Anadarko Petroleum Corporation: Mozambique project on track for late 2018 start

Expert Speak

Mozambique project on track for late 2018 start

Negotiations on for gas sales agreement; expect FID by 2HCY14

Anadarko Petroleum indicated that the Mozambique project is on track for late 2018 production

start with initial two 5mmt LNG trains. We hosted a conference call with the US-based Anadarko

Petroleum to get an update and outlook on its JV blocks with BPCL, ONGC and OINL (ONGC/

OINL stake purchase in process). Key takeaways:

3 December 2013

Sector: Oil & Gas

Mozambique development on track for 2018 production start



Anadarko Petroleum

Corporation



Anadarko indicated that the Mozambique project is on track for late 2018

Mr Bill Tedesco

Investor Relations,

production start, with initial two 5mmt LNG trains.

Anadarko Petroleum Corp.

Already certified reserves of 12tcf (Prosperidade discovery) of the 35-65+ tcf

Anadarko Petroleum Corp.

reserve and can support the first two trains.

Mozambique reservoir size of 35-65 tcf and ~25miles from shore is ideal for LNG

is a US-based

independent oil and

development providing cost advantages as against other LNG projects worldwide.

natural gas E&P company,

Mozambique wells can comfortably produce 100-200mmscmfd and hence would

with 2.56 billion barrels

of oil equivalent of

not require large number of producing wells.

It has acquired 17,000 acres of land for the LNG project and expects the Final

proved reserves at year-

end 2012.

Investment Decision (FID) by 2HCY14 and will be preceded by 1) FEED completion

in early 2014, 2) gas sales agreement and 3) Project financing (USD 12-16b capex expected till first two trains).

Company is in discussion with Japan, South Korea, China and India among others for gas sales. Mozambique

is geographically in advantage against other competing LNG suppliers in shipping cost.

Anadarko not to sell more equity in Mozambique, focus on development

Post the recent 10% stake sale to ONGC (expected to be completed in next few months), Anadarko does not

plan to sell further stake and is comfortable to retain its operatorship with 26.5% stake.



Currently, it is operating a rig in Mozambique and with the exploration phase scheduled to end in early 2015,

it is focusing to drill the current exploration inventory.



Anadarko has already signed Heads of Agreement (HoA) with ENI (operator of adjacent Area 4 acreage) in

2012 to jointly plan and construct onshore LNG liquefaction facilities. Some of the common facilities like

airstrip will be shared, but each operator will operate their own offshore facilities. Both the companies have

agreed that the unitization will take place after the first four trains.



Our E&P business valuation of BPCL is at 30% discount to benchmarks

We currently value 45tcf of the estimated recoverable reserves of 35-65tcf in Mozambique at INR139/sh and

value Wahoo reserves (150-200mmbbl) in Brazil at INR12/sh. Our valuation for Mozambique is at ~30% discount

to recent benchmark deals.



While Anadarko operated projects are on track for monetization, we believe there could be significant upside

from the Petrobras operated SEAL basin in Brazil (>1b boe gross oil as per media reports).



Key events to watch out for BPCL

(a) Final investment decision (FID) at Mozambique, (b) reserves for SEAL basin

(Petrobras operated block in Brazil) and (c) continuance of diesel reforms in India.

Our view:

We maintain BPCL as our top pick among OMCs due to its E&P upside potential. The stock trades at 9.4x

FY15E EPS of INR37.4 and 0.5x FY15E adjusted BV. Maintain

Buy

with a target price of INR447.

Harshad Borawake

(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432

Kunal Gupta

(Kunal.Gupta@MotilalOswal.com); +91 22 3982 5445

Investors are advised to refer through disclosures made at the end of the Research Report.

Expert Speak

Mozambique project on track

FID by 2HCY14 and production start in end 2018

Mozambique recoverable reserves at 35-65tcf; in-place resources of 100tcf



Anadarko, operator, estimates the recoverable reserves from the Mozambique

block's at 35-65tcf of natural gas and in-place resources at >100tcf of natural gas.

As acreage is in exploratory (exploration phase ends early 2015) and appraisal

stage, there is likely to be an upside potential to our reserve estimates.

Anadarko indicated that the Mozambique project is on track for late 2018

production start with initial two 5mmt LNG trains.

