BPCL - Mozambique - Big boys play - Antique

Anadarko Petroleum Corp and Videocon Industries (not covered) have launched sale of 20% stake (10% each) in Mozambique's Rovuma gas field that could fetch USD4.5bn, sources told Reuters. Global oil majors like PetroChina, Exxon Mobil, Shell seen as possible bidders apart from OVL and Oil India combine, reported Reuters quoting two sources familiar with the matter. We note that it's a strong positive for BPCL as combined stake will attract oil majors into the block to acquire larger slice of 100tcf gas discoveries in the block. We reiterate BUY on BPCL to play E&P and diesel price hikes as it is least leveraged.

Brazil the next driver

With Mozambique getting largely established as a huge gas province, we believe BPCL's next phase of upstream prospects lie in Brazil. BPCL has stakes in 10 assets in Brazil of which Sergipe & Alagoas and Campos basins are the most promising. Although these deepwater prospects are challenging, yet they provide considerable resource potential and are operated by global technology leaders like Petrobras and Anadarko. With extensive appraisal program in 2013, we expect true potential of Brazil resources will be known in near future which we expect to provide material fillip to BPCL's upstream valuations.

BPCL's E&P to provide strong valuation upside

We expect further upside in BPCL's E&P valuation - currently estimated by us at INR75bn (NR115/sh). Based on DCF, we conservatively value 10% stake in Mozambique Rovuma Area 1 at INR57bn. Further stake sale of Anadarko and Videocon at USD4.5-5bn valuations would attribute INR200/sh value for BPCL 10% stake. As per Reuters, first round bids are due on March 14 after an information memorandum on the sale was sent to potential bidders in early February. We believe this would help in establishing asset valuation significantly higher than our current estimate of INR86/sh.

BPCL ahead in core earnings performance

With addition of 9MFY13 net u/r burden to reported losses of OMCs, we note that HPCL still reports 9M loss of INR13.1bn while BPCL will report 9M PBT of INR37.6bn due to higher marketing inventory gains and significantly better GRMs. Weak core earnings of HPCL and higher probability of it reporting FY13e loss will ensures 100% compensation to OMCs for FY13e. BPCL higher earnings are supported by significantly better GRMs for 9MFY13 among OMCs (USD4.6/bbl vs. IOCL's USD2.2/bbl and HPCL's USD1.5/bbl). With assumption of 100% compensation, BPCL is set to report better than expected earnings of INR31/sh and INR32/sh for FY13e and FY14e, respectively, and RoEs of 12%.

Reiterate strong BUY

We reiterate our BUY on BPCL with a target price of INR442/sh valuing the core business at an average of 1x FY14e book and 10x FY14e earnings. We value BPCL's upstream at INR115/sh. We value Mozambique/BMC-C-30/SEAL-M-426 at INR86/11/12/sh. However we assume 150/100Mmboe of potential resources for BMC-C-30/SEAL-M-426 which we believe would witness significant upside once appraisal activities take off.

Source : Equity Bulls

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