According to newspaper reports, two public sector downstream oil companies, Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation Limited (BPCL) have entered into an agreement to share terminals at two locations.
BPCL is an integrated oil company operating refining as well as marketing facilities. It has a refining capacity of 7.3 m tonnes per annum and a distribution network which includes 4,376 petrol pumps and 1,147 LPG dealers.
HPCL is India's second largest integrated oil company. It operates two refineries (total capacity of 10 m tonnes per annum), a 3.67 m tonnes per annum product pipeline and a 330,000 tonnes per annum lube refinery. The company’s distribution network includes 4,327 pumps and 1,463 LPG distributors.
The two companies have decided to share their terminals at Loni and Manmad. This cooperation is expected to extend to other areas over a period of time.
The savings from such an agreement are likely to be substantial. Firstly, the need for capital expenditure by the competing company in the area is eradicated as it can share the existing facility. Moreover, the owner of the terminal benefits from optimal usage of its facilities and cost sharing. If and when the agreement were to cover other areas, these savings would become significant. Moreover, the collective competitive strength of the companies would be greatly increased.
However, these companies, which do not have a cross share holding, will become dependent on each other. If, for some reason, the agreement were to fall through, both the companies could suffer in several regions across the country (where they utilised the other company's resources). Therefore, all though the agreement is likely to benefit both the companies, it must be viewed cautiously from the long-term point of view.
Both HPCL and BPCL have been rated as a 'BUY' on account of their strong distribution networks, which is their key competitive strength. Moreover, the dismantling of the administered pricing mechanism in the oil sector has also supported the view. Some analysts are rating the stocks as 'HOLD' on account of the glut in domestic refining capacity.
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