Already certified reserves of 12tcf (Prosperidade discovery) of the 35-65+ tcf

reserved can support the first two trains.

It has acquired the land for LNG project and expects the Final Investment Decision

(FID) by 2HCY14 and will be preceded by 1) FEED completion in early 2014 and 2)

Gas sales agreement.

Company is in discussion with Japan, South Korea, China and India among others

for gas sales. Mozambique is geographically advantaged against other competing

LNG suppliers from shipping cost point of view.

Mozambique block has witnessed 13 successful wells till date (meters)

Discovery/ Appraisal

Windjammer

Barquentine

Lagosta

Tubarao

Barquentine-2 (Appraisal)

Camarao

Barquentine-3 (Appraisal)

Lagosta-2 (Appraisal)

Lagosta - 3 (Appraisal)

Barquentine-4 (Appraisal)

Golfinho

Atum

Orca

Date

Oil/Gas Pay Zone

Mar-10

Gas

365

Oct-10

Gas

126

Nov-10

Gas

168

Feb-11

Gas

Aug-11

Gas

Oct-11

Gas

Nov-11

Gas

202

Jan-12

Gas

237

Feb-12

Gas

176

Apr-12

Gas

160

May-12

Gas

Jun-12

Gas

Apr-13

Gas

Water Depth

1,465

1,576

1,539

900

1,650

1,441

1,575

1,467

1,404

1,650

1,027

1,000

1,061

Depth

4,250

5,115

4,221

3,337

2,450

2,409

2,509

2,868

4,180

4,537

3,860

4,996

Comments

No resource number available yet

Recoverable reserves - 3-4 tcf (indicative)

Recoverable reserves - 6 tcf

Recoverable reserves - 10 tcf

Recoverable resource range - 15-30tcf

Recoverable resource range - 17-30+tcf

Prosperiade - 17-30 tcf, Other - 7-20+tcf

Prosperiade - 17-30 tcf, Other - 10-30+tcf

Prosperiade - 17-30 tcf, Golfinho-Atum -15-35+tcf

Source: Company, MOSL

JV partners in the Mozambique block

Location of the proposed Mozambique LNG park

* ONGC and OINL stake purchase in progress

3 December 2013

Source: Anadarko, Company, MOSL

Expert Speak



Key events to watch out

in the near term before the likely FID approval by 2HCY14

are a) further reserve certification (currently approved 12tcf enough for first two

trains) and b) gas sales agreement (clarity on gas pricing).

Anadarko estimates recoverable resources at 35-65tcf after two new discoveries in northern

section of block

Source: Anadarko, Company, MOSL

Value BPCL's Mozambique at INR139/sh; ~30% discount to benchmarks

We value BPCL's stake at INR139/sh. assuming first gas by 2018, recoverable reserves

of 45tcf, valued at USD3.5/boe. We have taken a discounting rate of 12% to account

for country risk of Mozambique. We believe there could be upside to our numbers,

post clarity on reserves after the reserve certification and FID in 2014.



Our value for BPCL's 10% stake is at ~30% discount to the recently concluded deals

of ONGC and OINL with Anadarko and Videocon in this block.



3 December 2013

Expert Speak

Mozambique Development: Advancing toward 50 MMTPA

Source: Anadarko, MOSL

Mozambique Expolration and Appraisal: Focusing on upside potential

Source: Anadarko, MOSL

3 December 2013

Expert Speak

We assume 45 tcf of recoverable reserves in our base case

Likely recovery (tcf)

Likely recovery (mmboe)

Valuation (USD/boe)

Value (USDb)

Value (INR b)

BPCL stake (%)

FY19 Value to BPCL (INRb)

FY19 Value (INR/sh)

FY15E Value to BPCL (INRb)

FY15E value (INR/sh)*

Implied EV/boe (USD)

*discounted by 5 years @12%

Low

35.0

6,650

3.5

23.3

1,373

10%

137

190

108

High

65.0

12,350

3.5

43.2

2,550

10%

255

353

145

200

Base Case

45.0

8,550

3.5

29.9

1,766

10%

177

244

100

139

2.0

Source: Anadarko, MOSL

LNG development - key for block success

For monetization of this large resource base, Anadarko has decided to build initially

a two-train LNG facility of 5mmtpa/year and later expand it.



