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MOSL- BPCL - Mozambique reserve upgrade again, up 15% to 45-70+tcf - raising target price by 5% to INR486




Motilal Oswal Securities Ltd.


06 Mar 2014





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BPCL: Mozambique reserve upgrade yet again, up 15% Continued diesel price hikes, a big positive; raise target price Anadarko Petroleum (BPCLs JV partner and operator in Mozambique) has upgraded the recoverable resource estimate of Offshore Area 1 in Rovuma Basin in Mozambique by ~15%, from 35 to 65+ tcf to 45 to 70+ tcf. We are positively surprised by this resource upgrade that results in fair value upgrade of INR22/share. Maintain BPCL as the top pick among OMCs, with a revised target price of INR486/sh (v/s INR464 earlier), which includes INR172/sh for its E&P portfolio and INR62/sh for other investments, post 25% discount. E&P continues to drive upgrades for BPCL BPCLs Mozambique block has witnessed substantial resource upgrades from 3-4tcf in 2010 to 45-70+ tcf now and further appraisal could add more. However, focus will shift to FID and commencement of development in 2015 that will be critical for scheduled production commencement in 2018. We expect further upside from BPCLs block in SEAL basin in Brazil where reserve estimates are yet to be announced. Strong balance sheet; domestic sector reforms to improve profitability With adjusted net debt/equity at 0.7x, BPCL has a very comfortable balance sheet for its planned capex of ~INR450b (Kochi expansion: INR150b; E&P: ~INR120b; Numaligarh expansion: INR100b; Marketing/Other: INR100b) through FY17. We expect the companys profitability to improve in the medium term led by: (a) Freeing of working capital and interest cost reduction due to continued diesel reforms expect under-recovery to halve by FY16 and (b) Likely upside in diesel marketing margins post deregulation INR0.5/ltr increase leads to ~20% increase in EPS. Key events to watch out (a) reserve certification and final investment decision (FID) at Mozambique, (b) reserve announcement for SEAL basin, Brazil, (c) clarity on refinery transfer pricing (export/trade) and (d) continuance of diesel reforms. Valuation and view: We maintain BPCL as the top pick among OMCs due to its relatively strong balance sheet, operational upsides through capacity additions and complexity improvement and E&P upside potential. The stock trades at 9.5x FY16E EPS of INR40.8 and 0.5x FY16E adjusted BV. Maintain Buy with a revised target price of INR486.

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