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Ticket size for BPCL disinvestment is $8 billion, says Macquarie Capital’s Aditya Suresh

The government is getting ready to invite top global oil and gas giants to bid for its stake in Bharat Petroleum Corporation (BPCL). The petroleum ministry is expected to approach multinational companies and their investment bankers after the Union cabinet clears strategic disinvestment of the first set of companies -- which includes BPCL.
The research house Macquarie has written a note on the potential bidders for the oil major. In an exclusive interview with CNBC-TV18, Aditya Suresh of Macquarie Capital Securities spoke at length about the disinvestment process and how the assets of BPCL will fit the global energy majors. “In terms of the cultural aspects that BPCL is going to throw up, it’s going to be a national oil company versus an international oil company,” he observed.
Suresh noted that the BPCL's refining and gas assets would be very valuable for any international oil major. However, the refining assets are not the main reason to bid for an international oil company. "The ticket size is $8 billion, which is meaningful and they fund their own buyback and dividend programmes. There were a few acquisitions as well. So clearly there are a lot of attractive features but quite a few obstacles also to overcome,” he added.
On the stock front, Suresh said GAIL and HPCL would be preferred over BPCL in the oil and gas space.
Edited excerpts from the interview:
It is an interesting report. What are you saying, who is on the top of the list, number one, number two and number three?
There is a lot of excitement in this space with Total, Exon, British Petroleum and Aramco. So conclusion first; in terms of the cultural aspects of what BPCL is going to throw up, it is going to be a national oil company versus an international oil company and within that perhaps if we have to force fit, maybe Aramco, then Sinopec, then ADNOC.
Just to go into this note a bit in terms of what we are doing here, we are leveraging Macquarie’s global coverage and we are looking at how this asset of BPCL fits the global majors. So clearly there are a lot of attractive features but quite a few obstacles also to overcome.
According to you, what is the highest probability of a deal with an international company when it comes to BPCL?
We don’t want to put numbers on that but if I have to 'guestimate', 20 percent.
Any possibility of any of the Indian large companies bidding for BPCL? I am not asking about IOCs of the world, but any of the other companies which are likely to bid, and also on the list of names that you have mentioned, surprisingly Rosneft is not the name, is that a potential bidder which can come and look at buying into BPCL?
Specific to Rosneft, they are with the erstwhile Essar. So I think that partnership holds. With the other, Reliance-BP is always there. Does BPCL’s retail footprint speak well for Reliance’s retail ambition of 10-20 year view? It does. So you cannot rule them out as well.
It is an open clean field as we speak. If we had to rank this, then it will be a national oil company versus any other.
You said there are advantages but there are also things which allow BPCL to be a good fit and things which don’t allow them to be a good fit. I want to focus on not the shortcomings but to any national oil company, what are the things they need to watch out for, things they need to clear up before they go ahead and make a bid, for BPCL to be a good fit?
What the majors are focused on is more retail and cash and petrochemicals, long-dated refining assets which are key focus items in view of the energy transition. I think that is the first point. Sometimes within the asset base, BPCL’s retailing and gas assets make sense but refining not specifically. Total CEO was at an India Energy Forum recently and he referred these in those terms.
Second, the most obvious one is the ability to integrate culture and the fact that this comes with protected jobs – again an ideal outcome if you are an international oil company, comfort run, deregulation – today the brent is at $60 per barrel, there is not much of a subsidy risk. But when you are taking these investment decisions it is 20-30 year decision, so in that horizon getting comfort around the fact that there is deregulation is a key.
The other point we are highlighting here is the ticket size, $8 billion is a meaningful size and majors are funding their own divestment – they fund their own buyback programmes, dividend programmes, there are a few acquisitions as well. So yes, whether it is capital or deregulation or culture or lack of jobs or just a broader taking a step back - let us focus on energy transition, there are quite a few obstacles to overcome.
What are the synergies say between Saudi Aramco and BPCL?
The obvious one would be on crude sourcing to the extent that plays out. Aramco does have interest with other refiners across the region whether that is in Korea or Malaysia. So perhaps benefits from crude sourcing, perhaps that is as much as we can see as we speak.
In terms of across Asia or in this particular region, are there any such large assets, which are on the block or BPCL is going to be the only one large asset, which probably the international players can bid for and acquire if they want to enter India? So in that context, do you expect there will be aggressive bidding for BPCL given that such a large pricey asset and not much is on the block in the Asian region so to speak?
Actually there is a lot on the block, for example -- specific to India maybe BPCL is in the headline today but what has been in the works in China for example is the IPO of Sinopec’s marketing division. Just to put scale in perspective this is probably a transaction which is, call it 3-4x where BPCL is at today in terms of the scale and that is again an area where it has 35,000 fuel stations, there is non-fuel growth opportunity there, they are probably more evolved in that kind of process as well. So that is a transaction which happens at some point. It has been in the works for a few years now. There are other avenues to express an interest in fuel retail.
What is your call on BPCL as a stock? What kind of permutations and combinations have you built in terms of say your target price etc. based on a possible divestment and where does it stand in terms of the pecking order when it comes to the oil and gas space?
Frankly, we missed the divestment trade. So at Rs 350, perhaps BPCL made a lot of sense. At Rs 500 today we are struggling, so we wouldn’t be chasing BPCL here. Our fair value for BPCL is at Rs 500 but we wouldn’t be adding length here so our call is to kind of basically take profit in to strength. We would much rather play a same trade via GAIL and HPCL at current prices.
Any way to think about what Aramco would be willing to play, or should I decipher from your answer earlier that you wouldn’t chase BPCL that most of the upside is already in, I mean so probably if a deal were to happen today would not leave very much room for upside?
Let me put that in our perspective. So our base case is Rs 500. Let me walk you through the path to say Rs 700 on BPCL. So our Rs 500 assumes let us say 6 times EV- EBITDA on refining, 8 times on marketing, there seems no control premium. Let us say that Aramco comes in and says -- 10 percent control premium, and let us say they give BPCL an 8 times EV-EBITDA on refining. I believe they should not be, but let us say they do. Just those two kind of get you to that Rs 700 as an outcome and you will be buyer on that outcome but if I had to assign a probability weight there, probably 10 percent.

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