OIL to up stake in Numaligarh Refinery via debt, internal accruals

Firm is eyeing the role of a vertically integrated oil company with stake hike

Oil India (OIL) is eyeing the role of a vertically integrated oil company with a further stake buy in Numaligarh Refinery (NRL). 

Bharat Petroleum Corporation (BPCL) currently has a 61.65 per cent stake in NRL while OIL holds 26 per cent. The Assam government owns 12.35 per cent.

“The existing capacity of the refinery is almost similar to Oil India’s level of crude oil production. There is already some synergy between our businesses. We have a 26 per cent equity stake in NRL. It is the largest crude oil customer of Oil India. We supply crude oil to it through our pipeline and also evacuate the majority of products of NRL to Siliguri through our pipeline. With this acquisition, if successful, our group will become an integrated petroleum sector group with upstream and downstream integration,” a senior OIL executive told Business Standard.

“We already have some interests in downstream petroleum business. If successful, this will be OIL’s first large downstream acquisition,” he added.

Funding the deal

OIL will be funding the proposed transaction through a mix of debt and internal resources. Once executed, the move will further de-risk the company’s consolidated portfolio from crude price volatility.

It is estimated that at a consolidated group level, OIL’s debt-to-equity ratio is approximately around 0.5:1. Even after NRL’s acquisition, the ratio is expected to vary around 0.75-0.78:1. A debt-to-equity ratio less than one indicates lesser risk for a company because it has more assets (in the form of equity) than debt.

Joint bid with EIL

Last week, Engineers India (EIL) said that, in consortium with OIL, it will bid for acquiring BPCL’s stake in NRL. The stake buy bid will be the Centre’s attempt to divest its shareholding in BPCL. It will privatise the public sector undertaking (PSU) refining and marketing company. 

This is in line with the November 2019 decision of the Cabinet Committee on Economic Affairs (CCEA) that announced strategic disinvestment of 53.29 per cent of government shareholding in BPCL.

It was then announced that BPCL’s equity shareholding in NRL will be divested to another central public sector enterprise (CPSE) operating in the oil and gas sector. According to the Assam Accord, signed on August 15, 1985, the Centre cannot privatise NRL. 

Capex and outlook

OIL’s capital expenditure target for the current year (FY21) is around Rs 3,900 crore. “Around 65 per cent of it has been achieved till December 2020. Most likely, we will be achieving the capex target. For next financial year, the company has planned a capex of about Rs 4,100 crore. The capex figures are excluding the proposed investments in NRL acquisition,” the official said.

Fall in crude oil prices had hampered prospects of oil exploration and production companies. OIL was not untouched and net profit for the nine months ending December 31, 2020, plummetted to Rs 894.03 crore from Rs 1,658.42 crore in the same period of 2019-2020. The situation has improved since with a recovery in crude oil prices. 

“Crude prices, currently hovering around $60 per barrel, have brought some relief and if this level sustains, we should be in a good position,” the official said.

Crude oil price realisation (average price at which OIL sold crude oil) stood at $44.09 a barrel in the third quarter of FY21. It is expected that this will go closer to $50 a barrel in the current (fourth) quarter.