Fw: Company Report - BPCL - Twin Gains - BUY

 

BPCL: Twin Gains - BUY CMP Rs409, Target Rs480, Upside 17.3% BPCL is one of our top picks in the Indian Oil & Gas sector and the most preferred amongst the oil marketing companies (OMCs). It is set to gain on two folds: 1) current fall in crude oil prices from US$120/bbl to US$104/bbl and the consequent decline in under recoveries and 2) ascription of value to Mozambique block (most prolific upstream asset of BPCL) once the stake sale of Videocon and Anadarko goes through. We retain our BUY recommendation with a price target of Rs480. Under recoveries set to decline: Over the past couple of months, crude prices and product spreads have seen a marked decline, causing a sharp fall in gross under-recoveries. Diesel under-recovery has reduced from Rs11.2/litre in March 2013 to Rs2.9/litre currently. Assuming crude averages at US$100/bbl and product spreads stay at current levels, total gross under recoveries will reduce from Rs1,600bn in FY13 to Rs800bn in FY14. This would result in better cash flows and reduced leverage for OMCs. Also, if OMCs continue to raise diesel prices by Rs0.5/litre, diesel will be deregulated fully within six months. This will be a strong sentiment booster. Value ascription to Mozambique block: BPCL has a prolific upstream portfolio led by the Mozambique block (10% stake) which has estimated in-place reserves of 35-65tcf of natural gas. We note that Anadarko (operator with 35% stake) and Videocon (10%) have put up their joint 20% stake for sale. The last stake sale happened in July 2012, whereby PTTEP bought 8.5% stake in Mozambique from Ireland's Cove Energy at US$1.9bn. However, since then, new discoveries have been made and reserve estimates have been upgraded. Media reports have suggested that Videocon and Anadarko are looking for a valuation close to US$6bn for the combined 20% stake. If the sale goes through, it will ascribe a value of ~Rs220/share for BPCL's 10% stake. On the Brazilian asset front, extensive drilling is lined up in CY13 post the 100% exploration success achieved in CY12. Any further positive news flow would only improve! the prospects of the block and enhance its valuations too. Click here for the detailed report on the same. Warm Regards, Amar Ambani