BPCL - Comfortable refining to marketing mix - IIFL

BPCL sells ~31mtpa of products with a 21% market share. ~70% of the volumes are accounted by regulated products on which it bears under recoveries. The compensation from the government is received in staggered manner. However, it has refining capacity of 21.5MTPA, which enables it to meet 70% of sales and thereby purchases forming a smaller share of the sales. We prefer to measure the risk of the OMC's business as a ratio of refining to marketing and BPCL is relatively better placed vis-à-vis HPCL.

Expansion projects to improve the refining to marketing mix

Bina refinery has commissioned fully and its higher complexity will help the GRM's of the company going ahead in FY14. BPCL has targeted an investment of Rs400bn on upcoming and ongoing projects within next five years with aim to be self sufficient. Key ongoing projects include Kochi refinery expansion from 9.5mtpa to 15.5mtpa. Expansions are also planned at Mumbai and Bina refineries. However, outlook for GRMs is muted on back of significant global capacity additions and slower demand growth. Shift to complete export parity pricing would hurt GRM's by US$2.5/bbl.

Valuable upstream assets... crystallization of value to act as trigger

BPCL, through its subsidiary BPRL, has made investments of Rs50bn till date in upstream assets and has planned an outlay of Rs125bn till FY15. In the Mozambique block, multiple gas discoveries have been made and the initial estimate of recoverable reserves is 35-60tcf. The production is likely to start in 2017. Reserve certification is in progress and final outcome is expected in CY13 which will help in crystallizing value for the block. Three discoveries were made in the Brazil block. While the estimated recoverable resource in Wahoo discovery is 200mmboe, other discoveries are in appraisal phase.

Better placed than other OMCs

The business environment for OMC's has improved with government charting out a plan to reduce under-recoveries. However, with risks to execution of these measures, value of BPCL's upstream assets gives us cushion amidst such uncertainty. BPCL remains the best pick among the OMC's.

Source : Equity Bulls

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