JPM - Crude Reality

Asia Pacific Equity Research
24 November 2010
Crude Reality
Gas purchase agreement signed by Chevron Pacific
Indonesia
Gas purchase agreement is signed between Pertamina Talisman Asia Oil & Gas
Jambi Merang and Chevron Pacific Indonesia - Stevanus JuandaAC, AC
Brynjar Eirik Bustnes
Indonesia (852) 2800-8578
BP Migas announced that it had facilitated the gas purchase agreement brynjar.e.bustnes@jpmorgan.com
between Pertamina Talisman Jambi Merang and Chevron Pacific J.P. Morgan Securities (Asia Pacific) Limited
Indonesia. The contract is valued at US$577MM with a volume Sukit Chawalitakul
96,919MMbtu. Currently the gas plant at Jambi Merang is being (66-2) 684-2679
constructed and the initial gas supply from Jambi Merang will be used for chawalitakul.sukit@jpmorgan.com
the enhanced oil recovery for Chevron Pacific Indonesia in Duri and JPMorgan Securities (Thailand) Limited
Minas, which is declining. The Chevron Pacific operation is important to Samuel Lee, CFA
Indonesia’s oil production as it contributed 45% of Indonesia’s national oil (852) 2800-8536
output. Indonesia’s target FY10 oil output was recently revised downward samuel.sw.lee@jpmorgan.com
from 965,000bopd to 960,000bopd due to gas pipeline leakage, and the J.P. Morgan Securities (Asia Pacific) Limited
target for FY11 is 970,000bopd. Pradeep Mirchandani, CFA
(91-22) 6157-3591
Click on the links below for the latest news, research, energy events and
pradeep.a.mirchandani@jpmorgan.com
share price movements from Asian Oil & Gas Team.
J.P. Morgan India Private Limited
Oil Markets Weekly – Global perspective
Stevanus Juanda
Highlights during the week (62-21) 5291 8574
Latest research stevanus.x.juanda@jpmorgan.com
PT J.P. Morgan Securities Indonesia

• Chemical Reactions – Taiwan
Akhil Handa
• PTT Chemical Public Company
(91-22) 6157 3255
• PTT Public Company akhil.x.handa@jpmorgan.com
• Indorama Ventures J.P. Morgan India Private Limited
• Indian Oil Corporation Brent price ($/bbl)

• Oil India Ltd. 90
• Hindustan Petroleum Corporation (HPCL)
• Indraprastha Gas 80
• Bharat Petroleum Corporation (BPCL)

70
Sector drivers: Upstream
Sector drivers: Refining 60
Sector drivers: Petrochemicals
Jan-10
Mar-10
Jul-10
Sep-10
May-10
Nov-10
Valuation
Pricing summary Source: Bloomberg.
Brent Complex GRM PE-Naphtha
$/bbl $/bbl $/mt
2006 66 5.2 620
2007 73 7.3 594
2008 99 7.4 608
2009 62 2.6 575
2010 YTD 78 4.1 465
Source: Bloomberg, CMAI, J.P. Morgan estimates
See page 21 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Brynjar Eirik Bustnes Asia Pacific Equity Research
(852) 2800-8578 24 November 2010
brynjar.e.bustnes@jpmorgan.com
Oil Markets Weekly: Taking Advantage of

Volatility
Lawrence EaglesAC • What a difference a week makes. After pushing close to $90/bbl on QE2 and
(1-212) 834-8107 reports of widespread Chinese diesel shortages, and with discussions starting to
focus on whether the Saudis might ease supply into the market to help contain
lawrence.e.eagles@jpmorgan.com
prices, Brent crude briefly fell to $83/bbl earlier this week. Now the focus is on
JPMorgan Chase Bank, NA Chinese tightening measures and Eurozone troubles. While there are clearly
financial risks, we do not see anything yet that changes the tightening physical
market. Of course, any potential hiccup in a fragile global economic recovery
merits concern, but in our view recent developments are simply a temporary
distraction from constructive fundamentals and offering a buying opportunity.
• Recent economic data has consistently exceeded expectations and our Economics
Research team believes the global economy is poised for a further lift going into
1Q 2011. Chinese tightening measures may slow the economy marginally, but
our Economics Research team continues to forecast strong economic growth of
9.0% for 2011. The impact of the policy-induced gasoil shortages on regional
diesel prices remains murky as domestic and regional refiners are ramping up
runs in response. But clearly it is supportive for crude, as oil is being pulled into
power.
• Evidence that we are in the midst of a fundamentally tightening market abounds.
OECD commercial inventories continue to drawdown even as floating storage
has moved onshore throughout the year. Most recently, US inventories pulled
back sharply this week, declining 7.3 mb. Anecdotally we understand Chinese
inventories are low in some areas. China is the only the most recent example of
oil being pulled into power. Latin American and the Middle East are seasonally
relying heavily on oil in power generation.
• Pricing also indicates a firm underlying market. After slowly inching into
backwardation last week, Dubai M1-M2 sits firmly at $.20/bbl. Middle East
OSPs for Asia for December were recently raised across the board.
• Oil supply/demand balances are tightening structurally as the non-OPEC supply
increases seen earlier in 2010 are tapering off. Demand is also surging seasonally
heading into winter. Refinery runs are ramping up quickly following the global
maintenance peak in October, increasing by nearly 2mbd in November. The
critical point is that supply/demand balances imply that oil prices must rise to a
level where OPEC is forced to consider increasing supply. This does not happen
below $90/bbl. It may happen if prices spike over $100/bbl in 2011.
• Financial issues aside, among the well-known major threat to Asian economic
growth and oil product demand is a disease outbreak, and we note that Hong
Kong just reported its first case of “bird flu” since 2003. The Hong Kong
government raised its bird flu alert to “serious.” The threat is remote, but it is real,
in our view.
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(852) 2800-8578 24 November 2010
Highlights during the week

