Daiwa on BPCL: Exploration update: 14 wells likely to be drilled in 2011

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BPCL: Exploration update: 14 wells likely to be drilled in 2011
Target price: Rs619.00


What has changed?
 We met with Bharat PetroResources Limited, Bharat Petroleum’s (BPCL) unlisted
exploration and production subsidiary, on 29 December 2010 for an update on the
exploration activities being conducted in various blocks in India and abroad.

Impact
 BPRL is a partner in 26 exploration blocks in seven countries including India.
 Brazil: In Brazil, wells have been drilled in the blocks in the Campos, Espirito
Santos and Sergipe basins. Three wells have been drilled in the Campos basin
block, of which two have been ‘discoveries’, known to the market as Wahoo
discoveries. The company’s current estimates of the gross reserve potential are
200-300 mmboe and the final reserve estimate is likely only by end-2011. The
finding and development cost is likely to be around US$15-20/bbl, according to
the company. The tentative target production date from the field is in the second
half of 2014 and a detailed evaluation plan is being drawn up. The Barra well in
the Sergipe basin is also a discovery and the block could hold good potential
too. There have been no notable finds yet from other basins/blocks.
 In 2011, we may see further exploration activity at the Brazilian blocks,
including the drilling of four wells (one each in the Campos, Espirito Santos,
Sergipe and Potiguar basins).
 Rovuma Basin, Mozambique: Up until now, five wells have been drilled in the
block, of which three have been announced as discoveries by BPCL. We believe
some of the planned drilling in the field has been advanced from 2012 to 2011 due
to high optimism after these discoveries. We are likely to see drilling at an
additional three or four wells in 2011. The final reserve estimates for this block are
likely to be firmed up by end-2011. We understand that Rovuma is likely to be a
promising asset in terms of gas reserves and see the drilling plan as evidence.
 Various commercialisation options are being discussed, and BPCL has indicated it
and some other parties could be interested in putting up a LNG-liquefaction plant.
 Australia: One well is likely to be drilled in the first half of 2011, the
WA/388/P block.
 India NELP blocks: Five wells are planned to be drilled in 2011 in the Indian
NELP blocks of BPCL.

Valuation
 We maintain our SOTP-based six-month target price of Rs619. We do not attribute
any value to BPCL’s E&P block in our target price. The E&P value is dependent on
the reserve estimates of the blocks which are likely to be firmed up in due course in
2011, but we believe the Brazil and Mozambique blocks are the key assets to watch.

Catalysts and action
 We maintain our 4 (Underperform) rating on BPCL, due to uncertainty about its
core business of refining and marketing. We believe the rise in crude prices and
lower-than-expected government compensation is the key risk. Exploration
success could be a positive share-price catalyst.