BPCL, Gas provides buffer. -BUY:: Kotak Sec,

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Gas provides buffer. An Anadarko-led consortium with BPCL as a 10% partner has
made another discovery in Area 1 in the Rovuma basin in Mozambique. This is the
consortium’s fourth successful discovery in the same block. Reserves and PSC data are
not yet available but a consortium partner (Cove Energy) has put the resource potential
of the block as exceeding 10 tcf. We do not ascribe any value currently to BPCL’s E&P
assets in our 12-month fair valuation of `855.


E&P portfolio could be meaningful
Exhibit 1 gives details of discoveries in BPCL’s E&P assets. The available data is quite sketchy
currently for us to ascribe value to BPCL’s E&P assets. However, the value of the E&P portfolio
could be meaningful in the context of BPCL’s current market capitalization of US$5.8 bn.
Preliminary estimates put gross resource potential of over 300 mn bbls oil in BM-C-30 block in the
Campos basin in Brazil (BPCL’s stake: 12.5%) and over 10 tcf of gas in Area 1 in the Rovuma basin
in Mozambique (BPCL’s stake: 10%).
Downside risks to earnings exist for FY2011E but too early to take a call
We do not rule out earnings risks to our FY2011E earnings given (1) continued delay in
deregulation of diesel prices; we currently model deregulation from January 1, 2011 and
(2) higher-than-expected FYTD crude oil prices. We would note that FY2011E earnings would
depend on the amount of compensation from the government and net under-recoveries to be
borne by the downstream oil companies. We assume that the government-owned downstream oil
companies will bear net under-recoveries of `54 bn in FY2011E.
We base our BUY rating on FY2012E earnings anyway
We assume full deregulation of auto fuel prices in FY2012E and assume that the downstream oil
companies would bear `53 bn of net under-recoveries in FY2012E; the latter compares with `56
bn in FY2010. We currently assume US$75/bbl crude price and `46/US$ exchange rate for
FY2012E. The recent spike in crude oil prices poses risks to earnings of the downstream oil
companies; however, the recent increase in crude oil price seems to be largely driven by increased
speculation in crude oil futures (see Exhibit 2).
Value exists but realization will likely test patience
Exhibit 3 gives our computation for the fair valuation of BPCL and other downstream oil stocks
while Exhibit 4 shows our fair valuation under a blue-sky scenario of full deregulation. We use 10X
FY2012E EPS (less dividends from associates and subsidiaries valued separately) plus fair value of
investments to arrive at our 12-month fair valuation of `855 for BPCL.