Japan Drilling gets more drilling work
The Japan Drilling Company is set to start two new deals for work off Sri Lanka and
Burma. JDC has signed a contract with Cairn India to drill three firm wells and two
optional wells off Sri Lanka. JDC will use its deep-water drillship Chikyu and is
scheduled to start work in early July 2011. Separately, JDC signed a drilling contract
with Daewoo International to drill four firm wells and one option well off Sittwe in
Burma. JDC will use its semi-submersible drilling rig Hakuryu-5 for this.
Turkmen gas set to flow to central China

Turkmenistan gas piped through China's second west to east pipeline will reach
residential users in central China in early December, ahead of schedule (it was earlier
slated for startup in 2011). PetroChina, operator of the gas project, opened the valve
earlier this week for part of the eastern section of gas pipeline. The newly started
section spans nearly 1400 kilometres from Zhongwei in northern Ningxia region to
Huangpi in central Hubei province.
Indonesia awards four blocks

Indonesia has awarded four exploration blocks to local and foreign companies. The
four companies are expected to spend a total of $28 million for exploration which
included $4.2 million signature bonus for the government.
Petrobangla plans to double output by 2015

Petrobangla, will double its gas production by 2015 by extracting nearly 1800
million cubic feet per day more. At present Bangladesh's demand for gas is 2500
MMcfd against the production of about 2000 MMcfd and the demand of natural gas
is expected to rise to 4500 MMcfd in 2020 as per the chairman of Petrobangla.
Bangladesh Petroleum Exploration and Production Company Limited (BAPEX), the
exploration arm of Petrobangla, has plans to drill eight exploratory wells by the year
of 2012.
Petronas hands Total deep-water patch

Total is primed to explore the deep waters off Sarawak after Petronas awarded Block
SK317B to the French giant. Under the terms of the production sharing contract,
Total will operate the deep-water Block with an 85% stake, while Petronas Carigali
will hold the remaining 15% interest. Total is committed to drilling one exploration
well, shoot 400sq km of new 3D seismic data and reprocess 500 line km of existing
2D seismic data. Petronas said the minimum financial commitment is valued at $31
million. Block SK317B lies in the eastern part of the Sarawak basin in water depths
of between 200 and 1000 meters.
CNPC cuts investment plan

CNPC (parent of PetroChina) has cut its annual overseas oil and gas investment plan
for the five years ending 2015 to focus on returns rather than output. The
management did not specify the percentage of cuts or annual investment plan.
According to Deputy General Manager Wang Dongjin, CNPC had set specific
3
(852) 2800-8578 24 November 2010
indicators including returns on capital, net cash flow and internal rate of return for
overseas projects, and was no longer only targeting fast expansion. The company
currently operates 81 oil and gas projects in 29 countries, up from 58 projects in 22
countries at the end of 2005.
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(852) 2800-8578 24 November 2010
Latest research
The following extracts are from recently published research. Please see the relevant
research report and important disclosures, including a discussion of valuation
methodology and risks to price targets, for any security recommended herein before
forming any investment opinion whatsoever. J.P. Morgan research is available at
http://www.morganmarkets.com, or you can contact the analyst named above.
Chemical Reactions – Taiwan

Formosa Group's Ningbo expansion plans – ALERT
• News report today indicates the Formosa Group is looking to spend US$2.29b in
Ningbo, China to expand their current operations there. Construction is likely to
start in 2012 and finish in phases during 2013- 2014. While these projects will
continue to focus on intermediate chemicals or downstream plastics, they could
also be seen as a precursor to Formosa’s ultimate goal of building an Ethylene
plant in Ningbo, as the feedstock requirements could justify the new upstream
investments.
• Formosa Ningbo Ethylene getting closer? According to Formosa, around 3m
tons of new Ethylene capacities will be allowed to be built in Zhejiang province
during the 12th 5-year plan, with 2m tons already been allocated to Sinopec
Zhenhai Refining, an existing integrated refining/ethylene producer. With
Formosa’s new willingness to build an Ethylene plant without upstream refining,
work in a 50/50 JV and the strong backing from the local government, we believe
the dream of Formosa founder YC Wang (Chinese cracker) appears to be much
closer.
• Chinese operations strong: According to Economic Times, YTD Oct Formosa
Ningbo site revenues reached RMB17.7b, and are likely to reach upwards of
RMB20.0b, up 11% from 2010. Based on 9M actual data, we estimate combined
2010 profits from Formosa Chinese operations to be NT$13.6b (+55% Y/Y),
driven by stronger than expected domestic demand for plastics and a huge
turnaround in NPC's electronics and polyester business. Around 6% of FPC’s
2010 pre-tax profits will be from China while it is around 11% for FCFC and
NPC.
• Near-term neutral, longer-term positive: We believe the near-term share price
reaction to this set of news will be muted given that some approvals are still
needed and commercial operations is not likely to take place until 1H 2013 at the
earliest. However, we see this as a positive development longer-term as the
Formosa Group’s last major investment was in 2006 with the completion of their
#3 Olefins unit and expansion opportunities in Taiwan remains limited due to
various constraints.
For more details, this report can be accessed on Morgan Markets
(www.morganmarkets.com) or click here.
Analyst: Samuel LeeAC, CFA (852-2800 8536), samuel.sw.lee@jpmorgan.com
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PTT Chemical Public Company

