Bharat Petroleum Corporation Limited - Mozambique finds true value - Antique

ONGC/Oil India has agreed to buy Videocon' s 10% stake in Area 1, Rovuma Basin, Mozambique for USD2.48bn

ONGC through subsidiary OVL would hold 60% while Oil India would hold 40%. The transaction is in-line with expectation of USD2.3-2.6bn valuation cited in media and expected by us. The deal is subject to approval of Mozambique and Indian Govt. However Anadarko' s 10% stake sale is yet to be finalized. Anadarko intends to induct a partner having experience in offshore and LNG development. As per media sources, Shell is one of the lead bidders for this which can bring further credibility to asset and transaction value.

Positive for BPCL, as transaction value implies significant upside

Even a 20% discount to transaction value i.e. USD2bn implies INR41/sh upside to our target of INR535/sh for BPCL. We are currently valuing BPCL' s 10% stake at USD1.5bn (INR124/sh) on DCF. BPCL' s stock has outperformed its peers in the past when Cove Energy put its 8.5% stake on sale which witnessed a bidding war between Shell and PTTEP. We believe if Anadarko' s 10% stake is offloaded at USD2bn+ value to oil majors like Shell, the credibility of the transaction would go up further. ENH has also shown interest to divest its 15% holdings which may be clubbed with Anadarko' s stake.

Impact on ONGC and Oil India stocks to be marginal

We expect OVL and Oil India to raise USD loans for financing of this stake purchase. We assume 20% value erosion for ONGC and Oil India' s transaction value implying USD500m. This would lead to a per share impact of INR1.9/sh for ONGC and INR18/sh for Oil India which still leaves 16% and 20% upside respectively based on our target price of INR375/sh and INR700/sh. Further completion of transaction at reasonable valuations remove concerns of excess price (~USD3bn+ for 10%) expected to be paid by ONGC and Oil India.

Campos' appraisal may throw resource upsides

With two appraisal wells planned in Campos' basin (Wahoo) in FY14, we expect positive resource upside in Brazil. Also, consortium is readying appraisal program for Sergipe & Alagoas basin to commence in 2HFY14. Further in Mozambique, consortium partners have planned 7 appraisal and 4 exploration wells this year.

Reiterate BUY on BPCL with a target price of INR535/sh

Though in near term sharp rupee depreciation would impact BPCL due to its FX exposure on crude payables and dollar debt coupled with higher under-recoveries, however steady diesel price hikes as seen since Jan-13 and implementation of DBT for LPG could keep u/r under check. Reiterate BUY.

Source : Equity Bulls

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