The Centre’s plans to sell its entire stake in BPCL are expected to face hurdles as the unprecedented slump in global crude prices may deter international interest in the state-owned energy major in the near term, as per a senior government official and sources in the energy industry. The government may have to wait longer for bids at an attractive valuation as major international energy players are battling the financial stress caused by disruption in the crude oil market.
Industry sources said many refining companies globally have filed for bankruptcies recently, creating a negative spiral for energy assets. Since January, a total of 10 companies, including Whiting Petroleum and Echo Energy Partners in the US, have filed for bankruptcies. As prices of crude fall, domestic oil marketing companies (OMCs) such as Bharat Petroleum Corporation Ltd (BPCL) typically tend to benefit from it. But this is the first time that despite oil prices hitting new lows, OMCs had to shut their refining plants and lower their capacity due to the nationwide coronavirus-induced lockdown. This is the first time that refineries in India are running at low capacity of 25-30 per cent, industry sources said. Shutting down of refineries is a big challenge as costs of restarting them rises significantly.
On April 12, the Organization of the Petroleum Exporting Countries and its allies agreed to reduce production by 9.7 million barrels per day (bpd) in May and June — nearly 10 per cent of global supply. However, even this could not stop further fall in oil prices due to the demand collapse, with the International Energy Agency projecting demand to shrink by 29 million bpd this month alone. This has created a tough scenario for BPCL’s stake sale to go through at an attractive price in medium term.
An analyst at a leading brokerage firm, who wished to remain anonymous, said “the government would likely want to wait for the valuation to improve,” adding that major global upstream players, such as Saudi Aramco, who were thought to be interested in purchasing a stake in BPCL would have to cut capital expenditure and acquisition targets, given the impact on their businesses from the fall in crude prices.
Steep fall in demand means the valuation for BPCL would remain depressed for some time. “Even when demand recovers, I don’t think refining margin will recover soon,” he said.
Adequate valuation may take time
Slump in crude oil prices may create fresh challenges for privatisation of BPCL as refineries and oil companies across the world are facing financial stress. Despite the fall in oil prices, leading analysts expect demand to decline over the medium term. Also, many refineries globally are filing for bankruptcies as low prices make exploration of oil and gas unviable. Given that BPCL will be a sort of a model case of privatisation, the government may have to wait to get adequate valuation for its stake sale.
Shares of BPCL fell nearly 55 per cent from the high of Rs 549 on November 21, 2019 to Rs 253 on March 23, 2020 as the lockdown led to a crash in stock markets. It has since recovered to the Rs 350-level per share, still 36 per cent lower from November highs.
The Centre, last month, invited expressions of interest (EOIs) from interested parties with a net worth of at least $10 billion for the strategic sale of BPCL — one of the largest oil marketing and oil refining companies in India with a refining capacity of 38.3 million metric tonnes per annum or about 15 per cent of the country’s total refining capacity.
Divestment of the government’s 52.98 per cent equity stake in BPCL forms a key part of its Rs 2.1-lakh crore disinvestment target for FY21. Finance Ministry officials did not reply to queries seeking comment for this story.
“The valuation for BPCL will be lower due to the current situation and this has partially been reflected in the stock prices. Earnings for BPCL in Q1 would definitely be impacted by lower marketing volumes,” said Mayur Matani, equity analyst at ICICI securities, adding that once economic activity recovers, BPCL would do well on the marketing front as its marketing margins would benefit from low crude oil prices.
“Even if crude oil prices touch $30-$40 per barrel, it is a very good scenario for the marketing business (once demand picks up). So, in the near term, there will be some pain. Nobody who is willing to invest right now is actually looking for results in the next six months,” he said.
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