BPCL: Riding high on E&P gains

Exploratory upsides and refining gains should more than offset the negatives arising in the fuel marketing business

After scaling a 52-week high of Rs 768.40 on May 16, Bharat Petroleum Corporation Ltd’s (BPCL) stock came under pressure due to uncertainty regarding pricing of controlled products, as well as possible roll-back of petrol price increases. It has since wiped away the gains posted after the 12 per cent petrol price rise announced recently. While analysts believe a 10-15 per cent price rise in controlled products (diesel, LPG and kerosene) is the need of the hour, this isn’t coming anytime soon. Also, given the time lag in receiving the government’s share of subsidy, BPCL will continue to bear a higher interest cost burden. However, all isn’t lost.

Positively, the ramp up at the Bina refinery (Madhya Pradesh) and, more important, the exploratory success in Brazil and Mozambique will act as a catalyst for the stock. Most analysts, thus, remain bullish on it and expect an upside of 28-30 per cent from the current Rs 692.

Harshad Borawake and Deepak Dult, analysts at Motilal Oswal Securities Ltd (MOSL), wrote in their post-results report, “E&P (exploration and production) upside potential differentiates BPCL from HPCL and IOC. BPCL’s E&P portfolio has turned out to be a huge success, with multiple discoveries in its Brazil and Mozambique acreage. We believe there could be significant upside, as more clarity on the reserve size at its Mozambique and Brazil discoveries emerges. BPCL is our top pick among OMCs (oil marketing companies).” MOSL analysts have assigned a value of Rs 164 per share to BPCL’s E&P portfolio.
  

HIGH UPSIDE POTENTIAL
Sum of the parts (Rs/share)	IOC	BPCL	HPCL
Core business value	144.0	187.0	126.0
Investments	94.0	225.0	126.0
E&P	4.0	479.0	-

Target price270.0900.0300.0 Upside potential (%)*6.330.23.6 * From closing price of 30th May 2012                                               Source: CLSA  

SUBSIDY SHARING: UNCERTAINTIES PREVAIL
	IOC	BPCL	HPCL
Forex rate (Rs/$)	47.9	52	50
Brent Crude ($/bbl)	115	110	100
Gross under-recoveries (Rs bn) Subsidy sharing (%)	1,385	1,470	880
Government	60	54	51
Upstream	40	39	39
OMCs	0	7	10
Gross under-recoveries are estimates for FY13                                 Source: MOSL

Un-’Explored’ potential
BPCL’s E&P subsidiary, BPRL, has seen significant discoveries in recent months. On May 15, it reported its 11th successful well in the Rovuma Area-1 block in Mozambique. The company named this discovery ‘Golfinho’ and estimates total recoverable natural gas of 7-20 trillion cubic feet (tcf), taking the total recoverable gas reserves in Mozambique to 24-50 tcf. Even after considering BPCL’s small stake of 10 per cent in this block, it is significant (RIL’s KG-D6 basin has estimated proven reserves of 3.67 tcf).

Analysts remain bullish on BPCL’s E&P play as it gears up to drill newer blocks such as Atum, Orca and Black Pearl in Mozambique in the current year. The company plans to drill 10-12 wells annually till February 2015, though production (and, hence, monetisation) is likely only in FY19. Towards this, BPCL has raised its capex in E&P in FY13 to Rs 1,500 crore, a 76 per cent increase over FY12. This is against a 39 per cent rise in total capex to Rs 5,000 crore in FY13. The rest is spread equally between the Kochi and Mumbai refinery expansions, retail outlets and LPG cylinders. Within E&P, Mozambique and Brazil will take a larger pie of the capex spend.

Somshankar Sinha and Vikash Kumar Jain, analysts at CLSA, wrote in a recent report, “BPCL’s continued successes in Mozambique also validates Shell’s ostensibly aggressive $2-billion bid for Cove (8.5 per cent partner in the Mozambique block) that valued BPCL’s 10 per cent stake at Rs 375 a share.” Analysts currently value the E&P business anywhere between Rs 164 to Rs 451 per share of BPCL, with further upside potential likely.

OMCs adequately compensated
Higher-than-expected compensation paid by government and upstream companies enabled the OMCs (BPCL, HPCL and IOC) report net profit for the March quarter, as well as for FY12. While OMCs were fully compensated for their losses on controlled products (diesel, kerosene, LPG), they had to also bear losses on petrol sales (formally deregulated), due to their inability to fully pass on higher prices to consumers. Notably, BPCL posted losses on petrol sales of Rs 1,140 crore in FY12, while the total figure stood at Rs 4,900 crore for all the three OMCs.

On BPCL’s FY12 performance, on a consolidated basis, its profits were lower than standalone profits due to losses at the Bina refinery worth Rs 1,100 crore and some write-offs in domestic E&P. This, however, should change.

Analysts expect BPCL’s gross refining margins (GRMs) to inch up after capacity utilisation at Bina is scaled up to 100 per cent. This is because the Bina refinery is capable of earning much higher GRMs of $11 per barrel, given its high complexity configuration. IOC, too, will see an uptick in its GRMs after commissioning of its Paradip refinery in this financial year and so will HPCL, given the commissioning of its Bhatinda refinery. Thus, while the refining business of OMCs is expected to get better, the key overhang remains the subsidy issue. For BPCL, any delay in execution or monetisation of E&P assets could hurt sentiments.