BPCL Company Update 271112 UK ICON - Icon Capital Ltd - … Company U… · · 2015-04-285...

1

BPCLE&P @ Significant discount, Reiterate Buy

November, 2012

Jagdish [email protected]

Rohit [email protected]

ICON CAPITAL

This report is distributed by Icon Capital Limited in association with Emkay Global Financial Services Limited.

This report is classified as being a “marketing communication” for the purposes of the rules and guidance (FSA Rules) issued by the Financial Services Authority (FSA). This is principally because Icon Capital Limited cannot verify that this report has been prepared in accordance with UK legal requirements designed to promote the independence of investment research.

This report has been prepared by the research division of Emkay Global Financial Services Limited and has been reviewed by Icon Capital Limited, but no material changes have been made as a result. Emkay Global Financial Services Limited is a member of the Bombay Stock Exchange and The National Stock Exchange of India and is registered with the Securities and Exchange Board of India. Icon Capital Limited is a member of the London Stock Exchange and is authorised and regulated by the FSA.

EMKAY GLOBAL FINANCIAL SERVICES LTD.

Dhaval [email protected]

2

Summary

§ Risk reward ratio entering a favorable quadrant for BPCL.

§ We see high probability of positive news flows emerging from further drilling by Anadarko in the Mozambique

block.

§ Valuation: We value BPCL on an SOTP basis at Rs.397/sh. E&P assets at Rs 100/sh which accounts for 25%

of the value and other investments contribute 21.6% or Rs 86/sh. BPCL’s core refining and marketing

business is valued at ~Rs 211/sh on 1x FY14E BV. At CMP stock trades at 1.2x FY14 P/BV and post the

correction CMP provides attractive level to enter in the stock with favorable risk reward. Hence we change our

recommendation from Accumulate to BUY with TP of Rs.397.

** FY12 Book Value for Worst case scenario

303397Fair Value

1313Less: Debt of BPRL

1111Wahoo

87102Mozzambiq

85100E&P Value Per share

8686Other Investments - Quoted/Unquoted

132211Value of R&M per Share

0.81.0Multiple

165211Core Refining BV

5555Less :- Value of Investments Quoted/Unquoted

220266Book Value FY14E **

Worst caseBase case

Risk reward ratio in Favorable Quadrant

3

Investment Rationale

Source: Bloomberg, Emkay research

BPCL 1 yr Fwd P/B band BPCL 1 yr trailing P/B

0

250

500

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

Rs.

Price Avg P/B

0.5x

1 x

1.5x

2 x

0

1

2

3

4

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

P/B

(x)

BPCL at attractive level: BPCL has been one of the best performing (absolute performance) stocks this year

+32% from January 2012 on account of E&P successes and price hike/reforms in diesel/cooking fuels. Recently

stock has corrected from its high of Rs.394 to currently at Rs.315, mainly on the back of higher under recovery,

depreciation of rupee and weakening in GRM. It has outperformed HPCL 24% and IOC 30% YTD due to E&P

business valuations However at current level, we see that market/street has ignored the E&P valuation and

factored the worst case valuation (our worst Case Rs.303). We value BPCL on an SOTP basis at Rs.397/sh. E&P

assets at Rs 100/sh which accounts for 25% of the value and other investments contribute 21.6% or Rs 86/sh.

BPCL’s core refining and marketing business is valued at ~Rs 211/sh on 1x FY14E BV. At CMP stock trades at

1.2x FY14 P/BV, providing attractive level to enter in the stock with favorable risk reward. Hence we change our

recommendation from Accumulate to BUY with TP of Rs.397.

4

… Investment Rationale

Expect further upside potential in BPCL's E&P business: We currently value BPCL's E&P portfolio at Rs100/sh

and believe there could be a significant upside potential as we get more clarity on the reserve size in its both

Mozambique and Brazil discoveries.

§ In Mozambique reserves accretion is llikely as further drilling is carried out at 5 locations of Linguado, Orca, Tubarao,

Barracuda and Perola Negra. Hence we believe any success in this area would increase recoverable reserves

estimate which are at 32-65tcf currently.

§ In Brazil, appraisal wells program in Campos basin (Wahoo) and Sergipe and Alagoas basin may establish

reserves by 1HCY13.

§ Hence based on the lined up exploratory and appraisal drilling for CY12/13, we expect positive news to

continue as and when these activities are carried out/complete.

5

Potential upside in Mozambique…

§ Anadarko is expected to drill 5 more wells by Dec12.

