Investment Focus: BPCL - Buy ::Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Investors with a long-term perspective can consider buying shares of BPCL, the country's second largest public sector oil refiner and marketer.

Although high subsidy burden continues to negatively impact oil marketing companies, BPCL's overseas investments in exploration and production (E&P) assets seem to be paying off handsomely. Also, a possible increase in the price of petrol and diesel should ease under-recovery pressure.

The company's 10 per cent stake in the Rovuma basin block in Mozambique would be valued at around $2 billion (Rs 10,000 crore). This works out to around Rs 275 per share, almost 40 per cent of the stock's current market price.

The value for its stake is based on the recent $1.8-billion bid by global hydrocarbon players for Cove Energy's 8.5 per cent stake in the same asset. Reports suggest that the acquisition cost for the stake in 2008 was $75 million. Not surprisingly, the BPCL stock has rallied strongly, and is up around 40 per cent this calendar.

At its current price of Rs 664, the stock discounts its FY-11 consolidated earnings by around 15 times, higher than the price-earnings multiple of its peers Indian Oil (nine times) and HPCL (six times).

Yet, given BPCL's strong E&P portfolio in Mozambique, Brazil, Indonesia and Australia, the premium seems justified.

BPCL intends to hold the Rovuma asset for the long term and benefit from its high production potential.

Besides the Rovuma asset, the Wahoo wells in Brazil, in which it has stake, are also estimated to be quite prolific with initial discoveries yielding encouraging results. This should help the company in the long run and reduce its dependence on the refining and marketing business in India. That said, the E&P business is a risky one, susceptible to disappointments at various stages.

With crude oil (Brent) ruling above $120 a barrel and the rupee being weak, concerns persist about the rising subsidy bill in the refining and marketing business and its impact on the company's profits and cash flows. But with State elections over, there is likelihood of petrol and diesel prices being hiked in the near future. This should ease under-recovery concerns to some extent.

After registering losses in the first two quarters of FY-12 due to high subsidies, BPCL posted profits in the December quarter with the Government and upstream companies bearing higher burden. Gross refining margins also improved to $3.5 a barrel from $1.6 in the September quarter.

There is no clarity yet on the subsidy sharing mechanism for the full year. But it is likely that the oil marketing companies will be adequately compensated to help them to keep their heads above water. In the medium to long term, moderation in crude oil prices and reforms in fuel pricing should provide relief.

BPCL's equity stakes in high-potential domestic gas companies such as Indraprastha Gas and Petronet LNG also bode well.