3QFY10 Results: Below expectations
• PTTCH reports net profit of Bt2.0B for 3QFY10, down 28% Y/Y. However,
when FX translation gains are stripped out, core profit was Bt1.26B, down 53%
Y/Y and down 47% Q/Q. The performance is below our expectations, with 9M10
accounting for 62% of our FY10E full-year estimates.
• Olefins: The olefins division struggled during 3Q10 with segment profits of
Bt22MM, down 99% Y/Y. A sharp further deterioration in spreads helped
explain this poor profit performance. Olefins volume was also down 30% Y/Y to
308,608 tons due to a maintenance shut-down as well as gas re-allocation for
testing of a new unit.
• Poly-olefins: Downstream poly-olefins performed reasonably well with 3Q10
segment profits of Bt1.4B, up 12% Y/Y. Poly-olefins spreads held up better than
olefins. Also, the gradual ramp up of the LLDPE unit means higher volume for
the product (97,235 tons, 97% utilization).
• Other segments continue to struggle. MEG segment profits fell steadily due to
declining spreads while oleo-chemical divisions (both domestic and international)
were loss-making during the period.
• Outlook and PT: PTTCH should enjoy a recovery during 4Q10, with the recent
bounce in ethylene and poly-olefins spread (although we believe it's likely that
spreads will correct again in 1Q11). The gradual ramp up of the company's new
cracker and downstream units should also steadily boost volumes. Our Jun-11 PT
of Bt92/share is based on a target P/B of 1.0x, which is equivalent to the
company's LT ROE/COE. We also add an implied 25% growth premium (to
reflect PTTCH's robust capacity growth) to this P/B value to derive our PT. Key
upside risks: (1) a strong and sustained increases in key petrochemical spreads;
and (2) a potentially attractive acquisition or a major new project development.

Analyst: Chawalitakul SukitAC, (66-2-684-2679), chawalitakul.sukit@jpmorgan.com
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(852) 2800-8578 24 November 2010
PTT Public Company

3QFY10 Results: Slightly below expectations
• PTT reported net profit of Bt21.7B for 3QFY10, up 28% Y/Y. However, when
FX translation gains (at parent and associate levels) are stripped out, core profits
fell to Bt14.9B, down 6% Y/Y and down 7% Q/Q. The performance is slightly
below our expectations, with 9M10 accounting for 71% of our FY10E forecasts.
• Associates drag: PTT’s key petrochemical associates (PTTCH, PTTAR, IRPC)
all had a fairly bleak 3Q10, depressed by poor petrochemical spreads. This pulled
associate income down to Bt1.0B—the lowest level since 4Q08. Gas business:
Volume for this division remains very vibrant with 3Q10 output of 4,152MMcfd,
up 12.9% Y/Y. Gas separation plant volume also rose 10.8% Y/Y to 1.184MM
tons, thanks to the revamped ethane plant. However, very poor petrochemical
prices mean depressed GSP prices (net-back). Hence, despite record volume, gas
EBITDA fell 8% Y/Y to Bt11.0B. Oil marketing and international trading:
Oil marketing EBITDA fell 18% Y/Y to Bt2.9B due to lower margins of key
gasoline and diesel products. However, weaker oil marketing division was off-set
by better performance at international trading, buoyed by higher trading margins.
• Outlook and PT: We foresee stronger profits going into 4Q10. Recovery in
associate performance (especially PTTAR and Thai Oil) should lead to much
improved associate profits during the period. Upstream PTTEP subsidiary should
also provide higher contributions— especially with no write-off expense as seen
during 3Q10. Our Jun-11 PT of Bt395 is based on SOTP valuation (please see p.2
pie chart for segment breakdown). Key risks: (1) low petroleum prices hurting
E&P cash flows, (2) low gas demand hurting gas business cash flows and (3)
regulatory risks such as price control that hurt the company’s return and
profitability.

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(852) 2800-8578 24 November 2010
PTT Public Company

Upping the coal interest
• Buying more coal: PTT reported that it will pay A$544MM (Bt17B) to acquire
the coal assets of Straits Resources (SRL). The deal will increase PTT's effective
stake in Singapore-listed Straits Asia (SAR) from 27% to 46%. PTT will also
have increased stakes in Brunei and Madagascar coal ventures. Management
expects the transaction to close (subject to SRL shareholders’ and FIRB
approval) by February 2011.
• Two producing Indonesian mines: The key assets for SAR are Sebuku and
Jembayan, two producing mines in Kalimantan. In FY09, they produced a
combined 9.0MM tons of coal. SAR has ambitious plans to steadily raise output
there to around 18MM tons by FY13E. Sebuku and Jembayan have combined
reserves/resources of 134MM/1,500MM tons.
• Valuation—paying for the potential: We estimate the transaction is valued at
US$21.8MM/tons of SAR’s reserves. While this appears expensive, we note that
it ignores potential values of Brunei and Madascar. Also, the valuation assigns no
value to SAR’s resources, which management believes could be steadily moved
into reserves.
• J.P. Morgan comment: We are positive on coal and hence see PTT’s increased
focus on the sector as a positive. Still, given the company’s overall size, coal will
remain less than 5% of PTT’s FY11E profits (JPMe), even after this transaction.
We anticipate the company to continue growing this business—either through
developments of existing potential (like Madagascar) or through more
acquisitions. Management ambitiously targets 30MM tons of coal production
volume within five years.
• Price target: Jun-11 PT of Bt395 is based on SOTP valuation (please see p.2 pie
chart for segment breakdown). Key risks: (1) low petroleum prices that depress
E&P earnings, (2) low gas demand growth that hurts the gas business and (3)
regulatory risks in the form of price controls that depress returns from the gas and
refining divisions.