§ One well will be an appraisal well for Tubarao discovery (gas discovery made in Feb 2011)

§ 4 Exploratory wells to be drilled one each for Linguado, Orca, Barracuda and Perola Negra (Black Pearl)

To note that the above drilling is outside the discovered areas of Prosperidade field and Golfinho/Atum complex and any positive result would add to the reserves of the Mozambique block

6

What is the CMP factoring in?

§ The current market price factors in probably the worst case valuations for BPCL. On the E&P front market is

concerned about the pace of ramp in LNG capacity at Mozambique. On its core business of refining and

marketing, market is concerned about the uncertainty in earnings given the high subsidy under recoveries.

§ Considering a staggered ramp up in Mozambique LNG capacity over 2019-2025 similar to our Bear case

scenario and valuing core Refining & Marketing business of BPCL at 0.8x P/B (as against average of 1.3x) on its

FY12 book value we arrive at fair value of Rs303.

** FY12 Book Value for Worst case scenario

303397Fair Value


1111Wahoo

87102Mozzambiq




0.81.0Multiple

165211Core Refining BV



Worst caseBase case

7

2525

23.5

Golfinho &Atum

Prosperidade

Golfinho &Atum

48.5

0

10

20

30

40

50

60

FY19 FY21

Tcf

Base case valuation for Mozambique

§ In our base case for Mozambique, we have considered train 1 and 2 getting operational in FY20 and FY21.

Trains 3&4 and 5&6 start in FY22 and FY23

§ We also assume that Anadarko develops the Golfinho/Atum area first by FY19 and Prosperidade by FY21

Source: Company, Emkay Research

510

20

Train 3 & 4 start

Train 2 startsTrain 1 starts

Train 5 & 6 start

0

5

10

15

20

25

30

35

FY20 FY21 FY22 FY23

Mn

Ton

s

30

Cumulative LNG capacity and train start up scheduleCumulative Field Development

1.5

4.65.6

3.7 3.1

1.4 4.4 5.2

3.5 3.0

0123456789

FY15 FY16 FY17 FY18 FY19 FY20 FY21

$ bn

Golf inho/Atum Prosperidade

LNG train Capex (Total capex of US$21bn)Field development cost (Total capex of US$36bn)

0.71.4 1.4

0.71.4

1.4

1.42.8

2.8

1.42.8

2.8

0

1

2

3

4

5

6

FY17 FY18 FY19 FY20 FY21 FY22

$ bn

Train 1 Train 2 Trains 3&4 Trains 5&6

Assume Golfinho/Atum gets developed first given the dispute

on Prosperidade with ENI

Prosperidade gets developed two years later

Development cost at US$5/boe of capex to develop about 40TCF of gas reserves

6 LNG trains of 5mtpa each for a peak gas production of

120mmscmd

Assume 6 LNG trains to start over 4 years with Golfinho/Atum and

Prosperidade each supporting 3 trains

8

10%WACC

19.8Prosperidade

21.0Golfinho/Atum

40.8Total gas production (TCF)

0.6Total ($/mmbtu)

0.35LNG terminal ($/mmbtu)

0.25Upstream ($/mmbtu)

Opex

3.5LNG terminal cost ($bn for 5mtpa train)

5.0Field Development cost ($/boe)

12.5LNG price ($/mmbtu)

Assumptions


1.54.6

7.0 8.1 8.4

3.5 3.0

0.72.1

4.2

5.6 5.6

2.80

2

4

6

8

10

12

14

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

$ bn

Field development capex LNG train capex

Free cash flowsTotal capex

Total capex of US$57bn over 8 years to develop Golfinho/Atum

and Prosperidade

-15

-10

-5

0

5

10

15

20

FY

15

FY

18

FY

21

FY

24

FY

27

FY

30

FY

33

FY

36

FY

39

FY

42

FY

45

FY

48

FY

51

FY

54

FY

57

FY

60

$ bn

397Fair Value


11Wahoo

102Mozzambiq




1.0Multiple

211Core Refining BV



Base case

… Base case valuation for Mozambique

9

25 25Golf inho &Atum

23.5

Golf inho &Atum

Prosperidade

48.5

0

10

20

30

40

50

60

FY19 FY22

Tcf

0.71.4 1.4

0.71.4

1.4

0.7

1.4

1.4

0.7

1.4

1.4

0.7

1.4

1.4

0.7

1.4

1.4

00.5

11.5

22.5

33.5

4


$ bn

Train 1 Train 2 Trains 3 Trains 4 Trains 5 Trains 6

Bear case valuation for Mozambique

§ In our bear case for Mozambique, we have considered staggered start up of all 6 LNG trains over FY20 to FY25 with a gap of one year

