Brazil is next big market for BPCL: Antique

Moneycontrol Bureau

The next phase of growth for Bharat Petroleum (BPCL) will come from upstream activities in Brazil, states Antique Broking in its latest report. Taking a cue from the recent oil and gas discoveries that BPCL has made in Brazil, the brokerage believes that consistency in exploration activities will put BPCL on the higher pedestal than industry players.

For obvious reasons, the state-run oil marketer is betting big on its recent discoveries  and hence has earmarked Rs 45,000 crore investments in its overall upstream business.

The company has in the past few months made several announcements about completing drilling activities in a few wells which have accumulated oil and gas reserves. However, the true potential of these reserves will be known in three years.

Of the total blocks that BPCL owns in Brazil with other partners-- Sergipe and Alagoas and Campos seem to be the most promising and a reserve related announcement from these basins is likely soon.

In other blocks too, drilling process is on and an appraisal plan is likely to be submitted to the regulator. However, valuations on upstream activities can be made only after clarity on the quantum and quality of reserves, states the brokerage.

Antique further states that though the true potential of Brazil resources will be known in near future, it expects overseas blocks to provide substantial fillip to BPCL's upstream portfolio. The firm is prompted to re-iterate a 'buy' on the stock with a target price of Rs 442/share.

Investment rationale:  BPCL has been one of the best performing stocks amongst its peers on account of successful upstream activities. It has outperformed Hindustan Petroleum and Indian Oil Corp in IHFY13 due to superior gross refining margins (GRMs) which was USD 4.6/bbl when compared with HPCL's USD 1.2/bbl and IOC's USD 1.2/bbl.

Along with its peers, BPCL is likely to get compensated for losses it incurs on selling petroleum products at government dictated rates.  "We believe, the practice of bailing out the weakest OMC (in this case HPCL) would result in the strongest one (BPCL) posting significantly better earnings,"  said the brokerage.  BPCL's net loss in 1HFY13 was Rs 38 billion which is lower than HPCL's Rs 69 billion despite witnessing higher under-recoveries of Rs 61 billion against Rs 56 billion which HPCL had reported.