BPCL to invest Rs1 trillion for its next phase of growth

Mumbai: Bharat Petroleum Corp. Ltd (BPCL) will be investing Rs1 trillion between 2016 and 2021 for its next phase of growth, as lower crude price and reduced losses on fuel sales gives the company more headroom for business expansion.

The investments are mainly targeted towards increasing the company’s refining capacity by 40%, branching into the petrochemicals sector, expanding in the city gas distribution business and establishing itself as an oil and gas explorer and producer, the company informed the media on Wednesday.

“We want to have a truly global presence in refining and marketing and exploration and production in the next five years. We have embarked on a new five-year plan called project Sankalp under which the company will be doubling its investments from Rs.50,000 crore in last five years to Rs.100,000 crore in the next five years,” said R. Varadarajan, chairman and managing director, BPCL.

With a substantial presence in refining and marketing in India and exposure to promising oil and gas fields in Brazil and Mozambique, analysts have always said that BPCL is the only company among the three state-owned oil marketing companies to become India’s first integrated—present across the complete value chain—state-owned oil and gas company. These investments, if done as per schedule, can potentially double the company’s revenues and profits over the next five years.

Indian Oil Corp. Ltd (IOCL) and Hindustan Petroleum Corp. Ltd (HPCL) are the other two state-owned refining and marketing companies operating in India.

“As part of the Sankalp initiative, we are planning to go global not only with our upstream investments but also with our expertise in marketing of petroleum products. We are looking at setting up marketing infrastructure in the neighbouring countries as well as in regions such as far-east, Africa and Latin America,” said Varadarajan.

Out of the total Rs.1 trillion, the biggest chunk of Rs.40,000 core, will be invested in the company’s core business of crude oil refining to increase the company refining capacity from 30 million tonnes per annum (mtpa) as on 2015-16 to 50 mtpa till 2020-21. Another Rs.25,000 crore will be invested in the company’s oil and gas exploration and production activities, also called upstream business. This investment will be directed towards its upcoming projects in Mozambique and Brazil and for acquiring new assets globally.

Additionally, the investments will be channelled into beefing up its marketing infrastructure, city gas distribution business and setting up a global presence in the petroleum product marketing space.

However, the investment comes at a cost.

“We realise that this investment will require quite a substantial amount of debt on our part. Although so far the total money to be borrowed is not ascertained, internally we are aware that in the next five years, the company’s debt-equity ratio will go up to 1.5 from the current 0.6,” said P Balasubramanian, director—finance, BPCL.

However, with cash flows starting from the projects outlined, the ratio can be brought back to the current level, he added.

Under the company’s refining capacity expansion initiative which will accrue Rs.40,000 crore, BPCL does not plan to invest into any greenfield capacity but will largely focus on increasing the capacity of its existing units to reach a total refining capacity of one million barrels per day or 50 mtpa.

This will be contributed from its upcoming expansion of up to 15 mtpa at its Kochi refinery in Kerala. Its Bina refinery in Madhya Pradesh will be expanded from 6 mtpa to 15 mtpa, and its Numaligarh Refinery in Assam will be expanded to 9 mtpa from 3 mtpa.

Analysts call the investments ambitious but far-fetched.

“If the investment was planned over a period of 10 years, it could have been possible. But over the next five years, this investment is difficult unless BPCL generates profits of Rs.10,000 crore,” said an analyst with a domestic brokerage, who did not wish to be named due to his company policy.

For an investment of Rs.1 trillion, if the company plans to fund even 50% through debt, its interest burden will be close to a huge Rs.2,500 crore annually, he explained and questioned how the company plans to source the equity part of the funds given that the development of its upstream assets are likely to be delayed as well.

BPCL’s share price always traded at a premium as compared with its peers IOCL and HPCL due to its investments in upstream assets, especially in Mozambique and Brazil. But with fall in crude and natural gas prices in the last one year, the investments have shed a lot of value and the timelines for production have also been delayed.

While natural gas from Mozambique is expected to start flowing from 2020-21 as against 2018-19, its assets in Brazil are expected to start operations by 2019-20, said a company executive, who did not wish to be named.

“It is time to reassess the value of the assets,” admitted Varadarajan, but added that the costs of development have also come down with the fall in crude oil price.

Post the de-regulation of diesel prices from mid-October 2014, BPCL’s shares have gone up by 17% to Rs.820 as on 12 noon on Thursday. Its profit in the last fiscal also showed a healthy growth of about 25% to Rs.5,084 crore.