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Raft of upgrades for BPCL as non-core business fires

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The stock of Bharat Petroleum (BPCL), India’s second-biggest oil marketing company, appears to have a lot of gas left in it despite the fact that it has nearly doubled since December 2011.

The company has tailwind from its prolific Rovuma basin asset in Mozambique and the recently announced oil discovery in the Cauvery basin, analysts would have us believe.
So far this month, out of around 19 brokerages that have coverage on the stock, as many as 14 have given it an overweight, buy or outperform rating.

To be sure, at Rs 412.50 a share, the stock is up more than 9% so far this fiscal and 34% over a two-year period.

Indeed, it has even outperformed its peers by generous margins in the last two years.

“In the past two years, BPCL has created huge value from overseas upstream ventures, including Mozambique, which now accounts for 2/5ths of BPCL’s total value,” Jal Irani and Abhishek Agarwal of international brokerage Macquarie said in a note dated April 16.

In contrast, fellow state-owned oil marketers Indian Oil and Hindustan Petroleum have seen their share prices shaved off by 8% and 16%, respectively.

The gap is set to widen further with BPCL’s domestic exploration and production business gaining traction, say analysts.

On its oil find in the Cauvery basin, analysts Irani and Agarwal, said: “Total in-place resource estimate has been established at 535 million barrels of oil equivalent (mboe) and proved developed (PD) reserves at 23 mboe. Even if we attach a nominal value of $1/bbl on in-place resources (too early for PD) we arrive at a nominal value of ~$200 million, which is very conservatively Rs 16, or 4% of the current stock price.”

However, an analyst with a domestic brokerage said the oil find in Cauvery is almost 14 times smaller than Cairn India’s Rajasthan block and will take a lot of time to fructify into something substantial. “It is Mozambique that will continue to be the shining star in its portfolio,” he said.

R K Singh, chairman and managing director, BPCL, couldn’t agree more. “We are very positive of Mozambique and it is very good for the company. I can’t say more on this.”
During a recent analyst interaction, Singh had said that the company plans to invest $2 billion towards capex in Mozambique, mainly from reserves.

Also, BPCL would look at bringing its Brazil asset online by 2017 and Mozambique by 2018 before diving into more E&P portfolios elsewhere in the world, although it will have to face the risks usually associated with the upstream market – delay in execution, change in policy, etc.

“Nevertheless, risks may play out only after mid-2015 when exploration ends and development commences. By this time, we expect the consortium to have delineated a larger resource base and still consider BPCL’s E&P portfolio to be undervalued,” said analysts Somshankar Sinha and Pooja Gupta from international brokerage Barclays.

They have an ‘overweight’ rating on the stock.

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