Bharat Petroleum confident that OMCs will be fully compensated
Moneylife Digital Team 29 April 2013

With recent declines in oil prices, subsidy concerns have eased for FY14. Bharat Petroleum thinks that the government will keep allowing the monthly diesel price hike, and did not seem much concerned about no diesel price hike this month, said Nomura in its note on the company

 
Nomura Equity Research met the management of Bharat Petroleum Corporation (BPCL) on 25 April 2013. On the key question of subsidy share for FY13, the management said there is still no clarity. But it sounded confident that oil marketing companies (OMCs) would be fully compensated. With recent declines in oil prices, subsidy concerns have eased for FY14. The company thinks that the government will keep allowing the monthly diesel price hike, and did not seem much concerned about no diesel price hike this month. The company remains optimistic on E&P, and thinks that, with the recent ongoing stake sale in offshore Area-1, valuation could go up further. These observations were made by Nomura Equity Research in its analysis of the meeting with BPCL’s management.
 
The brokerage maintains its preference for OMCs versus upstream oil PSUs. “Among OMCs, BPCL remains our preferred pick primarily due to its exposure to Mozambique’s Area-1 block, where we think news flow is likely to continue to be positive”, according to Nomura.
 
Key takeaways of the meeting with the BPCL management
Diesel – No hike yet in April, but management optimistic: In January 2013, the government had allowed OMCs to take minor 45-50paise/litre hike on a monthly basis “until further orders”. Even as the order is not revoked, the oil companies have not taken any price hike this month. “We think the government is still micro-managing the price increases. With recent declines in oil prices, and resultant declines in under-recoveries, management did not seem unduly concerned on no hikes this month, and expected that price hikes would be taken soon.” Nomura believes the next price hike will be taken only after the ongoing Parliament session ends (10th May). Also, the brokerage continues to believe that, with elections approaching, the risk remains high that the government may stop further price hike increases after a few months.
 
Under-recoveries situation easing: With recent declines in oil prices and incremental steps like monthly diesel price increases, non-subsidised bulk diesel sales, and direct subsidy transfer on LPG, etc, the subsidy situation has eased. Nomura said the company’s management sounded optimistic that as the direct transfer of benefits commences soon, the under-recovery on LPG and kerosene would also reduce gradually over 3-4 years. The brokerage also thinks that with the peak of Rs1.6 trillion in FY13, the worst of fuel under-recoveries is behind us.
 
FY13 subsidy sharing – No clarity yet, management optimistic: According to Nomura, the BPCL management stated that its objective is to secure full compensation (from government/upstream PSUs) for its FY13F under-recoveries. The management also indicated that, with current reduced overall under-recoveries, the government’s capacity to shell out higher subsidy (from FY14 budget) has increased.
 
To be in profit for FY13F, Nomura believes OMCs need at least 100% compensation. They need further support of Rs612 billion (Rs366 billion for 4QFY13F + unpaid Rs246 billion for the April-December period of FY13), based on Nomura’s estimates. For 4QFY13F, it is assumed that OMCs will get Rs151 billion from upstream and Rs461 billion from the government of India (GoI).
 
However, the brokerage opines that the risk is high that GoI support will be far less. If government support is only Rs250 billion (similar to 3Q12), the upstream burden may be far higher at Rs362 billion, and upstream PSUs may report losses for 4Q. If OMCs receive less than 100% support, they could report full-year losses for the first time, says Nomura.
 
Debt levels have reduced recently: The BPCL management said that it has already received compensation announced by the government for the first nine months of FY13 (Rs550 billion for three OMCs and Rs132.3 billion for BPCL) in full. Due to this, total debt has reduced to Rs220 billion (from Rs310 billion as of December 2012). BPCL currently holds bonds worth Rs50 billion.
 
Kochi expansion: The management stated that work has commenced on the Kochi refinery expansion (capacity to increase from current 9.5 million tonnes (mt) to 15 mt at a capex of Rs200 billion). The expansion is expected to be completed in 2016-17.
 
Bina refinery: Bina refinery is currently operating at around 110% capacity utilisation and the management expects break-even of Bina refinery to take place in FY14.
 
E&P – total investment now of $1 billion: Total equity investment of BPCL in its 100%-owned E&P arm Bharat Petro-resources (BPRL) is Rs25 billion. With total borrowing of around Rs28 billion, total investments by BPRL are now close to Rs52 billion. BPCL indicated that for any further investment in Mozambique, the money could be easily raised by BPRL, and BPCL would not need to make any significant further investment.
 
Mozambique – Sounds optimistic: With further discoveries in Mozambique, the BPCL management sounded optimistic on its prospects in Mozambique. It indicated that the operator is looking initially develop two 5mmtpa LNG trains, and targeting final investment decision by end this year. The talks are ongoing for initial agreements with prospective LNG purchasers. The discussions are also continuing with ENI (operator of offshore area -4 north of offshore area -1) on possible unitisation and joint development of resources.
 
The management reiterated that BPCL is a long-term player in the Mozambique asset and is not even thinking of divesting its 10% interest. It thinks that the valuation for the ongoing stake sale (Videocon and Anadarko selling 10% stake) could exceed the Cove Energy stake sale transaction ($1.7 billion for 8.5% stake). Recent media reports have indicated that the likely valuation of a 20% stake sale has now increased to $8-$10 billion (from $5 billion earlier) (source: The Economic Times, 20 April 2013: “Videocon hopes to increase valuation of its 10% stake in a gas-rich block in Mozambique”).
 
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