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Indorama Ventures
3QFY10 Results--Spectacular, but exceptional
• IVL reported net profit of Bt2.9B for 3QFY10, up 412% Y/Y and up 40% Q/Q.
This performance, however, is buoyed by two exceptional items--Bt480MM in
FX translation gain and Bt747MM in negative good-will write-up. At recurring
level, core profit was Bt1.7B, up 202% Y/Y and up 27% Q/Q. The results are in
line with our expectations.
• Volume: PET volume surged 39% Y/Y and 7% Q/Q to 344,926 tons. This is
underpinned by gradual commissioning of IVL's new plant. For 3QFY10, both
lines of Alphapet (USA) are now up and running.
• Spreads: As expected, IVL’s PTA business was the star performer during the
period, driven by surging prices and spread. Management indicates that PTA's
EBITDA margins improved from 12.1% in 2Q10 to 18.0% in 3Q10. At the
consolidated level, we estimate that IVL’s EBITDA margin rose from 11.2% to
13.0% during the same period.
• Associates: Associate UAB Ottana in Italy, acquired in July 2010, is still slightly
loss-making (before negative good-will write-up). We, however, do not see this
as overly worrisome given that it will require management sometimes to go in
and improve the plant’s operations.
• Outlook and PT: We see continued strength into 4Q10, underpinned by
sustained strength in the PTA market, as well as steady volume increases as new
capacities come through. Our Dec-11 PT is based on target P/B of 2.46x, which is
equivalent to the estimated ROE/COE multiple with a 35% implied growth
premium. We project IVL's FY10E-FY15E ROE to average 20.4%. Key upside
risks: (1) very strong PTA/PET spreads and (2) potentially significant
acquisitions to could raise LT ROE.
• Rating: We like IVL for its aggressive but focused growth strategy. IVL's focus
on the polyester chain, which we are bullish on, adds to its appeal. Our U/W
rating is based purely on IVL’s demanding valuation which, we believe, limits its
upside (barring further major acquisitions).

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Indian Oil Corporation

2QFY11: Earnings boosted by govt. support
• 2Q earnings boosted by govt. support: IOC reported 2Q profits of Rs52.9n,
turning in a 1H profit of Rs19.1bn, with government subsidy support of Rs72.2bn
being booked this quarter.
• GRMs register healthy rise: IOC GRMs rose to ~$6.6/bbl this quarter (from
$3/bbl in 1Q), as the overall refining environment improved this quarter.
Throughput lower due to maintenance: Refinery throughput for the quarter
was 5.62 mmt (down 9% sequentially), as IOC carried out planned refinery
maintenance related shut downs this quarter. With the commissioning of the
Panipat refinery expansion, IOC’s total refining capacity has moved to
64.7mmtpa..
• Govt. subsidies boost earnings….: The govt. provided Rs72.2bn in subsidies to
IOC, adding to the Rs21.4bn from the upstream companies, providing a boost to
earnings, and allowing a profit for the first half of the fiscal.
• ….but risks from uncertain policy remain: While petrol de-regulation
continues to work, high inflation levels have necessitated a delay in
implementation of diesel de-regulation. With crude rising beyond $85/bbl,
potentially higher than expected marketing losses and uncertainty on the final
quantum of government support cause a continued lack of visibility of R&M
earnings.
• Price target, valuations and key risks: We maintain our Neutral stance, and
Mar-11 price target of Rs410, based on 6x FY12 EV/EBITDA, at a discount to
regional peers, given continuing policy uncertainty. Key upside risks to our call
emanate from policy initiatives on subsidy sharing and diesel de-regulation, and
key downside risks are sustained high crude prices. IOC remains our preferred
pick among the PSU R&M companies.

Analyst: Pradeep MirchandaniAC, CFA, (91-22) 6639 3041,
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Oil India Ltd.

