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Bharat Petroleum (BPCL)
Energy
Positive net income given cash bounty. BPCL reported 3QFY11 net income at `1.9
bn versus our estimate of -`9.3 bn; the positive variance reflects compensation of `18.1
bn from the government in 3QFY11 versus nil assumed by us. We maintain our BUY
rating with a revised target price of `740 (`860 previously). We see the recent
announcement of gas discovery in its Mozambique block as giving greater confidence
of the potential of BPCL’s overseas E&P portfolio. Key downside risk to earnings stems
from higher-than-expected net under-recoveries.
Compensation from government boosts earnings
BPCL reported 3QFY11 EBITDA at `7.5 bn versus `24.9 bn in 2QFY11 and `6.4 bn in 3QFY10; our
estimate was at -`8.2 bn. The stronger-than-expected performance was due to compensation of
`18.1 bn from the government in 3QFY11 versus nil assumed by us. We note that BPCL has borne
`23.3 bn as net under-recovery in 9MFY11. However, we would not extrapolate the subsidysharing
arrangement for 9MFY11 to estimate FY2011E earnings as the final subsidy-sharing
arrangement will not be known until 4QFY11 results.
Refining margins improve; sales volumes increased 5.7% yoy
BPCL’s 3QFY11 refining margin was US$4.6/bbl versus US$2.8/bbl in 2QFY11 and US$1.3/bbl in
3QFY10. The qoq improvement in refining margins reflects adventitious gains in 3QFY11 versus
adventitious/inventory loss in 2QFY11. 3QFY11 sales volumes (domestic) increased 5.7% yoy to
7.4 mn tons. The yoy growth in sales was led by strong growth in gasoline, diesel, LPG and ATF
sales which was partially offset by decline in sales of fuel oil and naphtha.
Fourth gas discovery in Mozambique gives greater confidence on potential of BPCL’s E&P portfolio
We see the announcement of fourth successful gas discovery (net gas pay > 110 feet) at Tubarao
exploration well in Area 1 in Mozambique as giving confidence about the prospectivity of the
block. The company has not yet disclosed the reserves but the value of the E&P portfolio could be
meaningful in the context of BPCL’s current market capitalization of US$4.7 bn. We believe
visibility on the development of BPCL’s E&P discoveries will likely boost sentiment for the stock
which has been subdued due to (1) the recent surge in crude oil prices, (2) lack of clarity on the
subsidy-sharing scheme and (3) delay in diesel deregulation.
Revised earnings; stock offering good upside to current target price
We retain our BUY rating on the stock noting 26% upside to our revised target price of `740
(`860 previously) based on 11X FY2012E EPS plus value of investments. We have revised our
FY2011-13E EPS to `53 (-2.5%), `50 (-19.6%) and `66 (-0.6%) to reflect (1) higher net underrecoveries
in FY2011-12E, (2) delay in diesel deregulation to FY2013E, (3) modestly higher refining
margins and (4) other minor changes.
Key financial and operating details of 3QFY11 results
Exhibit 1 gives key highlights of BPCL’s 3QFY11 results and compares the same on yoy and
qoq basis. We do not see significant merit in comparison of quarterly results given high
volatility in the timing and quantum of compensation from the government of India and
contribution from upstream companies.
Compensation (cash) from the government and discounts from the upstream oil
companies. BPCL received `18.1 bn as compensation from the government in 3QFY11.
BPCL received `11.7 bn of discounts from the upstream companies in 3QFY11 compared
to `8.2 bn in 2QFY11. Its net under-recovery was `5.3 bn compared to over-recovery of
`13.1 bn in 2QFY11 and under-recovery of `3.6 bn in 3QFY10.
Refining margins improve sharply qoq. BPCL’s 3QFY11 refining margin was
US$4.6/bbl versus US$2.8/bbl in 2QFY11 and US$1.3/bbl in 3QFY10. The qoq
improvement in margins was higher than improvement in global refining margins
reflecting high adventitious gains. The company reported adventitious gains of `3.2 bn in
3QFY11 versus a loss of `0.8 bn in 2QFY11.
Refining throughput lower; sales volumes increased moderately yoy. BPCL’s two
refineries processed 5 mn tons of crude in 3QFY11 compared to 5.6 mn tons in 2QFY11
and 3QFY10. The decline in crude throughput reflects shutdown of crude distillation unit
at its Mumbai refinery. BPCL’s sales volume was 7.4 mn tons for 3QFY11 (+5.7% yoy,
+12.1% qoq).
Employee cost increases sharply qoq. The company reported a 26% qoq increase in
employee cost at `5.7 bn versus `4.5 bn in 2QFY11. The management attributed higher
cost to the pay revision of its employees and expects it to continue at similar levels.
