Brazilian boost for Bharat Petroleum

From: LiveMint and The Wall Street Journal

Pallavi Pengonda

A view of Bharat Petroleum Corporation Ltd. Refinery in Mumbai. The BPCL stock has been the best performing oil marketing company so far in this calendar year.

Bharat Petroleum Corp. Ltd (BPCL) announced on Tuesday that Petroleo Brasileiro SA (Petrobras), made a new oil discovery in a Brazilian block in which BPCL and Videocon Industries Ltd hold a 20% stake each. Although resource potential details are not available, in general, any discovery is considered positive. BPCL’s stock increased marginally on Tuesday, a day when the BSE Sensex was trading lower. Analysts believe that the chances of success on these fields does increase post discoveries.

It’s also helpful that the Street has not been immune to BPCL’s exploration and production (E&P) potential and has given enough brownie points to it. Not surprisingly, the BPCL stock has been the best performing oil marketing company (OMC) so far in this calendar year. Consider this: in 2012, the stock has risen 48% to Rs.354, notwithstanding other fundamental concerns (read subsidy problems).

Brokerage firms are betting on BPCL’s E&P potential in Brazil now. With Mozambique getting largely established as a huge gas province, BPCL’s next phase of upstream prospects lie in that country, said Antique Stock Broking Ltd. “With extensive appraisal programme in 2013, we expect true potential of Brazil resources will be known in near future, which we expect to provide material fillip to BPCL’s upstream valuations,” Antique analysts said in a 4 December research note.

While that’s encouraging, the stock currently appears rather expensive against the other two OMCs—Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC). At the current market price, based on Bloomberg estimates, the BPCL stock trades at 14.2 times its estimated earnings for FY14 against 6.8 times and eight times for HPCL and IOC, respectively.

Meanwhile, like the other two OMCs, BPCL too posted a loss for the half year ended September. That’s because in the June quarter, no subsidy was received from the government. Going by past trends, investors can expect OMCs to get a lion’s share of the subsidy in the second half of this fiscal year.

But BPCL did manage to post a relatively lower loss than the other two for the first half. One reason for that is that it reported stronger gross refining margins (GRMs). But GRMs have been weak in the current quarter. According to Motilal Oswal Securities Ltd, Singapore GRMs have averaged $6.9 (around Rs.375 today) per barrel so far in this quarter, while in the September quarter, the same were as high as $9.1 per barrel.

While the potential upside from exploration in the long run may be influencing valuations, a weak refining environment in the December quarter may affect the performance in the near term.

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