BHARAT PETROLEUM: Govt’s Subsidy Policy Hits Fuel Retailing Major

With its profits at the mercy of the government, one cannot really evaluate BPCL on earnings. But the growing value of its assets highlights the success of its exploration portfolio. Long-term investors would do well to buy in

    Bharat Petroleum has lost control over its quarterly and annual profits, which are solely at the discretion of the government’s subsidy policy. However, the value of its assets is growing thanks to its successful portfolio of exploration assets. Long-term investors can ignore the current fluctuations in BPCL’s profitability and buy the scrip. 

CURRENT SCENARIO BPCL’s primary business of fuel retailing has been suffering from the government’s subsidy policies. It has to sell petro products below cost, but the extent and timing of reimbursement of the under-recoveries remain uncertain.
As a result it no longer has control over its quarterly and annual profits, which go up suddenly in one period and plunge in another. Secondly, its working capital needs have gone up necessitating heavy borrowings that impact its balance sheet health and put an additional burden on its profits.
While the government has been tinkering with its fuel subsidy policies from time to time, it has largely avoided any structured solution to the problem for years and we don’t expect it to change in the near future. 

GROWTH DRIVERS BPCL has stakes in 27 petroleum exploration blocks — 9 in India and 18 overseas — through its wholly owned subsidiary Bharat Petro Resources. Over the last few years BPCL has been very successful in its exploration with 13 discoveries — 3 in Brazil, 9 in Mozambique and one in Indonesia.
The nine discoveries in the Rovuma block in Mozambique hold an estimated 15-30 trillion cubic feet of recoverable natural gas reserves and have substantially increased the value of this asset. This was validated in the ongoing acquisition deal of London-listed Cove Energy, which holds 8.5% stake in the block. Royal Dutch Shell valued the firm at above $1.6 billion. With this benchmark, BPCL’s 10% stake in the same block alone is worth onethird of BPCL’s current market capitalisation of 24,240 crore.
The testing and certification processes are under way, still the consortium developing the field has already planned an LNG export plant to commence sales by 2017. BPCL’s exploration assets in Brazil also hold great promise. The Wahoo discoveries in the Campos basin hold estimated recoverable oil reserves of 150-200 million barrels. First production is expected in 2017.
Bharat Oman Refinery (BORL), a joint venture of BPCL and the Oman Oil Company with a refining capacity of 6 million tonne per annum, was commissioned in June 2011. BPCL holds a 49% stake in the company with Oman Oil holding 26%. The BPCL management has mentioned several times its intent to float a public issue for BORL. 

FINANCIALS In the first three quarters of FY12, BPCL has made a net loss of 2,651.6 crore against a small profit in same period of last year. Delayed reimbursements from the government have necessitated heavy borrowings, which have resulted in a debt-to-equity ratio of 1.6 at the end of September 2011. In the first three quarters, the interest cost jumped 66% to 1,305.5 crore. 

VALUATIONS BPCL needs to be valued on its assets rather than earnings, which are not under its control. The scrip is currently trading at 1.6 times its book value at the end of September 2011. However, this doesn’t capture the market value of its assets. With the Mozambique stake worth onethird BPCL’s market-cap and its investments in other listed companies making up another 14%, its core business and other assets are valued at a price-to-book value of just 0.8. This undemanding valuation means the downside is protected and gains can be expected in line with the progress in the overseas exploration projects. 

Vital STATISTICS 1-Year Return (%) 17.12 Price to Book Value 1.72 Market Cap ( Cr) 24,121.95 Dividend Yield (%) 2.1