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As per press reports (not confirmed by the companies), Indian state-owned companies GAIL and ONGC (through its overseas E&P subsidiary OVL) plan to bid ~US$2bn for Cove Energy’s African assets. This follows the bids of SHELL and PTTEP made for these assets last week. Although, these counter bids underscore the high E&P potential attached to these assets, the long-tailed nature of this business (first gas in 2018) would make value creation a gradual process. Further, near-term concerns on high crude prices, lack of clarity on subsidy sharing, high under-recoveries would cloud the earnings outlook of BPCL. Maintain HOLD.
Counter bids for Cove Energy’s assets in Africa indicate high prospectivity
Recent press reports indicate that the Indian PSU companies GAIL and ONGC Videsh (OVL), ONGC’s overseas E&P subsidiary, plan to put in a bid of ~US$2bn for Cove Energy’s Africa assets. Please note that this has not been confirmed by the respective companies as on date. This is 26% higher than the bid put in by SHELL (US$1.6bn) and 12% higher than that of PTTEP (Thailand) at US$1.8bn. These bids only give an indication of the high E&P potential of Africa. Cove Energy has four assets in Africa, which include Mozambique offshore, Mozambique onshore, Tanzania – Manzi Bay and Kenyan offshore basin. However, the basin with the highest exploration potential (based on studies conducted till date) is the Mozambique offshore basin, where BPCL holds 10% participating interest.
Recoverable reserves pegged at 15-30TCF; First gas likely only in 2018
The operator of the Mozambique offshore basin i.e. Anadarko has pegged the in-place reserves in the basin at 30-50TCF (5.4-9.0bn boe) and recoverable reserves at 15-30 TCF (2.7-5.4 bnboe), implying 50-60% recovery rate. BPCL’s stake therein at 10% works out to 270-540 mmboe. However, as per the development plan indicated by Cove Energy in its presentation, the FID for this is likely only in 4Q 2013 and the first gas in H2 2018. Thus, although this appears to be a promising prospect, realization of full value will be gradual and not immediate due to risks associated with execution. Although operating in a different geography i.e. India, we have witnessed the risks associated with being too optimistic in building in exploration upsides in case of RIL only to end up with disappointments later. Thus, there is a need to attach a risking factor to the value of these discoveries.
Imputed valuation for BPCL works out to `122-154/share on risked basis
The imputed valuation, assuming average recoverable resources in the Mozambique basin, works out to US$4.5-5.6/boe. This factors in bids put in by SHELL, PTTEP and the proposed bids by OVL, GAIL (see table 2). Applying these imputed multiples to BPCL’s stake, we arrive at a valuation of US$1.8-2.3bn (`244-308/share) for its upstream portfolio in Mozambique offshore region. However, since the first gas is likely only after six years i.e. in 2018, we would ascribe a 50% discount to this valuation to factor in the risks associated with execution. Thus, the ‘risked’ exploration upside works out to `122-154/share (see table 3).
Upstream valuation a long-term positive; near term concerns still persist
BPCL’s promising upstream portfolio is a long-term positive. However, near-term concerns viz. lack of clarity on subsidy sharing for FY12E, prevailing high crude prices remain a worry. Although, we do not rule out price hikes in the interim, especially given that key state elections are behind us now, these price hikes could at best be a near-term palliative for R&M companies. We value BPCL on a SOTP basis, which includes its core business + value of investments + value of upstream assets. Our SOTP based fair value works out to `696/share (see table 4). Maintain HOLD.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
As per press reports (not confirmed by the companies), Indian state-owned companies GAIL and ONGC (through its overseas E&P subsidiary OVL) plan to bid ~US$2bn for Cove Energy’s African assets. This follows the bids of SHELL and PTTEP made for these assets last week. Although, these counter bids underscore the high E&P potential attached to these assets, the long-tailed nature of this business (first gas in 2018) would make value creation a gradual process. Further, near-term concerns on high crude prices, lack of clarity on subsidy sharing, high under-recoveries would cloud the earnings outlook of BPCL. Maintain HOLD.
Counter bids for Cove Energy’s assets in Africa indicate high prospectivity
Recent press reports indicate that the Indian PSU companies GAIL and ONGC Videsh (OVL), ONGC’s overseas E&P subsidiary, plan to put in a bid of ~US$2bn for Cove Energy’s Africa assets. Please note that this has not been confirmed by the respective companies as on date. This is 26% higher than the bid put in by SHELL (US$1.6bn) and 12% higher than that of PTTEP (Thailand) at US$1.8bn. These bids only give an indication of the high E&P potential of Africa. Cove Energy has four assets in Africa, which include Mozambique offshore, Mozambique onshore, Tanzania – Manzi Bay and Kenyan offshore basin. However, the basin with the highest exploration potential (based on studies conducted till date) is the Mozambique offshore basin, where BPCL holds 10% participating interest.
Recoverable reserves pegged at 15-30TCF; First gas likely only in 2018
The operator of the Mozambique offshore basin i.e. Anadarko has pegged the in-place reserves in the basin at 30-50TCF (5.4-9.0bn boe) and recoverable reserves at 15-30 TCF (2.7-5.4 bnboe), implying 50-60% recovery rate. BPCL’s stake therein at 10% works out to 270-540 mmboe. However, as per the development plan indicated by Cove Energy in its presentation, the FID for this is likely only in 4Q 2013 and the first gas in H2 2018. Thus, although this appears to be a promising prospect, realization of full value will be gradual and not immediate due to risks associated with execution. Although operating in a different geography i.e. India, we have witnessed the risks associated with being too optimistic in building in exploration upsides in case of RIL only to end up with disappointments later. Thus, there is a need to attach a risking factor to the value of these discoveries.
Imputed valuation for BPCL works out to `122-154/share on risked basis
The imputed valuation, assuming average recoverable resources in the Mozambique basin, works out to US$4.5-5.6/boe. This factors in bids put in by SHELL, PTTEP and the proposed bids by OVL, GAIL (see table 2). Applying these imputed multiples to BPCL’s stake, we arrive at a valuation of US$1.8-2.3bn (`244-308/share) for its upstream portfolio in Mozambique offshore region. However, since the first gas is likely only after six years i.e. in 2018, we would ascribe a 50% discount to this valuation to factor in the risks associated with execution. Thus, the ‘risked’ exploration upside works out to `122-154/share (see table 3).
Upstream valuation a long-term positive; near term concerns still persist
BPCL’s promising upstream portfolio is a long-term positive. However, near-term concerns viz. lack of clarity on subsidy sharing for FY12E, prevailing high crude prices remain a worry. Although, we do not rule out price hikes in the interim, especially given that key state elections are behind us now, these price hikes could at best be a near-term palliative for R&M companies. We value BPCL on a SOTP basis, which includes its core business + value of investments + value of upstream assets. Our SOTP based fair value works out to `696/share (see table 4). Maintain HOLD.
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