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A file photo of a BPCL refinery in Mumbai. Photo: Reuters
A file photo of a BPCL refinery in Mumbai. Photo: Reuters

Valuation of BPCL’s upstream assets faces downward revision

Analysts say firm's shares may witness a correction soon, as the fall in oil and gas prices erode the value of its upstream assets

Mumbai: Overseas exploration ventures that lifted the valuations of Bharat Petroleum Corp. Ltd (BPCL) way beyond those of its refining-only peers during the years of soaring energy prices have come back to haunt the company, as record low crude oil prices trim valuations of energy explorers worldwide.

Analysts and brokerage reports said shares of the country’s second largest oil refiner may witness a correction soon, as the fall in oil and gas prices erode the value of its upstream assets, particularly in Mozambique and Brazil.

BPCL also has stakes in exploration ventures—so-called upstream assets—in Indonesia and Australia.

BPCL holds a 10% stake in a Mozambique gas block operated by the US-based Anadarko Petroleum Corp. It also has a 20% stake in a Brazil block in an equal joint venture with Videocon Industries Ltd. The block is operated by Petrobras SA, Brazil’s state-owned oil company.

Gas prices at current levels threaten the viability of the Mozambique venture, an analyst said.

“The Mozambique asset, where the company along with its partners are investing close to $20 billion, can be viable only at natural gas prices of $12-13 per mmBtu (million British thermal units)," said Dhaval Joshi, analyst with brokerage firm Emkay Global Financial Services Ltd.

He said spot liquefied natural gas (LNG) now comes for $6-7 per mmBtu, with a weaker outlook. Therefore, this asset will definitely see some correction in valuation. Joshi, who values the upstream assets of BPCL at 200 a share out of its Friday’s share price of 780.50, said a correction may be on the cards.

According to Bloomberg, the price of spot LNG has fallen 48% from a high of $15.5 mmBtu in mid-September to almost $8 per mmBtu on 31 March. The average price in fiscal 2014 was $13 per mmBtu.

The Mozambique asset, with reserves of 70 trillion cubic feet (tcf), has been the shining jewel in BPCL’s upstream portfolio.

BPCL’s share in the asset stands at 7tcf and is almost five times the size of the reserves in the D6 block of Reliance Industries Ltd (RIL) in the Krishna Godavari basin.

Mozambique block’s operator Anadarko is planning to build an LNG terminal with a capacity of 10 million tonnes per annum (mtpa) and start selling natural gas from 2019. However, companies often delay such projects when output prices fall.

In a 4 December report, JP Morgan Securities Llc pointed out that Malaysia’s Petroliam Nasional Bhd (Petronas) has decided to defer the $36 billion final investment decision of its 12mtpa Canadian LNG project as it “wants to further evaluate the economic viability of the project in light of the recent decline in oil prices".

The report said this could just be the beginning of major global LNG projects being exposed to risks of lower crude oil prices.

An analyst said the prospects of BPCL’s other major asset in Brazil—whose reserves are not yet confirmed—are also not too encouraging.

“With a debt of net $106 billion, Petrobras is the highest indebted oil and gas company in the world and plans to sell off at least $13 billion of assets over the next two years. This will also entail a shift in the company’s focus from developing the fields of the future and shore up production from existing assets and this will hurt BPCL," said an energy analyst with an international brokerage.

This has to be seen in correlation with the fall in crude price, which has corrected by 50% in the last financial year, raising doubts on several upstream investments, he said.

A mail sent to BPCL on Thursday seeking comments was not answered till press time.

A 19 March report by HDFC Securities Ltd on BPCL pointed out that while the brokerage is bullish on BPCL’s domestic operations and expects higher operating income and lower debt in the coming two years, clarity on the upstream business is key for the company. “Falling crude and gas prices are key risks to valuations," said the report.

The report valued the company’s upstream assets at 223 per share. In 2014-15, while BPCL’s share price rose 81%, its peer Hindustan Petroleum Corp. Ltd, to which it is often compared, rose 114%.

Indian Oil Corp. Ltd is almost double the size of the both companies put together and has operations spread across the refining and petrochemicals sector, and is not a strict comparison. Its share price rose a more modest 35% during the financial year.

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