ONGC’s financial ratios will remain largely unchanged if it funds the Rs 28,000 crore acquisition of HPCL through sale of its minority stake in IOC and GAIL, S&P Global Ratings said today.
The rating agency said that the Indian government’s approval to sell its majority 51.11 per cent stake in Hindustan Petroleum Corp Ltd (HPCL) to Oil and Natural Gas Corp Ltd (ONGC) is likely to be credit neutral for the state explorer.
It however did not see much benefit in combining of HPCL’s downstream oil refining and fuel marketing business with ONGC’s oil and gas production.
“We do not expect any significant synergy between ONGC’s upstream operations and HPCL’s downstream operations although it will provide some diversity. Also, a complete merger of ONGC and HPCL is unlikely because we believe that will have significant challenges in integrating the people, systems, and corporate culture,” it said in a statement.
ONGC has a 71.63 per cent stake in Mangalore Refinery and Petrochemicals Ltd, which has a capacity of 15 million tonnes per year. Combining this with HPCL’s similar refining capacity and about 15,000 fuel retail stations could help derive some procurement benefits.
S&P said if ONGC exercises the option of divesting its minority stakes in other state-run oil and gas companies to fund the acquisition of the HPCL stake, ONGC’s financial metrics will be largely unchanged. However, using debt to fund the HPCL stake will put pressure on ONGC’s stand-alone credit profile.
S&P said the deal could take six months to complete and ONGC would be able to secure the necessary approval from the government and regulatory bodies to avoid triggering a mandatory open offer to buy an additional 26 per cent stake in HPCL from the public.
ONGC’s financial ratios, it said, will remain largely unchanged if it funds the HPCL stake purchase by selling its stakes in IOC and GAIL.
“We expect ONGC’s ratio of funds from operations (FFO) to debt to remain at 35-40 per cent over the next two to three years post the proposed transaction,” it said.
ONGC has 13.77 per cent stake in IOC, valued at Rs 25,400 crore and 4.87 per cent stake in GAIL (India) Ltd, valued at Rs 3,100 crore.
“We believe ONGC — with the required approvals — can sell these stakes in the open market to fund the HPCL deal.
However, the divestment may be gradual and ONGC could meanwhile fund the HPCL stake purchase using a bridge loan,” it said.
The rating agency said if ONGC funds the deal with debt of about USD 4.5 billion, the company’s FFO-to-debt ratio to trend towards 30 per cent — below the trigger for a lower assessment of rating — potentially resulting in at least a one notch lower.
In addition, if ONGC makes an open offer for the additional 26 per cent stake, the company will need to pay out a further Rs 14,500 crore, potentially resulting in a lower rating assessment by two notches.
The deal is a part of the government’s announcement to create an integrated national oil major by combining several of its state-owned oil and gas companies.
“However, we believe the government’s intention may be to have a few large integrated oil companies instead of one big integrated national oil major. Still, such combined entities will be small in comparison to global oil majors,” it said.
Combining HPCL will improve ONGC’s cash flow stability and operating scale to an extent. However, there will be no material change in ONGC’s business risk profile.
This is because HPCL’s pre-tax profit is relatively modest — about 25 per cent of ONGC’s. HPCL will remain a majority-owned subsidiary of ONGC.