Other income lower qoq and yoy. BPCL reported a sharp decline in other income to
`3.1 bn versus `5.3 bn in 2QFY11 and `4.7 bn in 3QFY10.
Prior-period tax expense. BPCL reported one-off tax expense of `1.05 bn as provision
for previous years.
E&P portfolio could be meaningful
Exhibit 2 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$4.7 bn. Preliminary estimates put gross resource potential of over 300 mn bbls oil in BMC-
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%).
Earnings revisions and key assumptions behind earnings model
We have revised our FY2011E, FY2012E and FY2013E EPS estimates to `52.9, `49.5 and
`66.5 from `54.3, `59.9 and `66.8. We discuss key assumptions behind our earnings model
below.
Compensation from government and discount from upstream companies. We
assume the government will restrict the amount of net under-recoveries at around `70 bn
for FY2011E and `75 bn for FY2012E (higher than `56 bn in FY2010) for the
downstream oil companies. We model BPCL to receive compensation of `96.5 bn,
`105.7 bn and `60.8 bn from the government in FY2011E, FY2012E and FY2013E. We
assume BPCL to receive discount of `56.4 bn for FY2011E, `61.6 bn for FY2012E and
`37.8 bn for FY2013E from the upstream companies.
Refining margins. We model refining margin for BPCL at US$3.9/bbl in FY2011E,
US$4.3/bbl in FY2012E and US$4.8/bbl in FY2013E compared to US$3/bbl in FY2010.
Exhibit 3 gives our key assumptions for BPCL’s refining division. We assume adventitious
gains at `7 bn in FY2011E in line with 9MFY11’s `7.1 bn and nil gains or losses for the
future years.
Crude throughput. We model crude throughput at 21.6 mn tons in FY2011E and 22
mn tons in FY2012E versus 20.4 mn tons in FY2010.
Marketing margins. We model marketing margin on gasoline and diesel at –`2,525/ton
and –`2,154/ton in FY2011E and `1,350/ton and -`2,892/ton in FY2012E compared to –
`3,929/ton and `1,113/ton and in FY2010. We expect diesel prices to be deregulated by
April 1, 2012 with the easing of inflationary concerns. We do not assume any increase in
LPG and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rate for FY2011E, FY2012E and FY2013E at
`45.6/US$, `45.5/US$ and `44/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Petroleum (BPCL)
Energy
Positive net income given cash bounty. BPCL reported 3QFY11 net income at `1.9
bn versus our estimate of -`9.3 bn; the positive variance reflects compensation of `18.1
bn from the government in 3QFY11 versus nil assumed by us. We maintain our BUY
rating with a revised target price of `740 (`860 previously). We see the recent
announcement of gas discovery in its Mozambique block as giving greater confidence
of the potential of BPCL’s overseas E&P portfolio. Key downside risk to earnings stems
from higher-than-expected net under-recoveries.
Compensation from government boosts earnings
BPCL reported 3QFY11 EBITDA at `7.5 bn versus `24.9 bn in 2QFY11 and `6.4 bn in 3QFY10; our
estimate was at -`8.2 bn. The stronger-than-expected performance was due to compensation of
`18.1 bn from the government in 3QFY11 versus nil assumed by us. We note that BPCL has borne
`23.3 bn as net under-recovery in 9MFY11. However, we would not extrapolate the subsidysharing
arrangement for 9MFY11 to estimate FY2011E earnings as the final subsidy-sharing
arrangement will not be known until 4QFY11 results.
Refining margins improve; sales volumes increased 5.7% yoy
BPCL’s 3QFY11 refining margin was US$4.6/bbl versus US$2.8/bbl in 2QFY11 and US$1.3/bbl in
3QFY10. The qoq improvement in refining margins reflects adventitious gains in 3QFY11 versus
adventitious/inventory loss in 2QFY11. 3QFY11 sales volumes (domestic) increased 5.7% yoy to
7.4 mn tons. The yoy growth in sales was led by strong growth in gasoline, diesel, LPG and ATF
sales which was partially offset by decline in sales of fuel oil and naphtha.
Fourth gas discovery in Mozambique gives greater confidence on potential of BPCL’s E&P portfolio
We see the announcement of fourth successful gas discovery (net gas pay > 110 feet) at Tubarao
exploration well in Area 1 in Mozambique as giving confidence about the prospectivity of the
block. The company has not yet disclosed the reserves but the value of the E&P portfolio could be
meaningful in the context of BPCL’s current market capitalization of US$4.7 bn. We believe
visibility on the development of BPCL’s E&P discoveries will likely boost sentiment for the stock
which has been subdued due to (1) the recent surge in crude oil prices, (2) lack of clarity on the
subsidy-sharing scheme and (3) delay in diesel deregulation.
