BPCL - Large upsides from E&P investments; company update; Buy (Edelweiss PDF link)

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BPCL (BPCL IN, INR 666, Buy)

Recent developments in Bharat Petroleum’s (BPCL) upstream venture (Bharat Petroresources, BPRL), especially in Mozambique (10% stake), have catapulted BPCL in the global E&P map. After incorporating increase in reserves and potential upsides, we raise our estimate of BPCL’s E&P business to INR 166/share. We also note that a bull case may lead to further upside by INR 223/share. BPCL remains our favourite among the three OMCs. We retain ‘BUY’ on the stock with TP of INR 843/share.

Mozambique discoveries catapult BPCL in global oil & gas map

Recent successes in the Rovuma offshore block, Mozambique, have catapulted BPCL in the global oil & gas map. With total nine successful wells, Anadarko (operator) estimates recoverable reserves at 16.5-31.5+ tcf of gas. With a hectic exploration programme of eight wells in FY13 and potential oil-bearing targets in the block’s southern area, we see further rise in news flows with potential upgrade in reserves estimates. Reserves are expected to be certified in mid-CY13 as Anadarko expects FID to be announced in CY13. At 13% WACC, we assign a value of INR130/BPCL sharewith bull case, pegging the same at INR298. The recently announced Cove Energy bid of USD1.7bn implies BPCL value at INR240/share (assigning 80% value to Mozambique).  

Drilling activity in Brazil to intensify; news flows every 1-2 months

Drilling activity in Brazil is expected to intensify as the company plans to drill nine wells in FY13 (six in past 3.5 years). BPCL is excited on potential targets, especially in the Espiritos Santos basin (discoveries present in all four corners of blocks; close to Jubarte complex of ~2.0 bn bbls) and Sergipe Alagoas basin (appraisal of recent large discovery + exploration targets). Triggers: News flows every 1-2 months. At USD 5.0/boe, we value Brazilian assets at INR 45/share and bull case of INR 95/share.

Outlook & valuations: Increasing TP to INR843/share; ‘BUY’

We peg BPCL’s E&P assets at INR166/sh (base case) and bull case at INR389/sh. As a result, we raise our TP to INR843/sh (INR753/sh earlier). Our confidence of substantial value in E&P asset stems from recently announced bid of USD1.7bn for Cove Energy (8.5% in Mozambique block). Apart from E&P, we also like BPCL due to trigger of potential increase in diesel prices post parliament session (April end). Triggers: News-flows every month from Mozambique and Brazilian blocks. Maintain ‘BUY’.

BPCL - Large upsides from E&P investments; company update; Buy