2QFY11: Ahead of consensus
• 2Q profits ahead of consensus: Oil India reported 2Q profits of Rs9.16bn (up
27% y/y), ahead of consensus estimates, led by a combination of lower subsidies
and improved crude oil production.
• Oil production recovers…: Crude oil sales rose 27% sequentially, recovering
due to the resumption of full supplies to the Numaligarh refinery, which went
through a longer than anticipated shut-down. We expect the current level of
production to sustain, leading to a full year average of ~3.7mmt.
• ....while gas sales remain muted: Gas sales fell 4% over last year, due to a
combination of lower than anticipated customer offtake and a delay in the
commissioning of Duliajan-Numaligarh pipeline, which will carry gas to the
Numaligarh refinery. While we expect gas sales to improve in 2HFY11, we
expect the full impact of sales to NRL to come through in FY12. However,
overall gas realizations rose as the full impact of the APM price revisions came
through in the quarter.
• Lower subsidies cushion earnings….: Oil India provided Rs3.99bn in subsidy
support to the downstream companies in 2Q (down 45% sequentially), as auto
fuel price hikes led to a reduced overall subsidy bill (~Rs110bn) this quarter. As
such, net crude realizations rose to $63.2/bbl this quarter (from $49.7/bbl in 1Q).
• ….but policy risks remain: While petrol de-regulation continues to work, high
inflation levels have necessitated a delay in implementation of diesel de-
regulation. With crude rising beyond $85/bbl, potentially higher than expected
marketing losses and uncertainty on the final quantum of upstream support cause
a continued lack of visibility of Oil India earnings.
• Price target, valuations and key risks: We maintain our Underweight stance,
and Sep-11 price target of Rs1200, based on 4x FY12 EV/EBITDA, a 10%
discount to regional peers due to continuing policy uncertainty. Key risks to our
call emanate from policy initiatives on subsidy sharing and diesel de-regulation,
as well as any significant exploratory success.

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Hindustan Petroleum Corporation (HPCL)

2QFY11: Subsidies drive profits
• Govt. subsidies drives 2Q profits: HPCL reported 2Q profits of Rs20.9bn,
• GRMs decline despite better regional environment: HPCL GRMs for the
quarter came in at ~$2.7/bbl (vs. $3.72/bbl in 1Q). This fall came despite an
improvement in regional benchmark GRMs to $4.23/bbl (from $3.56/bbl last
quarter) and was likely impacted by refinery turnaround. Refinery throughput for
the quarter was 3.04 mmt (down 8% sequentially), as HPCL carried out planned
maintenance shutdowns of its Vizag refinery.
• Govt. subsidy payout supports earnings….: The govt. provided Rs28.3bn in
subsidies to HPCL, adding to the Rs8.1bn from the upstream companies,
providing a cushion to earnings, and allowing a profit for the first half of the
fiscal.
• ….but policy risks remain: While petrol de-regulation continues to work, high
inflation levels have necessitated a delay in implementation of diesel de-
regulation. With crude rising beyond $85/bbl, potentially higher than expected
marketing losses and uncertainty on the final quantum of government support
cause a continued lack of visibility of R&M earnings. Price target, valuations
and key risks: We maintain our Underweight stance, and Mar-11 price target of
Rs365, based on 6x FY12 EV/EBITDA, at a discount to regional peers given
continuing policy uncertainty. Key risks to our call emanate from policy
initiatives on subsidy sharing and diesel de-regulation.

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Indraprastha Gas
2QFY11 results in line
• 2Q results in line: IGL reported 2Q profits of Rs663mn (up 16% sequentially),
in-line with our estimates, which were ~4% below consensus, as the full impact
of price hikes passed through this quarter, along with higher volumes.
• Price hikes passed through: IGL was able to hike prices this quarter in response
to the APM gas price hikes this quarter, amply demonstrating IGL’s continuing
ability to pass on raw material cost increases. CNG realizations rose to over
Rs27/kg.
• Volumes improve: Volumes registered a healthy increase, with CNG sales rising
to ~2.2mmscmd (up 10% q/q), with additions to bus fleets due to the
Commonwealth Games. PNG volumes grew 88% y/y with healthy growth in the
industrial and domestic segments.
• Stock impact: While the stock corrected ~4% in trade, we believe the stock price
adequately captures IGL's growth profile. With the boost to CNG sales from the
Commonwealth Games likely to moderate over the coming months, we expect
volume growth to moderate over the medium term. While the NCR region
remains supportive for growth in terms of vehicles and industrial/domestic
consumers, we believe geographical growth beyond the NCR region will be
constrained for IGL.
• Price target, valuations and key risks: We maintain our Underweight stance,
and our Sep-11 price target of Rs305, based on a 3-stage DCF model which we
believe captures the period of high growth in CGD volumes. Key risks to our call
are better than expected volume growth and access to new growth geographies.

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Bharat Petroleum Corporation (BPCL)

2QFY11: Shored up by government subsidies
• Govt. subsidies underpin 2Q profits: BPCL reported 2Q profits of Rs21.4bn,
• GRMs decline due to upgradations: BPCL GRMs for the quarter came in at
~$2.8/bbl (vs. $3.57/bbl in 1Q). The Kochi refinery GRMs were affected this
quarter due to the Euro 3/4 upgradations during the quarter - this impacted the
secondary units processing and led to lower GRMs. GRMs for 1H stood at
$3.19/bbl.
• Throughput steady: Refinery throughput for the quarter was 5.62 mmt (vs. 5.57
mmt), as an increase in the Mumbai refinery output offset the reduction from
Kochi.
• Govt. subsidy payout supports earnings….: The govt. provided Rs29.5bn in
subsidies to BPCL, adding to the Rs8.2bn from the upstream companies,
providing a cushion to earnings, and allowing a profit for the first half of the
fiscal.
• ….but policy risks remain: While petrol deregulation continues to work, high
inflation levels have necessitated a delay in implementation of diesel deregulation.
With crude rising beyond $85/bbl, potentially higher than expected marketing
losses and uncertainty on the final quantum of government support cause a
continued lack of visibility of R&M earnings, in our view.
• Price target, valuations and key risks: We maintain our Neutral stance, and
Mar-11 price target of Rs645, based on 6x FY12E EV/EBITDA, at a discount to
its regional peers due to continuing policy uncertainty. Key upside risks to our
call emanate from policy initiatives on subsidy sharing and diesel deregulation.
Downside risk would be sustained high crude prices.