§ We also assume that Anadarko develops the Golfinho/Atum area first by FY19 and Prosperidade by FY22

510

15

Train 3

Train 2

Train 1 20

Train 4

Train 6

Train 5

25

0

5

10

15

20

25

30

35

FY20 FY21 FY22 FY23 FY24 FY25

Mn

Ton

s

30


Cumulative LNG capacity and train start up scheduleCumulative Field Development

1.5

4.65.6

3.7 3.1

1.44.3

5.23.5 3.0

012345678


$ bn

Golfinho/Atum Prosperidade

LNG train CapexField development cost



Prosperidade gets developed two years later


6 LNG trains of 5mtpa each for a peak gas production of 120mmscmd



Prosperidade gets developed three years

later


Assume 6 LNG trains to start over 6 years with Golfinho/Atum and

Prosperidade each supporting 3 trains

10


10%WACC

19.8Prosperidade

21.0Golfinho/Atum

40.8Total gas production (TCF)

0.60Total ($/mmbtu)

0.35LNG terminal ($/mmbtu)

0.25Upstream ($/mmbtu)

Opex

3.5LNG terminal cost ($bn for 5mtpa train)

5.0Field Development cost ($/boe)

12LNG price ($/mmbtu)

Assumptions

Free cash flowsTotal capex

1.5

4.6 5.6 5.17.5

5.23.5 3.0

0.7 2.1

3.5

3.5

3.5 3.5

2.81.4

0

2

4

6

8

10

12

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24

$ bn

Field development capex LNG train capex

Total capex of US$57bn over 10 years to develop Golfinho/Atum and Prosperidade

-15

-10

-5

0

5

10

15

FY15

FY18

FY21

FY24

FY27

FY30

FY33

FY36

FY39

FY42

FY45

FY48

FY51

FY54

FY57

FY60

$ bn

382Fair Value

* Considering Bear Case for Mozambique block


11Wahoo

87Mozzambiq




1.0Multiple

211Core Refining BV


266Book Value FY14E

Base case *

… Bear case valuation for Mozambique

11

Key Concern

§ Lower than estimated LNG price - The current consumption levels of 240mmtpa as against existing export

capacities total 280mmtpa. While 84.2mmtpa of additional LNG export capacities are under-construction and

likely to be commissioned by 2017. A further 143.6mmtpa of liquefaction capacity is in planning phase which is

likely to be come online by 2023. While there are various supply sources emerging, viz. East Africa, Australia

and US, the demand for LNG would come primarily from Asia. Given the abundance of reserves and capacity

addition going ahead, LNG prices would come under pressure. However we have already factored conservative

LNG prices at $12.5/mmbtu for our estimates, considering Mozambique project is competitive compared to

other projects . (Refer Slide No. 14)

§ Delayed ramp up in LNG capacity, our NPV would affect by Rs.15/share – Currently in both Mozambique

and Brazil company is under drilling process (i.e Exploration and appraisal). We note that monetization of the

find/assets is still a few years away (first LNG train expected only by 2019). Staggered start up of all 6 LNG trains

over FY20 to FY25 with a gap of one year, results in NPV decline of Rs.15/share.

12

Financial

13

Annexure

14

LNG pricing

§ With substantial level of liquefaction capacities coming up globally, concerns have been raised on the gas pricing

with competition expected to increase and it being a buyers market.

§ The current consumption levels is around 240mmtpa against existing export capacities total 280mmtpa. While

84.2mmtpa of additional LNG export capacities are under-construction and likely to be commissioned by 2017. A

further 143.6mmtpa of liquefaction capacity is in planning phase which is likely to be come online by 2023.

§ With mounting competition for export markets, LNG projects with high cost such as those in Australia will be the

ones which will face the most pricing pressure. We believe that cost control would be the determining factor and

LNG projects in Mozambique would be better placed to face the competition.