Revised earnings; stock offering good upside to current target price
We retain our BUY rating on the stock noting 26% upside to our revised target price of `740
(`860 previously) based on 11X FY2012E EPS plus value of investments. We have revised our
FY2011-13E EPS to `53 (-2.5%), `50 (-19.6%) and `66 (-0.6%) to reflect (1) higher net underrecoveries
in FY2011-12E, (2) delay in diesel deregulation to FY2013E, (3) modestly higher refining
margins and (4) other minor changes.
Key financial and operating details of 3QFY11 results
Exhibit 1 gives key highlights of BPCL’s 3QFY11 results and compares the same on yoy and
qoq basis. We do not see significant merit in comparison of quarterly results given high
volatility in the timing and quantum of compensation from the government of India and
contribution from upstream companies.
Compensation (cash) from the government and discounts from the upstream oil
companies. BPCL received `18.1 bn as compensation from the government in 3QFY11.
BPCL received `11.7 bn of discounts from the upstream companies in 3QFY11 compared
to `8.2 bn in 2QFY11. Its net under-recovery was `5.3 bn compared to over-recovery of
`13.1 bn in 2QFY11 and under-recovery of `3.6 bn in 3QFY10.
Refining margins improve sharply qoq. BPCL’s 3QFY11 refining margin was
US$4.6/bbl versus US$2.8/bbl in 2QFY11 and US$1.3/bbl in 3QFY10. The qoq
improvement in margins was higher than improvement in global refining margins
reflecting high adventitious gains. The company reported adventitious gains of `3.2 bn in
3QFY11 versus a loss of `0.8 bn in 2QFY11.
Refining throughput lower; sales volumes increased moderately yoy. BPCL’s two
refineries processed 5 mn tons of crude in 3QFY11 compared to 5.6 mn tons in 2QFY11
and 3QFY10. The decline in crude throughput reflects shutdown of crude distillation unit
at its Mumbai refinery. BPCL’s sales volume was 7.4 mn tons for 3QFY11 (+5.7% yoy,
+12.1% qoq).
Employee cost increases sharply qoq. The company reported a 26% qoq increase in
employee cost at `5.7 bn versus `4.5 bn in 2QFY11. The management attributed higher
cost to the pay revision of its employees and expects it to continue at similar levels.
Other income lower qoq and yoy. BPCL reported a sharp decline in other income to
`3.1 bn versus `5.3 bn in 2QFY11 and `4.7 bn in 3QFY10.
Prior-period tax expense. BPCL reported one-off tax expense of `1.05 bn as provision
for previous years.
E&P portfolio could be meaningful
Exhibit 2 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$4.7 bn. Preliminary estimates put gross resource potential of over 300 mn bbls oil in BMC-
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%).
Earnings revisions and key assumptions behind earnings model
We have revised our FY2011E, FY2012E and FY2013E EPS estimates to `52.9, `49.5 and
`66.5 from `54.3, `59.9 and `66.8. We discuss key assumptions behind our earnings model
below.
Compensation from government and discount from upstream companies. We
assume the government will restrict the amount of net under-recoveries at around `70 bn
for FY2011E and `75 bn for FY2012E (higher than `56 bn in FY2010) for the
downstream oil companies. We model BPCL to receive compensation of `96.5 bn,
`105.7 bn and `60.8 bn from the government in FY2011E, FY2012E and FY2013E. We
assume BPCL to receive discount of `56.4 bn for FY2011E, `61.6 bn for FY2012E and
`37.8 bn for FY2013E from the upstream companies.
Refining margins. We model refining margin for BPCL at US$3.9/bbl in FY2011E,
US$4.3/bbl in FY2012E and US$4.8/bbl in FY2013E compared to US$3/bbl in FY2010.
Exhibit 3 gives our key assumptions for BPCL’s refining division. We assume adventitious
gains at `7 bn in FY2011E in line with 9MFY11’s `7.1 bn and nil gains or losses for the
future years.
Crude throughput. We model crude throughput at 21.6 mn tons in FY2011E and 22
mn tons in FY2012E versus 20.4 mn tons in FY2010.
Marketing margins. We model marketing margin on gasoline and diesel at –`2,525/ton
and –`2,154/ton in FY2011E and `1,350/ton and -`2,892/ton in FY2012E compared to –
`3,929/ton and `1,113/ton and in FY2010. We expect diesel prices to be deregulated by
April 1, 2012 with the easing of inflationary concerns. We do not assume any increase in
LPG and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rate for FY2011E, FY2012E and FY2013E at
`45.6/US$, `45.5/US$ and `44/US$.
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