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Sector drivers: Upstream

Crude(left) and natural gas prices(right)—Long term ($/bbl, $/mmbtu) Historical annual Brent price ($/bbl)
150 20 150
15
100 125
10
100
50
5
75
0 0
50
Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10
Crude (Brent) Natural Gas (Henry Hub), RHS 25
Oct
Dec
Mar
Apr
Jul
Jan
Feb
Jun
Sep
May
Nov
2010 2005 2006 2007 2008 2009
Source:, Bloomberg. Source: Bloomberg.
Crude spreads ($/bbl) Asian crude spreads ($/bbl)

15 15
10 10
5 5
0 0 `
-5 -5
Se 7
Se 8
Se 9
Se 0
De 6
M 6
Ju 7
07
M 7
Ju 8
08
M 8
Ju 9
09
M 9
Ju 0
10
Se 7
Se 8
Se 9
Se 10
De 6
M 6
Ju 7
07
M 7
Ju 8
De 8
M 8
Ju 9
De 9
M 9
Ju 0
10
0
1
0
c-0
-0
c-0
-0
c-0
-0
c-0
-1
0
n-
n-
n-
n-
0
c-0
-0
c-0
-0
0
c-0
-0
0
c-0
-1
p-
p-
p-
p-
p-
ar
ar
ar
ar
n-
n-
n-
n-
p-
p-
p-
p-
p-
De
De
De
ar
ar
ar
ar
Se
De
Se
WTI-Brent Brent-Dubai Brent-Minas Brent-Cinta
Source: Bloomberg. Source: Bloomberg.
Contango/ Backwardation time series (Brent, $/bbl) Contango/ Backwardation time series (WTI, $/bbl)
5 Contango 5 Contango
3 3
1 1
(1)
(1)
(3) Backw ardation (3)
(5) Backw ardation
(5)
Nov -09 Jan-10 Mar-10 May -10 Jul-10 Sep-10
Nov -09 Jan-10 Mar-10 May -10 Jul-10 Sep-10
2month premium 6month premium
2month premium 6month premium
Source: Bloomberg.
Source: Bloomberg.
15
(852) 2800-8578 24 November 2010
Sector drivers: Refining

Brent prices and J.P. Morgan Singapore Complex GRM ($/bbl) Historical annual J.P. Morgan Singapore Complex GRM ($/bbl)
15 15
10 10
5
5
0
0
-5
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
-5
J F M A M J J A S O N D
Complex GRM Annual GRM
2009 2010 5Y av erage
Source: Bloomberg, J.P. Morgan estimates

Source: Bloomberg, J.P. Morgan estimates.
Complex and Simple GRM spread ($/bbl) Crude and GRM Spreads ($/bbl)
15 15
10 10
5
5
0
0 c -5
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
-5
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
GRM Spread: Complex - Simple

CrudeSpread: Brent - Dubai
Complex GRM Simple GRM

Refined products- Crude(Dubai) spread ($/bbl) China theoretical GRM- US$/bbl

40 20 150
30 120
0
20 90
10 (20)
60
0
-10 (40) 30
-20
Oct-08
Oct-09
Oct-10
Jan-08
Apr-08
Jul-08
Jan-09
Apr-09
Jul-09
Jan-10
Apr-10
Jul-10
-30
-40 China GRM Brent (RHS)
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Diesel-Crude Fuel Oil-Crude Gasoline-Crude Source: Bloomberg, J.P. Morgan estimates
16
(852) 2800-8578 24 November 2010
Sector drivers: Petrochemicals

Key petrochem prices ($/mt) Ethylene/ Propylene spot margins ($/mt)
2000 1000
800
1500
600
1000 400
500 200
0
0 (200)
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Naptha Ethy lene Propy lene PX

