Capital said, “We expect now focus would be back on core business where ONGC is well-poised with higher gas production growth, expected higher gas price from Apr'18 and incremental gains due to higher crude oil price.”