HPCL rallies over 10% in two days after merger announcement with ONGC

Hindustan Petroleum Corporation Limited (HPCL) rallied 6% to Rs 382 in intra-day trade, extending its Wednesday’s 5% gain on the BSE, after the media report suggested that the merger of the company with Oil and Natural Gas Corporation (ONGC) is likely to take place soon.

At 12:43 pm; the stock was trading 5% higher at Rs 376, against 0.66% rise in the S&P BSE Sensex. It is quoting close to its record high of Rs 390 (adjusted to 1:2 bonus shares) on February 14, 2017 in intra-day trade. ONGC, on the other hand, was down 2% to Rs 160, erases its entire previous day’s gain.

“The Cabinet is likely to consider this month sale of government's 51% stake in HPCL) to ONGC for over Rs 26,000 crore,” the PTI report suggests.

After the Cabinet nod, the government will move to appoint valuation and transaction advisers while ONGC too may decide to hire merchant bankers to arrive at the valuation of government shareholding, added report.

Media reports today speculated that HPCL’s disinvestment may take place at a premium to current market price.

Analysts at SBICAP Securities believe HPCL’s marketing assets are undervalued, notwithstanding the expected competition. Further, an open offer is likely to be triggered to protect minority shareholders’ interests and prevent the risk of litigation. An event trigger, if any, is likely to accelerate value creation.

According to analysts, the expenditure of around Rs 26,400 crore to buy the government’s stake in HPCL is likely to exert further strain on ONGC’s balance sheet and constrain its ability to acquire more oil and gas assets overseas.

“ONGC’s strategy of acquiring only producing assets limits the scope of value creation; hence, the investment in HPCL’s assets is likely to be positive for ONGC’s shareholders. However, we see significant downside risks to crude prices, and ONGC is significantly levered to the same (every US$1/bbl increase/decrease in crude price results in 1.6% increase/decrease in ONGC’s EPS). Hence, we continue to prefer OMCs over upstream PSUs,” added report.

Hindustan Petroleum Corporation Ltd.(HPCL)

Oil and Natural Gas Corporation Limited (ONGC)