BPCL - UW: Latest oil discovery is positive but not enough :: HSBC

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Bharat Petroleum (BPCL)
UW: Latest oil discovery is positive but not enough
􀀗 BPCL has 20% stake in a discovery announced by its partner
Petrobras in a deepwater block in Sergipe-Alagaos basin
􀀗 We believe this discovery could add more than 25mn boe net
resource to BPCL (c125mn boe for the block)
􀀗 Maintain Underweight but raise TP to INR630 (from INR611)
for current discovery





Petrobras, BPCL’s partner in four blocks announces a deepwater discovery.
Petrobras has announced a discovery in the block SEAL-M-426 in the Sergie Alagaoes
basin. This discovery opens the area as there was no deepwater discovery nearby. It
further compared the estimated discovered volume as greater than that found in the
shallow water fields of Guaricema and Dourado. These two shallow fields were
discovered in the 1960s and 1970s respectively.
We expect discovery to hold c100 mn boe resource. We estimate the reserves from
Guaricema fields at c50mnboe based on a report from American Association of Petroleum
Geologist (AAPG). While Dourado is a smaller field, in the optimistic case, the two fields
put together are unlikely to exceed 100 mnboe resource base. Therefore, we believe that
Petrobras’ estimate is in the range of 100-150mn boe. We therefore are basing our
valuation on a resource base of c125 mn boe for the latest discovery. Our analysis of the
Brazilian fiscal regime shows that the street is likely to ascribe a valuation of cUSD5/boe
to a deepwater midsize block in Brazil.
Valuation and risks: We value the stock as sum of core business, unlisted and listed
subsidiaries and the value of its pure refining investments. The unlisted subsidiaries
include BPRL (which is the 100% subsidiary of BPCL for its E&P activities), which we
now value at INR67/share (previously INR50/share), adding INR17/share for the current
discovery. Overall, we are Underweight on the stock with a target price of INR630 as we
expect oil marketing companies to bear some portion of under-recovery which will remain
uncertain till the end of the financial year. Key risk to our target price is fuel price
reforms, lower crude oil price or a huge discovery in BPCL’s blocks.