The Hindu Business Line : `Synergy' report unlikely to energise oil stocks

The recommendations of the Synergy in Energy Committee are likely to act as a further dampener on depressed oil stocks. While the panel's views on mega mergers has put the brakes on speculative interest, its suggestion to set up a price stabilisation fund seems to hark back to the era of administrative control when, in fact, the efforts should be towards freeing the industry.

OIL stocks, except ONGC, have completely missed out on the recent rally in the market. Stocks of refining and marketing companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum have been going through a depressed phase over the past couple of months due to the rising subsidy bill, lack of freedom to increase retail prices in tune with global prices and the consequent impact on their profitability.

Now there is added reason for these stocks to stay depressed: The report of the Synergy in Energy Committee. Its recommendations, especially on the issue of mega mergers and the creation of a National Shareholding Trust, are unlikely to go down well with the market.

Constituted to examine the possibility of restructuring the industry through mergers of the existing companies, the Committee has said that such an option is not worth pursuing.

The possibility of a loss of jobs and the empirical evidence proving that just 29 per cent of all mega mergers had succeeded in increasing returns for shareholders are factors given in support of the Committee's recommendation.

This is not the appropriate column to debate the recommendations; suffice it to say that the conclusion of the Committee is likely to dissipate any speculative interest that may have been building up in these stocks in anticipation of some M&A activity. All those who had taken up positions in these stocks expecting a payback through the merger route can now unwind their positions.

There is also another reason why speculative activity in these stocks may now reduce. The Committee has recommended that the government holding in these companies be transferred to a National Shareholding Trust so as to ensure that they do not pass into private hands.

This clearly puts paid to any possibility of privatisation of these companies or even a divestment of government holding in small lots through the market.

The imbroglio over the BHEL sell-off now is a clear indication of where things are headed in this government — disinvestment of government holdings, whether to a private player or through the market to investors, is a clear no-no. The Committee's recommendation is only a confirmation of this.

The Committee has recommended the merger of standalone refining/marketing companies with their parents. This mainly applies to companies such as Chennai Petroleum, Kochi Refineries, Bongaigaon Refinery and IBP.

The last three are already well into the process of merging with their respective parents while the first, Chennai Petroleum, has to sort out the issue of foreign shareholding before it can merge with its parent, Indian Oil.

The National Iranian Oil Company (NIOC) holds a 15.4 per cent stake in Chennai Petroleum and it has proved a tough task till now to get the company to sell that to Indian Oil.

Pursuing the alternative option would mean that NIOC will get a stake in Indian Oil as part of the share exchange ratio. Though in the past Indian Oil has not been averse to this, NIOC has held out asking for a higher stake in the former.

Among the other recommendations of the Committee, there is one that looks suspiciously like a throwback to the era of the administered pricing mechanism.

The Committee has recommended a Price Stabilisation Fund for petrol and diesel. Though an impromptu sharing mechanism exists now to share the subsidies on LPG and kerosene, there is none such for petrol and diesel. The marketing companies bear the losses fully on these two products.

A Price Stabilisation Fund would be akin to the Oil Pool Account, which was wound up in April 2002. The reintroduction of such a mechanism would be retrograde, taking the industry back into the dark ages of administrative control. When the effort now should be to free the industry and let go of all controls, the Committee's recommendation comes as a dampener.

Though the tone of the Committee's report appears market-unfriendly, one particular recommendation is rather interesting.

The Committee has said that the ex-storage price for petrol and diesel should be the ceiling price, with companies having the freedom to fix the retail prices based on competition. This would mean limited freedom to the marketing companies to fix their own prices.

While anything in the direction of freedom is welcome, this particular recommendation may mean nothing in the current context where the marketing companies are losing money for every litre of petrol and diesel sold by them at the government-fixed prices.

In this milieu, where is the room for them to compete on price?

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