BPCL-2Q Buoyed by Gov’t Compensation, But Lower Than Expected: Citi

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Bharat Petroleum (BPCL.BO)
2Q Buoyed by Gov’t Compensation, But Lower Than Expected


 Gov’t compensation lower-than-expected, but boosts 2Q — PAT of Rs21.4bn (vs.
1Q loss of Rs17.2bn) was mainly due to Rs29.5bn of payout from gov’t to partly
compensate for 1H gross losses of Rs71.1bn. With upstream bearing 1/3rd of
losses, BPCL’s 1H net under-recovery stands at Rs17.9bn (25% of losses vs. 12%
in FY10). Gov’t has borne just 41% of 1H losses vs. our 50% full yr assumption.


 Unexciting refining performance — 2Q GRMs came in at a tepid US$2.8 vs. S’pore
GRMs of US$4.3. While throughput of 5.6 MMT was in line (up yoy due to Kochi
expansion), weaker GRMs impacted refining performance. BPCL plans to
commission its 6 MMTPA Bina refinery by end-Dec’10.
 Rising crude a concern — With crude prices rising to >US$85 levels, our FY11 net
under-recovery assumption of Rs20bn for BPCL (Rs17.9bn already in 1H) and
Rs90bn for the industry (Rs79bn in 1H) could be at risk unless the gov’t increases
its share substantially in 2H. In addition, with the gov’t displaying lack of urgency
in deregulating diesel (OMCs are currently losing Rs3-4/ltr on diesel, even despite
the stronger INR), higher crude could act as a further deterrent.
 Watch out for E&P — BPCL has announced quite a few oil/gas discoveries
recently: 1) Badik-1 oil+gas discovery in Indonesia (est. to hold 80-100 mmbbl of
recoverable reserves), 2) oil discovery in Sergipe Alagoas basin offshore Brazil
(reserve size unknown), and 3) Barquentine gas discovery offshore Mozambique
(following the Windjammer discovery; area est. to hold ~6 tcf of recoverable
reserves). Besides, BPCL had earlier announced the Wahoo discoveries in
offshore Brazil (resource potential of 200+ mmboe). While monetization of these
discoveries could still be some time away, we view BPCL’s evolving E&P portfolio
+vely, helping it diversify from core R&M and making it relatively better positioned
vs. peers. We raise our TP to Rs790 as we increase our E&P value to Rs82/sh
(Rs41 earlier based on book value) to reflect some of the potential reserve nos.