ONGC Shares Surge On Deal To Buy Majority Stake In Hindustan Petroleum

Shares of Oil and Natural Gas Corp Ltd jumped as much as 6.3 per cent on Monday to their highest in nearly a year after the explorer said it would buy a majority stake in state-run refiner Hindustan Petroleum Corp Ltd. ONGC, India's biggest explorer, said on Saturday it will pay Rs 36,900 crore ($5.77 billion) for a 51.1 per cent stake in HPCL, or Rs 473.97 per share.

That amounted to a premium of about 14 per cent to Friday's closing price, and ONGC expects to complete the deal - first announced last July - by end-January.

HPCL shares fell as much as 3.8 per cent as the value of the deal was lower than market expectations. ONGC also said it would not buy shares from minority investors, contributing to the share fall.

Jefferies said it had expected Rs 500 per share, adding the deal would boost ONGC's earnings per share by 4-6 per cent, while leaving its valuations at just 8.5 times price-to-earnings for the 2019 financial year.

"ONGC will not be paying an egregious premium," the brokerage said in a note to clients. Local media reports had indicated ONGC could pay a higher premium. Jefferies retained its "buy" rating on ONGC and "underperform" on HPCL.

Meanwhile, Emkay Research said the deal would diversify ONGC's operations given that the company is focused mainly on exploration and production, while HPCL is focused on refining and marketing.

"The deal will allow ONGC to navigate periods of oil price downturns relatively smoothly, as refining margins typically expand during such periods," Emkay said in a research note.

"Integrated companies tend to generate higher returns during a down-cycle in oil prices compared to a pure-play upstream company."

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ONGC shares were up 4.2 per cent at 0529 GMT (10:59 am in India), compared with a 0.05 per cent gain in the broader NSE Nifty HPCL was down 3.5 per cent.

($1 = Rs 63.94)