Ethy lene-naphtha Propy lene-naphtha
Source: Bloomberg.
Source: Bloomberg.
Polyolefins spot margins ($/mt) Aromatics spot margins ($/mt)
800
600 900
400 700
200 500
0
300
(200)
(400) 100
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 (100)
HDPE-Ethy lene PP-Propy lene Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: Bloomberg. Benzene-naphtha PX-Naphtha
Source: Bloomberg.
Polyester Chain spot margins ($/mt) PVC Chain spot margins ($/mt)
1000
1,000
800 800
600 600
400 400
200 200
s
0 0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
PTA-PX MEG-Ethy lene POY-(PTA/MEG)
PVC-VCM PVC-EDC
Source: Bloomberg Source: Bloomberg.
17
(852) 2800-8578 24 November 2010
Price performance
Upstream
Upstream - % Change – 1 Week Upstream - % Change – 1 Month
Energi
4.5 CNOOC
7.3
PPL 3.5 OGDC 6.8
Inpex 3.3 P TT 5.9
OGDC 3.3 P TTEP 5.3
P TTEP 1.4 PPL 5.0
CNOOC 0.9 Inpex 3.8
P TT 0.3 Sino pec 0.1
Sino pec (2.2) P etro China (3.3)
Cairn India (2.9) Cairn India (4.3)
ONGC (3.2) ONGC (5.3)
M edco (3.4) Energi (7.3)
P etro China
(5.6)
(4.2) RIL
(9.6)(8.0)
RIL M edco
Refining
Refining - % Change – 1 Week Refining - % Change – 1 Month
TOP TOP 22.0
13.7
S - OIL 4.2 GS Ho ldings 12.4
Shell M alaysia 0.4 S - OIL 10.6
FP CC (0.9) SK Energy 6.2
GS Ho ldings (2.4) FP CC 5.6
CP CL (3.6) Shell M alaysia (0.9)
B P CL (4.3) B P CL (2.0)
HP CL (4.4) CP CL (6.3)
M RP L (10.3)
SK Energy (4.7)
HP CL (11.3)
IOC (8.2) (14.4)
IOC
M RP L (9.6)
Petrochems
Petrochems - % Change – 1 Week Petrochems - % Change – 1 Month
P TTA R
P TTA R 8.8 26.5
Sino pec Yizheng 5.5 Sino pec Yizheng 19.5
Titan P etro 5.0 P TTCH 13.5
Hanwha 4.1 Hanwha 10.9
P TTCH 3.5 LG Chem 10.6
LG Chem 2.4 FCFC 8.1
IRP C 0.9 FP C 6.6
FP C (0.4) Nan Ya 2.2
Ho nam (0.8) IRP C 1.9
FCFC (3.0) Titan P etro (6.0)
(3.9) (7.4)
Nan Ya Ho nam
Source: Bloomberg
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(852) 2800-8578 24 November 2010
Regional Sector/ Country Performance
Asia Ex-Japan Indices- % Change - 1 Week Asia Ex-Japan Indices- % Change - 1 Month
Techno lo gy Chemicals 4.6

0.6
Chemicals (0.9) Techno lo gy 3.0
Teleco m (1.0) A uto s & parts 2.8
Retail (1.4) Oil & Gas (0.7)
Industrials (1.6) Industrials (0.8)
Financials (1.6) Retail (1.8)
A uto s & parts (1.9) B anks (2.3)
Utilities (2.0) Teleco m (2.3)
Oil & Gas (2.1) Financials (2.6)
B anks (3.1) Utilities (4.1)
(6.4)
Real estate
Real estate
(6.2)
Country performance - % Change - 1 Week Country performance - % Change - 1 Month
P akistan Japan
2.9 6.3
Indo nesia 2.9 P akistan 4.5
Japan 2.8 Ko rea 3.9
Ko rea 2.1 Thailand 3.8
Thailand 0.3 Indo nesia 3.3
M alaysia 0.2 M alaysia 0.8
China (1.3) China (1.2)
(2.2)
India(1.5)
India
Source: Bloomberg.
Other Global Periodical reports

