ONGC surges 6% on acquisition of 51.11% stake in HPCL

Oil and Natural Gas Corporation (ONGC) has surged 6% to Rs 206 on BSE in early morning trade after the state-owned oil exploration company announced that it will acquire the 51.1% government stake in Hindustan Petroleum Corporation (HPCL) at a cost of Rs 369.15 billion.

ONGC will acquire the government stake in HPCL by paying Rs 473.97 per share which works out to a 14% premium to HPCL’s closing market price of Rs 417 on Friday, 19 January. ONGC is likely to be exempt from issuing an open offer and expects to complete this deal by the end of January 2018.

“Key benefits of having an integrated oil conglomerate are performance of integrated oil companies balance upstream and downstream pressure and provide for stability despite volatility in crude prices, lower earnings volatility, diversified cash flows and lower business risk resulting in higher PE multiples and valuations resulting in higher shareholder value and several synergies are available through HPCL (complimentary asset portfolio, midstream and downstream presence and access to marketing network),” ONGC said in a statement.

“Assuming this deal is entirely funded through debt (which looks to be the most probable route), ONGC’s consolidated debt/equity ratio would increase to only 0.4x from 0.2 now,” according to analysts at BOB Capital Market.

“The acquisition will give ONGC access to a 26% ROCE business, while its own core E&P business makes around 10% ROCE. HPCL will continue to operate as an independent entity and hence we expect no merger or operational synergies,” the brokerage firm said in a sector update.

For ONGC, the stake would merely contribute as investment value of a subsidiary (net of the acquisition price of Rs 474/share).

We see no change in fundamental outlook or valuations as this deal carries no operational synergies, it added.

At 09:36 am; ONGC was trading 5% higher at Rs 203 with a combined 5.55 million shares change hands on BSE and NSE. HPCL was quoting 2.2% lower at Rs 407 after hitting an intra-day low of Rs 402 on BSE in early morning deal.

Oil and Natural Gas Corporation Limited (ONGC)

Hindustan Petroleum Corporation Ltd.(HPCL)