Source: Industry, Emkay Research

Break even LNG price to achieve 12% IRR

14

11 11 10 9 8

0

2

4

6

8

10

12

14

16

Brow se andArrow

Gorgon Wheatstone Cheneire'sSabina Pass

Mozambique PNG LNG

$/m

mbt

u

15

The dispute with ENI…

§ Anadarko’s Area 1 Block off the coast of Mozambique stands adjacent to ENI’s Area 4 Block in which it has 70%

stake. Anadarko’s discovered Prosperidade field straddles with that of discoveries of ENI’s

§ ENI discoveries of Mamba/Coral are larger as compared to Anadarko’s Prosperidade field with the formers in-

place reserve estimates of about 70TCF from its 6 discoveries. As against this Anadarko’s Prosperidade field has

recoverable reserves of 17-30 TCF.

§ Under the Mozambique law the operator are required to discuss and come to unitization agreement if possible.

§ Recent news suggest that unitization of Prosperidade/Mamba complex may not be as simple as suggested

earlier.

§ ENI estimates the total potential at 70Tcf of gas in place and the resources exclusively located within Area 4 and

not subject to unitization to be at least 29Tcf. This shows the large extent to which the fields are straddled.

§ On account of the dispute, Anadarko has announced its decision to go ahead with setting up of two LNG

trains which can be supported by discoveries of Golfinho/Atum. Also to be noted that Golfinho/Atum are

located closer to the shore, while Prosperidade/Mamba lies 50-60 km offshore in deeper water than

Golfinho/Atum.

16

Current Status in E&P – Mozambique

Mozambique block status

§ BPCL's upstream venture, Bharat Petro Resources (BPRL) would continue to witness robust activity going forward. In Mozambique, 8 discoveries are currently being appraised and reserve certification and FID is expected by CY13E end.

§ For Golfinho/Atum company has completed initial appraisal drilling and Integrated Testing Program underway. We believe

§ These activities would continue to bring in discovery based news flows which would have a positive impact on the stock.

92Gas12-JunAtumMozambique Offshore Area 1, Rovuma Basin11

59Gas12-MayGolfinhoMozambique Offshore Area 1, Rovuma Basin10

176Gas12-FebLagosta- 3Mozambique Offshore Area 1, Rovuma Basin9

237Gas12-JanLagosta- 2Mozambique Offshore Area 1, Rovuma Basin8

202Gas11-NovBarquentineMozambique Offshore Area 1, Rovuma Basin7

116Gas11-OctCamaraoMozambique Offshore Area 1, Rovuma Basin6

70Gas11-AugBarquentineMozambique Offshore Area 1, Rovuma Basin5

34Gas11-FebTubaraoMozambique Offshore Area 1, Rovuma Basin4

168Gas10-NovLagostaMozambique Offshore Area 1, Rovuma Basin3

127Gas10-OctBarquentineMozambique Offshore Area 1, Rovuma Basin2

145Gas10-FebWindjammerMozambique Offshore Area 1, Rovuma Basin1

PayOil/GasDateWell name/discoveriesCountryBlock NameSr. No

Details of discoveries in Mozambique blocks

17

Current Status in E&P – Brazil

§ In Brazil, currently appraisal wells are under drilling in Campos basin (Wahoo) and 1 appraisal well is under

progress in Sergipe and Alagoas basin.

Proceed with well drilling and will analyze the

rocks and fluids obtained from this well with the

aim of submitting the Appraisal Plan to the ANP.

Oct-12FarfanPetrobrasSergipe and

Alagoas

Contract: BM- SEAL- 11,

Block: SEAL- M- 426

Brazil

To submit evaluation plan to Brazil’s

upstream regulator

July-12Grana PadanoPetrobrasEspirito SantoContract: BM- ES- 24,

Block: ES- M- 661

Brazil

Will continue the operations in order to confirm

the extension of the new discovery and

characterize reservoir conditions encountered.

Aug-12Barra1

Completed drilling activity and Drilled

appraisal well Barra 1

Sep-11BarraPetrobrasSergipe and

Alagoas

Contract: BM- SEAL- 11,

Block: SEAL- M- 426

Brazil

Drilled appraisal well, expected to

complete by Dec12

Nov-09Wahoo 2

Drilled appraisal well, expected to

complete by Dec12

Sep-08Wahoo 1AnadarkoCamposContract: BM-

C- 30, Block: C- M- 101

Brazil

StatusDateWell nameOperatorBasinBlockCountry

18

BPCL E&P Portfolio – 28 blocks in 7 countries

19

Emkay Rating Distribution

BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months.ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months.HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.REDUCE Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months.SELL The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months.

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BPCL Company Update 271112 UK ICON - Icon Capital Ltd - … Company U… · · 2015-04-285...

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Transcript of BPCL Company Update 271112 UK ICON - Icon Capital Ltd - … Company U… · · 2015-04-285...