Mumbai: Not many outside the energy sector know Ashok Sinha. At most, people know him as a former chairman and managing director (CMD) of India’s second biggest oil marketing and refining company—Bharat Petroleum Corp. Ltd (BPCL). What is less known is that the decisions taken during his tenure between fiscals 2005 and 2010 are slowly transforming BPCL into an integrated energy firm and putting it on track to take on its larger rival Indian Oil Corp. Ltd (IOCL).
An integrated oil and gas firm is one which has a substantial presence across the value chain of its business. The exploration and production (E&P) businesses are termed as upstream operations, transportation forms the midstream segment, while refining, marketing and petrochemicals are categorized as downstream operations.
IOCL is India’s largest state-owned oil and gas refiner and marketer with a revenue of `4,73,210 crore in fiscal 2014. BPCL and HPCL follow with revenues of `2,60,060 crore and `2,23,271 crore, respectively. In terms of growth rates and stock performance, though, BPCL has already overtaken the others.
In the last five years, while IOCL revenue grew at a compounded annual growth rate (CAGR) of 15.92%, BPCL grew 16.39% and HPCL, with the lowest base, 17.34%. In terms of five-year CAGR of net profit, BPCL trumped all with a growth of 19.09%, while both IOCL and HPCL have posted a negative CAGR of 2% and 6%, respectively.
In fact, from 27 October 2009 till 27 October 2014, BPCL shares have gained over 170% from `254.30 to `686.35, as against IOCL’s 9.58% and HPCL’s 48.19%. During the same period, the benchmark Sensex has gained almost 60%, as per Bloomberg data.
On Monday, IOCL closed at `353.25 per share and HPCL closed at `515.20 per share.
Part of this outperformance is due to the decisions taken in fiscal 2006. At that time, as it is now, BPCL earned 100% of its revenue from refining and marketing activities, with minor interests in the domestic exploration and production business.
These investments, says BPCL, will start paying off by fiscal 2018. That is when two of its major upstream interests—Brazil and Mozambique—come on stream, making it a fully integrated global energy firm.
“We knew the subsidy would eat into the company’s profits for a long time and our investments in domestic E&P blocks under the new exploration licensing policy regime were not yielding anything. That was the time when we decided to venture out,” said Sinha in a phone interview on 22 October.
BPCL had a strategic plan to double volumes and increase profitability fourfold over a five-year period but that was unrealistic if it was confined to India.
“In India, our gross refining margins were stuck between $1-2 per barrel and we learnt that in E&P, we could have margins as high as $30-40 per barrel. That led to a foray into foreign shores. We had several brainstorming sessions and meetings between 2005 and 2006 and finally formulated a plan,” Sinha recalls.
The discussions led to the formation of a dedicated upstream subsidiary in 2006 called Bharat Petro Resources Ltd (BPRL).
A team of four-five geologists and geo-physicists on contract from upstream companies in India and top management officials from BPCL, formed its core team.
“Our focus was sharp, we wanted to enter assets which were in the pre-drilling stage so that the lead time in bidding for an asset, then winning it and then the long-drawn process of seeking approvals is saved,” Sinha said.
This led the company to Brazil in fiscal 2007. Videocon Industries Ltd was looking for a joint venture partner to buy out 10 blocks of Encana Corp. which it held in Brazil and BPCL agreed to take a look. The negotiations succeeded and together, the companies invested $150 million in the Brazil assets.
Then came Mozambique, the bigger gamble.
Sinha said the company had already established a relationship with Anadarko Petroleum Corp. in Brazil where it was a joint partner in one out of the 10 blocks that BPCL and Videocon bought into. This led the two companies to Mozambique when Anadarko was bidding for an offshore block in the Rovuma basin in the African country.
While there were no exact estimates of reserves in Mozambique, the company went ahead with the investment.
“It was a wildcat—a hydrocarbon reserve which might or might not lead to results. We wanted to get some more partners, but nobody showed interest as companies in India rejected it as a difficult country to work and not too promising a venture. But we persisted and finally bought a 10% stake for a paltry sum of $80 million by August 2008,” he said, adding Videocon picked up an additional 10% stake.
Both bets paid off.
The Mozambique block has total reserves of up to 50-70 trillion cu. ft, while the Brazil blocks are expected to hold over a billion barrels. Final reserve figures, though, will be announced by mid-2015 by Petrobras SA which operates the block.
In an endorsement for BPCL’s investment, last year, ONGC Videsh Ltd, the overseas arm of India’s biggest upstream company Oil and Natural Gas Corp. Ltd (ONGC), along with Oil India Ltd (OIL), bought out Videocon’s stake for $2.4 billion and another 10% from Anadarko for $2.6 billion.
Bhaskar Chakraborty and Mohit Agarwal from India Infoline Finance Ltd (IIFL) in a June report pegged the value of the Mozambique block at `227 per share and the Brazil block at `200 per share. The estimates remain valid as there have been no updates since then. Some of this additional value has already been captured in the BPCL stock price, which is trading at `686.35 per share as on Monday, compared with `564 per share when the report was published.
“The company has seen its valuations at Mozambique soar by 30 times within a span of six years,” said Dhaval Joshi, analyst with brokerage Emkay Global Financial Services.
While a lot of the ground work for converting BPCL into an integrated energy firm was done earlier, the onus is now on current CMD S. Varadarajan to reposition the company.
“In five years, we will indeed become a truly integrated global energy player with downstream operations in India and upstream operations internationally,” said Varadarajan in a phone interview on 22 October.
“Brazil, where we have crude oil assets, will come on stream by fiscal 2018 and natural gas-rich Mozambique will be ready by fiscal 2019. This will ensure a steady stream of revenue and profits for the company from the upstream business which will ensure complete integration for the company,” Varadarajan added. He, however, declined to give projections for revenue and profits from the upstream business.
BPCL currently has a 30.5 million tonnes per annum (mtpa) refining capacity and 34 mtpa in marketing capacity. The company is also planning a `5,000 crore expansion into the petrochemicals segment at Kochi, and has a presence in the midstream segment through a joint venture with Petronet LNG Ltd and investments in city gas distribution.
Across its upstream operations, the company plans to invest `10,000 crore in Mozambique as part of its share towards a 10 mtpa LNG terminal project in Mozambique, while Brazil investment figures are still to be finalized, an investment of `3,000 crore is expected, said D. Rajkumar, managing director of BPRL, during an interaction with Mint on the sidelines of BPCL’s annual press conference on 18 September.
While former and current officials credit BPCL’s transformation to well-thought out strategy, peers say luck has played a part as well. “The company has been singularly lucky,” said a former chairman of one of India’s public sector oil and gas companies.
Concerns remain.
“There are serious political risks associated with an African country and that will be an important impediment to tide over,” said Debasish Mishra, senior director, Deloitte Touché Tohmatsu India Pvt. Ltd, while commenting on BPCL’s Mozambique plans.
Elara Capital Ltd, in a note on 5 September pointed out that of late, the development of liquefied natural gas (LNG) trains in Mozambique has seen serious cost escalations, which could translate into higher debt levels for BPCL.
As compared with its peers IOCL and HPCL, BPCL holds the least debt on its books.
According to Bloomberg, BPCL had a debt of `33,152.27 crore and a debt-equity ratio of 1.61 as on fiscal 2014 end, as against IOCL’s debt of `94,915.88 crore and a debt-equity ratio of 1.37 and HPCL’s `47,993.78 crore and 3.42.
Source: Mint; 28 Oct 2014
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