The company’s plans to scale up its exploration arm and investment in gas pipelines will change its business mix and improve revenue visibility.
Discovery of significant gas reserves at the Rovuma basin in Mozambique, Africa, has been a positive development for Bharat Petroleum Corporation (BPCL). The rising share of exploration and production (E&P) in the company’s business mix is likely to bear fruit in the long term. In fact, after the discovery, analysts like Kumar Manish of HSBC Securities have doubled the value of BPCL’s stake in this block to Rs 62 a share. Moreover, of its current valuation per share of Rs 752, 16 per cent is attributed to the E&P business.
Though the development augurs well, the stock has not gained much as uncertainty on the subsidy sharing mechanism continues to be a drag. While an announcement regarding further fuel price reforms (diesel price deregulation) could help the stock, the scenario appears unlikely in the short term given the government’s priority of taming inflation.
| AFRICAN BOOST | ||||
| E&P VALUATION | Reserves* | $/boe | % share | Rs/share |
| BM-C-30 (Campos Basin) | 250 | 6 | 13 | 26 |
| Mozambique - Rovuma Basin | 900 | 5 | 10 | 62 |
| BM-SEAL-11 | 125 | 6 | 20 | 21 |
| Exploration upside | 15 | |||
| Valuation of BPRL | 123 | |||
| * Million barrels of oil equivalent Source: HSBC estimates | ||||
| Sum of the parts | '/share |
| Listed holdings | 87 |
| Unlisted subsidiaries | 134 |
| Pure refinery investments | 121 |
| Core business value | 409 |
| Target price | 752 |
| Source: HSBC estimates | |
Other positive triggers include full compensation of under recoveries and lower crude oil prices. While the near-term outlook is uncertain, Probal Sen of IDFC Securities believes that the expansion in refining capacity as well as E&P activities will boost the long-term prospects of the company. He expects the earnings to grow by 12 per cent annually over FY10-13.
NEW DISCOVERY
BPCL, through its 100 per cent subsidiary, Bharat PetroResources (BPRL), holds a 10 per cent stake in the deepwater Rovuma Basin. US-based Andarko has 36.5 per cent stake in the block and is the operator of the area. Last week, Andarko said it has doubled the resource potential from this block to 10 trillion cubic feet (tcf) from 5 tcf earlier. It now expects to develop at least two liquefaction and purification facilities of five million tonnes per annum, with an option to develop more. While gas production in Mozambique is likely to commence only by CY2018, Andarko aims to drill seven more wells in the Rovuma Basin over the next one year. Manish of HSBC believes that this event coupled with BPCL’s stake in three upcoming cross-country gas pipelines in India can catapult it into an integrated energy company. BPCL currently has 27 blocks across seven nations and has earmarked about $2 billion towards its exploration activities in the next five years. The company has also made new oil and gas discoveries in Inonesia and Brazil recently. While exploration upsides will act as a catalyst for the stock, delays in execution is a key risk.
REFINING CAPEX
In addition to the spend on its E&P activities, BPCL has lined up a capital expenditure of Rs 40,000 crore over FY12-17. The company aims to ramp up the refining capacity of existing units. It also plans to enter the petrochemical segment with an investment of Rs 6,000 crore in Kochi. Further, higher complexity of the Kochi refinery will improve its gross refining margins in the long run. BPCL’s stakes in three upcoming gas pipelines in India will make it an end-to-end gas company.
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SUBSIDY WOES CONTINUE
Given the high inflation and burgeoning fiscal deficit, it is unlikely that oil marketing companies (OMCs) will get any relief on the subsidy burden. BPCL and other OMCs sell diesel, kerosene and LPG below international prices and are compensated by the government and upstream companies for the under recoveries. Given the rising fiscal deficit, it is unlikely that the government will compensate the OMCs for their full losses. Further, high inflationary pressures also rule out the likelihood of further fuel price hikes.
Analysts at HSBC Securities believe that BPCL will have to bear around 9.2 per cent of the total under recoveries of FY12. Given that crude oil prices are at the $100-110 per barrel level, under-recoveries for FY12 will be higher than those in FY11, say analysts. These pressures have led to a huge debt pile up (around Rs 24,000 crore) on BPCL’s balance sheet. In this scenario, bottom line of the company will take a beating. For the quarter ending September, analysts expect a gross under recovery of Rs 5,140 crore. Of these, upstream companies are likely to share 33.33 per cent and 50 per cent will be borne by the government. Any changes in the above will alter the bottom-line of BPCL proportionately. Further, BPCL could also report forex losses driven by the depreciation of the rupee in the quarter.