With continued success in basin, Anadarko has indicated that there is possibility

of expanding it to 10 trains.



The distance of the basin from the shore is only 50km and Mozambique's

geographic location is also ideal as it is near to high gas demand areas of Asia.



Production could ramp-up to 50mmtpa (10 trains), Mozambique to become third largest LNG

supplier in the world

Source: Company, MOSL

Timelines for BPCL's E&P Projects

Source: Company, MOSL

3 December 2013

Expert Speak

Brazil - a lot more to come

We value Anadarko operated Wahoo discovery block at INR12/sh

BPCL has stake in 10 offshore blocks in Brazil, out of which four are in Sergipe and

Alagoas basin, three in Espirito Santo basin, two in Potiguar basin and one in

Campos basin.



Till date, BPCL has made five discoveries in Brazil, one in Campos (Operator-

Anadarko) and Espirito Santos (Operator-Petrobras) basin and three in Sergipe-

Alagoas (Operator-Petrobras) basin. Out of these five discoveries, only Anadarko

has indicated the recoverable reserves estimate of 150-200mmbbl for Wahoo-1

discovery in Campos basin.



We value BPCL's stake (only Campos - Wahoo) at INR12/sh. We have assumed the

recoverable reserves at 200mmboe and have valued it at USD10/boe. We have

taken a discounting rate of 12%. We believe there could be a significant upside to

our numbers, post clarity on reserves after the reserve certification for discoveries

in the Petrobras operated Sergipe and Alagoas (SEAL) basin.



We value 200mmboe of recoverable reserves for Wahoo discovery

Wahoo discovery - FY17 Production

Likely recovery (mmboe)

Valuation (USD/boe)

Value (USDm)

Value (INR m)

BPCL stake

Value to BPCL (INR m)

Value (INR/sh)

FY15E value

Implied EV/boe (USD)

Discounted by (years)

200

10.0

2,000

118,000

12.5%

14,750

6.6

4.5

Source: Anadarko, MOSL

BPCL present in 10 blocks in four basins in Brazil

Reserves estimates of Wahoo discovery at 150-200mmbbl

Source: Anadarko, MOSL

3 December 2013

Expert Speak

Valuation & view



E&P upside potential key differentiator:

E&P upside potential is BPCL's key

differentiator vis-à-vis HPCL and IOCL. BPCL's E&P portfolio has turned out to be a

huge success, with multiple discoveries in its Brazil and Mozambique acreage.

Value BPCL at INR447/share, including investments at INR210/share:

On FY14E basis,

we assign a P/B multiple of 1x, EV/EBITDA multiple of 4.5x and P/E multiple of 9x

arriving at a fair value of INR447/share based on the average of P/B, EV/EBITDA and

P/E valuation methodologies. We value BPCL's investments at INR210/share, which

comprises of E&P potential: INR151/share, listed investments: INR35/share (post

25% discount), and treasury shares: INR24/share

The stock trades at 9.4x FY15E EPS of INR37.4 and 0.5x adj. FY15E BV after adjusting

for investments. BPCL is our top pick among OMCs. Maintain

Buy.

Key events to watch out

(a) Final investment decision (FID) at Mozambique, (b)

reserves for SEAL basin (Petrobras operated) and (c) continuance of diesel reforms.

Key risks are

(a) delays in the diesel reforms and (b) shift of refinery transfer

pricing to export parity

We value BPCL at INR447/share

EV/EBITDA (FY15E 4.5x)

P/B (FY15E 1x)

P/E (FY15E 9x)

Average

372

431

539

447

Source: MOSL

We value BPCL's investments at INR210/share

Investments

Oil India

Petronet LNG

Indraprastha Gas

Treasury Shares

E&P Value

Mozambique

Brazil (Wahoo)

Brazil (SEAL)

Total

INRb

100

152

INR/sh

139

210

Details

25% discount

CMP/TP

BPCL has 10% stake

BPCL has 12.5% stake

5 successful wells, await reserve estimates

Source: MOSL

BPCL P/B Chart: Trading at 0.5x adj. for investments FY15E BV

BPCL P/E Chart: Trading at multiyear low

Source: Company, MOSL

3 December 2013

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