BPCL – BUY Exploration upside in Brazil ::IIFL

We hosted BPCL at our investor conference in Singapore. The
management indicated the possibility of further reserve
accretion in Mozambique as the unexplored southern part of
the block will be drilled in 2HCY12. Appraisal drilling in Barra
and Wahoo in Brazil may establish reserves by mid-CY2013.
The company intends to increase upstream capex from Rs8.5bn
in FY12 to Rs20bn in FY14. We revise our target price upward
to Rs865/share to factor in exploration upside from Brazil and
upgrade our rating to BUY

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Mozambique may see further resource upgrades: Only the
northern part of the block has been drilled until date. The Barracuda
and Black Pearl prospects in the southern part of the block are
scheduled for drilling in 2HCY12-1HCY13. Success in any of these
wells would substantially increase recoverable reserve estimates that
are at 30-60TCF currently.
Commerciality of Brazil discoveries to be known by mid-2013:
Appraisal drilling in the ‘Barra’ discovery (34m net pay) with PetroBras
is scheduled over 2HCY12-1HCY13. BPRL expects to have the
estimates for recoverable reserve by mid-CY2013. Two appraisal wells
at Wahoo scheduled in CY2012 will determine commerciality of the
discovery. If the wells are found commercial, the first oil from Wahoo
could come in 2017, ahead of the first gas from Mozambique.
Revise target price by 12%, recommend BUY: Exploratory and
appraisal drilling is scheduled to accelerate with 10 new wells each in
Mozambique and Brazil in FY13. BPRL’s capex is scheduled to increase
from Rs8.5bn in FY12 to Rs15bn in FY13 and Rs20bn in FY14. We
value BPCL’s stake in Mozambique at Rs227/share. Wahoo would
contribute Rs36/share based on current estimates of recoverable
resources. We note that BORL is expected to contribute 12% of BPCL’s
consolidated Ebitda in FY13. We revise our target price upward to
Rs865/share to factor in higher recoverable reserve estimate from
Mozambique and introduce exploratory upside from Brazil.
Recommend BUY.


Resource estimate in Mozambique conservative: BPRL indicated
that the consortium drilled 14 wells in the block with 12 hydrocarbon
shows, based on which it arrived at the current reserve estimate of
30-60TCF. ENI, that is exploring the adjacent block, has announced
reserve estimate of 47-52TCF based on only three exploratory wells.
The consortium’s estimate in Mozambique is more concrete.
US$14bn capex for first gas from Mozambique: The operator
estimates that US$8bn-9bn will be spent on development and
US$6bn for another LNG train. The total capex for development and
the first LNG train is US$14bn-15bn, which would be funded via
equity and debt by the consortium members. The second LNG train
will be funded from cash flows generated by the first train starting
CY2018.
Barra reserve estimate by mid-CY2013: Two appraisal wells are
scheduled to be drilled in this promising block in late CY2012. BPRL
indicated that recoverable reserve estimates will be ready by mid-
CY2013.
Further, appraisal drilling in two locations in BM-C-30 in the Campos
basin will determine the commerciality of the block by mid-CY2013.
First oil from the block may flow by CY2017 as it is relatively an
easier development compared with Mozambique.
Upgrade to BUY with 15% upside: We see BPCL’s current price
discounting 45TCF from Mozambique. Given likely acceleration in
news flow from Brazil over FY13 and the possibility of reserve
upgrade in Mozambique, we expect the stock to continue to
outperform the Sensex over our target horizon. We upgrade BPCL to
BUY with a target price Rs865.