BNP Paribas: Bharat Petroleum (BPCL): GoI payout helps earnings

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BPCL: GoI payout helps earnings

• ƒ 9M under-recovery share about 23%, much higher than estimates 
• ƒ Fourth gas discovery in Mozambique adds to the E&P profile 
• ƒOf OMCs we continue to like BPCL, reforms overhang 
• ƒ Reiterate REDUCE with a TP of INR547.00 

Q3FY11 results 

BPCL reported standalone Q3FY11 profit at INR1.9b, backed mainly by a 

government cash subsidy of INR18.1b and upstream discounts on crude sale at 

INR11.7b. Blended GRMs were registered at ~USD4.5/bbl (9M averaging 

USD3.63/bbl), which is slightly better than the historical average of USD3-4/bbl, but 

refinery performance was muted owing to shutdown in the Mumbai refinery which 

led to low blended utilisation at 93%. 

Delayed payouts by the GoI continue to highlight the working capital issues at oil 

marketing companies and the last two quarters have seen an approximate 10% jump in interest costs. We observe risk to earnings estimates, as the 9M subsidy share net to OMCs 

has been about 23%, compared with our estimate of 5%.

Fourth gas discovery adds to E&P profile  

BPCL recently announced another discovery in the highly prospective 

Mozambique block. The fourth discovery, named Tubarao in the Rovuma 

basin, has opened up an entirely new play which could result in additional 

discoveries in Mozambique’s offshore Area 1. We continue to be 

impressed by the progress made by BPCL through its stakes in some of 

the most prospective E&P plays globally. The recent Maersk-SK energy 

deal reiterated our confidence in the potential value accretion for BPCL 

through its E&P business in years to come. Management rates the 

Tubarao discovery as significantly more prospective than the previous 

three discoveries in the Rovuma basin. 

Reform uncertainty exists but E&P provides support 

We continue to reiterate our fundamental underweight stance on the 

OMCs as delays in compensation by the government, policy uncertainties 

and high crude prices continue to hamper earnings visibility. Although the 

recent correction may have made the shares attractive, we believe the 

GoI payout if any will come closer to the end of FY11, and, in the 

absence of a diesel price hike the shares will be range bound. We value 

BPCL at 1.2x P/BV in line with its five-year average to arrive at our TP of 

INR547. We would get incrementally positive on BPCL in the event of 

any further correction as then we would be neutral on the reform 

outcomes which currently remain the key overhang.