BPCL's largest hydrocarbon discovery to prop up valuations

The discovery off Brazilian coast with recoverable reserves of over one billion barrels of crude oil will add around Rs 60 per share to its stock's fair value

In one of the largest oil discoveries made by any Indian company, Bharat Petroleum (BPCL) and Videocon Industries have struck recoverable oil equivalent to one billion barrels off the Brazilian shore.

As per reports, the SEAL-11 exploration block (Brazilian Petroleo Brasileiro SA owns 60 per cent in the block, while IBV Brasil, a 50-50 joint venture between BPCL and Videocon Industries owns 40 per cent) contains very large amounts of high-quality light crude oil and natural gas. Though the exact numbers will only be known once appraisal plans are completed in the next two years, analysts feel that the area is likely to contain gross oil recovery of one to three billion barrels of oil. This is almost equivalent to Cairn India’s Rajasthan block MBA (Mangala, Bhagyam Aishwarya) fields which have gross ultimate oil recovery of over one billion barrels from primary, secondary and Enhanced Oil Recovery (EOR) methods.

Given the 40 per cent stake owned by BPCL-Videocon Joint Venture, their share works out to 200 million barrels of recoverable oil reserves each. Looking at current oil prices of around $100 a barrel, it would add $20 billion (Rs 1,23,960 crore as per today’s exchange rate of Rs 61.98 to a dollar) to BPCL’s revenues over a period of time; the same for Videocon.  The news caused the stock price of BPCL to surge by almost six per cent on bourses to close at Rs 328.55, while Videocon’s was up 6.33 per cent to Rs 180.65.

Since the block will take a few years to start production and given that a lot of money will have to be spent towards capex and that gains will accrue over a decade post start of production, analysts like Nitin Tiwari at Religare Capital Markets estimate the discovery to add Rs 60 per share to BPCL’s fair value. According to his earlier calculations, the fair value of BPCL stood at Rs 440, which stands increased to Rs 500 post this discovery.

The Exploration and Production (E&P) assets of BPCL in Brazil as well as Mozambique have always been considered as a game changer for the company and help it enjoy superior valuations compared to peers like HPCL and IOC.

Earlier, ONGC and Oil India’s purchase of 10 per cent stake in the Mozambique block had boosted the valuations of BPCL’s 10 per cent stake in the same block. Analysts at IDFC Securities had observed that the value of BPCL’s 10 per cent stake in the Mozambique block (on the basis of Videocon’s deal to sell its own stake) stood increased by two times, compared to their estimated NAV of Rs 87 a share (prior to Videocon’s deal).

Meanwhile, the concerns for the oil & gas marketing companies (OMCs) like BPCL, HPCL and IOC have increased in the recent past. Despite regular diesel and petrol price hikes, the under recoveries of the oil companies (both upstream & downstream) has gone up due to the rupee’s depreciation. Analysts at Credit Suisse peg under-recoveries are likely to remain high around (Rs 1,05,000-1,35,000 crore) in FY14/15 even if the government continues to deliver the promised diesel price increases and directed LPG payments. They add that the government seems to have deferred the expected diesel price increase for now, but any efforts to reduce losses (which seem imperative) should be positive for the companies.

However, the Credit Suisse analysts had already upgraded BPCL to Outperform on September 24 with a target price of Rs 376 due to lower leverage, better capex discipline and stronger return on equity/cash performance. The current development should likely see this target price being further upgraded.

In the near-term, though there are talks of Export Pricing Parity (EPP) for OMCs (decision expected at the meeting to be held on Saturday), analysts feel that the impact may not be as severe as was being anticipated. Analysts at Kotak Institutional Equities see a negative impact of Rs 2,300 crore on BPCL’s earnings from potential implementation of EPP for diesel, but they also see the same being partially offset by nil or lower under recoveries as they do not see any imposition of subsidy burden after imposition of EPP. The subsidy burden for FY15 has been estimated at Rs 1,700 crore by them.