Bharat Petroleum Corporation Limited (BPCL) is one of the three largest PSUs (public sector undertaking) in the Indian refining and marketing (R&M) space.
The oil and gas sector is highly regulated in India and the government owns a 65% stake in BPCL.
The company operates two refineries, at Mumbai and Kochi. Along with its subsidiary, Numaligarh, the combined capacity (>20mmtpa) constitutes approximately 15% of India’s refining capacity. BPCL has over 8,250 auto-fuel retail outlets with a market share of nearly 25%.
The recent acquisition of Brazilian subsidiary of EnCana Corp has given BPCL a 10-20% stake in ten deepwater and ultra-deepwater blocks in Brazil.
BPCL has paid ~ $80 million for its stake. In addition, BPCL has stakes in 14 exploratory blocks, of which nine are in India, two in Australia and one each in Timor, Oman and North Sea.
It has made a hydrocarbon discovery in the block BM-C-30 offshore Brazil at the Wahoo prospect. BPCL holds 12.5% working interest in the Campos concession.
The 1-APL-1-ESS well in BM-C-30 block is located ~25 miles southeast from Petrobras previously announced pre-salt discoveries at the giant Jubarte field.
Currently, investors consider BPCL a modest company with barely any growth. We believe the Brazil discovery reinforces our view that the upstream as a potential growth option for BPCL is likely to trigger a sharp valuation re-rating.
If the crude oil price continues to remain low, we believe the government is likely to allow free pricing for petrol and diesel.
We believe free pricing is likely to happen only after elections scheduled for May 2009. Our scenario analysis suggests profits could double under free pricing.
When prices were temporarily decontrolled in early 2002, stock prices of public sector oil companies had nearly doubled.
Our 12-month price target is Rs470 based on a RNAV methodology and we maintain OUTPERFORM rating.