Analysis: ONGC-HPCL Merger- Birth of an Oil Behemoth?


Finance minister Arun Jaitley announced in his budget speech in February to create an oil behemoth by combining operator ONGC and refiner HPCL. Just a few months after this announcement, the Union Cabinet approved the plan to sell government’s 51.1 percent stakes in HPCL to explorer ONGC.

The ONGC-HPCL merger is a big step towards country’s efforts to build a mega company that can directly compete with global integrated majors like Chevron, Shell etc. integration helps companies to withstand ups and downs in the industry. Recently, oil and gas industry is witnessing major changes because of volatility of oil prices.

Analysts are not happy with this deal, as government has turned down possibility of an open offer. From HPCL’s minority shareholders, this means that nothing has changed but just shift of ownership. Shares of HPCL fell on this news, tumbling as much as 5% to Rs 364.75 in the opening trade on BSE on Thursday. On the other hand, ONGC shares rose, surging 2.9% to Rs 167.8.

The merger will be a long drawn process, the benefits of which, will take a lot time to reflect in the operations and financials of both these companies. Analysts anticipates, considering size of the deal, that the whole procedure would take around 8-9 months to complete.


  1. Mergers and consolidation of government owned companies are only way to create an oil giant. This deal is the first step towards that goal. The deal might encourage further similar actions like acquisition of the smaller Oil India by IOCL.
  2. The combined market value of HPCL and ONGC would be $42 billion, which is comparable with the Russian energy giant Rosneft’s $56 billion, but much smaller that the global giants such as ExxonMobil ($340 billion), Shell ($220 billion), Total ($128 billion) or BP ($114 billion).
  3. Consolidated state-run oil PSUs into a single major company will create economies of scale and have greater capacity to withstand hiccups, improved margins and more efficiency.
  4. This major deal will give ONGC control over value chain leading to strengthening of balance sheets, but also increasing debt-to-equity ratio. Integration in oil sector is a globally acknowledged practice. Global giants such as Chevron, Shell also have consolidated operations.
  5. A bigger Indian oil company will be able to better withstand the volatility in the global oil market.
  6. A bigger company will have better bargaining power. ONGC’s subsidiary, ONGC Videsh, which is engaged in acquiring the energy assets across the world also has been suffering from recent oil price drop. This merger would help ONGC to smoothen its profit streams to a large extent.
  7. The ONGC-HPCL deal will help the center meet its divestment target for the current financial year without losing control over the company.
  8. HPCL shareholders are disappointed as government has waived possibility of an open offer which resulted in tumbling of share price of HPCL. On the other hand, shareholders of ONGC are in agreement of this decision which resulted in increase in share price by up to 3%.
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  1. Simply a smiling visitor here to share the love (:, btw outstanding design and style. “Reading well is one of the great pleasures that solitude can afford you.” by Harold Bloom.

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