Fitch Rates Bharat Petroleum’s US$ 2bn MTN Programme as ‘BBB-‘
Company’s net leverage to increase to around 5x over the next two to three years
KEY RATING DRIVERS
Strong Government Linkage: BPCL has very strong linkages – operationally and strategically – with its 54.9% shareholder, the Indian state (BBB-/Stable). Its rating is equalised with that of India based on Fitch’s Parent and Subsidiary Linkage criteria.
BPCL continues to sell public distribution kerosene and household LPG at below market prices under a regulated pricing regime, although diesel prices were deregulated in October 2014. Fitch believes that BPCL continues to be a strategically important entity for the state.
Before the deregulation of diesel pricing, the prices of around two thirds of the petroleum products (including retail diesel, public distribution kerosene and household LPG) marketed by BPCL were regulated by the government, and sold at prices lower than international market prices. The government funded these under recoveries (UR; difference between market prices and regulated prices) partly through direct budgetary support and partly by directing upstream oil companies to provide discounts to BPCL.
Significant Player: BPCL is the third-largest refiner in the country with a capacity of 30.5 million tonnes per annum (mtpa) that accounted for 14% of capacity in India, and the second-largest marketer of petroleum products with a 21% market share. In the financial year ended March 2014 (FY14), BPCL marketed 34.3mtpa (FY13: 33.7mtpa) domestically, exported 3.1mtpa (FY13: 3.2mtpa) and refined 28.7mtpa (FY13: 28.6mtpa) of petroleum products.
Under Recoveries Impact Working Capital and Debt: BPCL’s gross UR in FY14 was INR345bn (FY13: INR390bn), which was covered by government subsidies of INR184bn (FY13: INR219bn) and discounts from upstream players of INR156bn (FY13: INR168bn). BPCL shouldered INR5.1bn of the UR (FY13: INR2.5bn). BPCL’s working capital position has been impacted because of delays in the receipt of subsidy payments from the state.
Diesel accounted for the 52% of BPCL’s FY14 UR, but the amount of diesel UR is likely to decline substantially following the deregulation of diesel pricing. Further, the fall in oil prices to below USD50 per barrel in January 2015 from more than USD100 a year ago, will also help bring down inventory costs. These two events will reduce BPCL’s working capital requirements and the short-term debt required to fund it.
High Capex Planned: The company has outlined a fairly high capex of more than INR300bn over the next four years. The largest part of the capex is for the expansion of the Kochi refinery to 15.5mtpa from the current 9.5mtpa at a cost of around INR165bn. The high capex is likely to lead to continued negative free cash flows over the next four to five years.
Upstream Discoveries: BPCL has 20 upstream blocks (eight in India and 12 abroad), from which it has some successful discoveries – notably in the Rovuma Basin in Mozambique (in which it has 10% participating interest), in its Brazilian assets (20% participating interest), and West Australian onshore assets in Perth (27.8% stake). The Mozambique asset is assessed at having recoverable resources of 50trn-70trn cubic feet of natural gas, and the investors in the project also plan to set up a natural gas liquefaction plant with two trains with an initial capacity of 5mtpa each.
Credit Profile to Weaken: At FYE14, BPCL had a net leverage (net debt/EBITDA) of 2.8x (FYE13: 3.8x) and interest cover of 4.7x (FYE13: 2.6x). With BPCL likely to generate negative free cash flows due to high capex, Fitch expects the company’s net leverage to increase to around 5x over the next two to three years. BPCL has a comfortable liquidity position with cash and cash equivalents of INR50bn at end-September 2014 (FYE14: INR69bn). The company also enjoys good access to international and domestic capital markets.