BPCL - Complete energy play - Antique

Bharat Petroleum Corporation (BPCL) would benefit with Indian government's focus on oil and gas sector reforms, which include hiking diesel prices, capping LPG cylinders per connection, and decontrol of bulk diesel price to lower gross under-recoveries. We estimate under-recoveries to fall ~50% by FY16 despite 12% INR depreciation. Lower losses would help reduce working capital borrowings and interest cost on the same, which is currently not reimbursed. BPCL is establishing itself as an integrated oil and gas player with its 10-20% stake in highly prospective assets in Mozambique and Brazil, which places it much ahead of its peers. In line with FY13 outperformance, BPCL topped 1HFY14 performance with a reported PBT of INR15.2bn against a negative PBT of INR14.1bn by Indian Oil Corporation and INR11.4bn by Hindustan Petroleum Corporation. We expect full subsidy compensation in FY14 which would result in robust earnings for BPCL.

Mozambique establishing as a world class asset: Mozambique Area-1 Rovuma basin is expected to see disclosure of certified reserves in 1HCY14 followed by final investment destination of LNG terminals and finalisation of gas sales contract within the next six months. Operator Anadarko would continue to drill exploratory wells which may lead to further upside in the 35-65tcf resource base. Anadarko has already signed a preliminary agreement with PTTEP to sell 2.6mmtpa LNG.

Brazil, the next upstream driver: BPCL has stakes in 10 blocks in Brazil, of which Sergipe and Alagoas and Campos's basins are key assets. Activities are undergoing in BMSEAL-11 concession at Sergipe and Alagoas basin, which is estimated to hold 3bn boe of resources, mostly oil. Operator Petrobras would continue its appraisal activities and reserve positions are likely to be known post this by CY15. The discoveries already made are Barra, Barra-1, Farfan and Cumbe in exploration and Farfan 1 in appraisal phase.

Pricing reforms continue; Export parity risk largely over: OMCs have continued with monthly diesel price hikes resulting in a total retail sale price hike of INR7.2/litre in Delhi in the last 1 year. While concerns persist on further continuance due to upcoming election season, a complete deregulation could be achieved in ~20months if the current pace is maintained. The Kirit Parikh Committee has suggested maintenance of current trade/import parity pricing and is not in favor of changing the same unless full deregulation is achieved.

BPCL ahead of peers in core earnings performance: In line with FY13 outperformance, BPCL topped 1HFY14 performance with a reported PBT of INR15.2bn against a negative PBT of INR14.1bn by Indian Oil Corporation and INR11.4bn by Hindustan Petroleum Corporation. Adding back respective net under-recoveries to PBT, we infer that HPCL's adjusted PBT is still a negative INR4.3bn in 1H against INR2.2bn for IOCL and a significantly higher INR22.8bn for BPCL. We expect full subsidy compensation in FY14, which would result in robust earnings for BPCL.

Reiterate Buy on BPCL with INR549 per share target price

We recommend a Buy rating on BPCL with a target price of INR549 per share, which implies a ~67% upside. We value its core business at 10x FY15e EPS and 1x FY14e BV. We value upstream at INR180 per share and listed investments at INR31 share.

Source : Equity Bulls

Keywords