Chemical Reactions – Asia ex Japan, Chemicals Monthly
Russia Oil and Gas
Oil Markets Weekly – Global Energy Strategy Team
Oil Markets Monthly – Global Energy Strategy Team
19
(852) 2800-8578 24 November 2010
Valuations
Company Ticker Price Rating PT U-D/side Mcap EV P/E EV/EBITDA P/BV Yield ROE% D/E%
BBG (LC) (LC) USD Mn USD Mn 2009A 2010E 2011E 2009A 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E
Upstream
CNOOC 883 HK 17.7 UW 12.5 -29% 101,960 96,976 23.0 14.2 13.8 11.4 7.2 6.4 3.6 3.3 3% 3% 26% 24% -11% -15%
ONGC ONGC IN 1,297 N 1,375 6% 59,945 51,054 14.0 11.1 10.3 5.7 4.5 4.0 2.3 2.1 3% 3% 23% 21% -34% -43%
PTTEP PTTEP TB 184 OW 187 2% 20,312 21,328 27.4 16.4 14.9 7.8 6.4 5.9 3.6 3.2 3% 3% 24% 23% 12% 18%
Medco MEDC IJ 3,625 OW 4500 24% 1,352 1,693 70.0 48.3 20.6 7.6 4.5 3.4 1.9 1.7 0% 1% 4% 9% 0% 0%
Inpex Corp 1605 JT 447,500 OW 630,000 41% 19,634 12,805 6.2 8.4 13.3 2.0 2.8 1.7 0.8 0.8 1% 1% 8% 7% -5% -29%
Integrated
PetroChina 857 HK 9.76 UW 7.6 -22% 229,011 271,666 14.8 11.6 11.1 7.1 5.7 5.4 1.7 1.5 4% 4% 15% 14% 26% 28%
Sinopec 386 HK 7.38 OW 8.5 15% 82,034 106,472 8.9 8.0 7.0 5.2 4.6 4.0 1.3 1.1 3% 4% 17% 17% 39% 33%
RIL RIL IN 1,012 OW 1,260 24% 71,748 73,162 20.7 14.4 12.6 10.8 8.3 7.0 2.4 2.0 1% 1% 18% 17% 5% -8%
PTT PTT TB 326 OW 395 21% 30,955 37,178 15.5 12.6 10.9 7.8 6.5 5.5 1.9 1.7 3% 3% 16% 17% 49% 36%
Average Upstream 23.4 16.4 12.1 5.8 4.2 3.6 2.0 1.8 2% 2% 14% 14% -6% -12%
Average Integrated 15.0 11.6 10.4 7.7 6.3 5.5 1.8 1.6 3% 3% 16% 16% 30% 22%
Refineries
Thai Oil TOP TB 65.3 OW 71 8% 4,442 5,150 11.0 15.9 12.3 8.3 9.4 7.1 1.9 1.8 4% 4% 12% 15% 43% 29%
PTTAR PTTAR TB 37.0 OW 40 8% 3,663 5,367 12.0 16.6 11.7 11.0 10.5 8.1 1.7 1.6 3% 4% 11% 14% 110% 89%
SK Energy 096770 KS 168,500 OW 165,000 -2% 13,428 17,454 22.1 9.6 10.0 11.0 6.7 6.7 1.6 1.4 1% 1% 18% 15% 63% 51%
S-Oil 010950 KS 77,000 UW 60,000 -22% 7,690 9,147 38.6 16.6 13.5 20.1 10.5 8.5 2.0 1.8 1% 2% 13% 14% 50% 41%
GS Holdings 078930 KS 63,600 NR NR NA 5,307 5,825 12.7 8.1 9.0 13.6 8.2 9.0 1.3 1.1 2% 2% 17% 13% 13% NA
Shell Malaysia SHELL MK 10.6 NR NR NA 1,024 1,033 14.2 14.5 29.0 6.2 7.8 12.1 1.5 1.5 5% 5% 14% 3% 17% NA
Reliance Industries RIL IN 1,012 OW 1260 24% 71,748 73,162 20.7 14.4 12.6 10.8 8.3 7.0 2.4 2.0 1% 1% 18% 17% 5% -8%
IOC IOCL IN 386 N 410 6% 19,591 23,296 9.2 9.9 9.5 7.0 6.9 6.2 1.6 1.4 3% 3% 17% 16% 31% 14%
HPCL HPCL IN 448 UW 365 -19% 3,307 6,261 17.9 10.5 11.5 11.3 7.5 6.6 1.2 1.1 3% 3% 12% 10% 106% 85%
BPCL BPCL IN 717 N 645 -10% 5,616 7,768 22.5 16.0 13.1 13.5 8.3 6.8 1.8 1.7 2% 2% 12% 13% 71% 53%
FPCC 6505 TT 84 UW 71 -16% 26,422 29,195 20.4 22.5 20.3 10.7 11.7 11.3 3.4 3.4 5% 4% 15% 17% 57% 45%
Shanghai Petrochem 338 HK 3.78 NR NR NA 7,239 7,143 12.3 10.6 10.4 12.3 13.3 12.5 1.4 1.2 2% 3% 13% 12% 46% NA
Average Refineries 17.8 13.8 13.6 11.3 9.1 8.5 1.8 1.7 3% 3% 14% 13% 51% 44%
Petrochemicals
FCFC 1326 TT 90.0 OW 103 14% 16,891 12,534 17.4 11.5 10.5 16.7 9.6 8.4 1.9 1.8 5% 8% 18% 18% -4% -1%
FPCC 6505 TT 84.1 UW 71 -16% 26,422 29,195 20.4 22.5 20.3 10.7 11.7 11.3 3.4 3.4 5% 4% 15% 17% 57% 45%
Nan Ya Plastics 1303 TT 70.2 N 64 -9% 18,180 17,064 33.6 13.1 11.5 30.0 14.7 14.0 1.9 1.9 3% 7% 16% 17% 19% 19%
Formosa Plastics 1301 TT 90.0 N 79 -12% 18,168 13,081 20.0 12.9 12.6 18.4 11.3 11.3 2.3 2.2 4% 7% 18% 18% -2% -2%
LG Chem 051910 KS 395,000 OW 430,000 9% 23,015 10,513 18.0 12.9 12.0 5.6 4.5 3.6 3.4 2.7 1% 1% 30% 25% -11% -31%
Honam Petrochem 011170 KS 236,500 UW 110,000 -53% 6,721 2,256 9.5 11.0 15.6 3.2 3.1 4.1 1.7 1.5 0% 0% 17% 10% -12% -14%
Hanwha Chemical 009830 KS 33,250 UW 15,000 -55% 4,137 2,364 13.6 10.9 15.0 5.2 5.4 5.6 1.5 1.4 1% 2% 15% 10% 29% 27%
PTTAR PTTAR TB 37.0 OW 40 8% 3,663 5,367 12.0 16.6 11.7 11.0 10.5 8.1 1.7 1.6 3% 4% 11% 14% 110% 89%
PTTCH PTTCH TB 164.5 UW 92 -44% 8,311 4,891 36.3 23.5 17.2 10.5 7.5 5.9 2.3 2.2 2% 2% 10% 13% 31% 21%
Sinopec Yizheng Chemical 1033 HK 3.59 NR NR NA 4,417 3,579 23.5 11.8 8.0 25.1 19.4 18.1 1.4 1.1 2% 2% 9% 13% -52% NA
Indorama Ventures IVL TB 46 UW 21 -55% 6,689 5,032 32.2 28.2 25.8 15.6 13.3 11.9 6.3 5.5 1% 1% 29% 23% 103% 72%
Shanghai Petrochem 338 HK 3.78 NR NR NA 7,239 7,143 12.3 10.6 10.4 12.3 13.3 12.5 1.4 1.2 2% 3% 13% 12% 46% NA
Average Petrochemicals 20.0 15.0 13.7 13.1 10.0 9.3 2.4 2.1 2% 3% 17% 16% 19% 22%
Source: Bloomberg, IBES, J.P. Morgan estimates. J.P. Morgan estimates for rated stocks, consensus estimates for non-rated stocks. Note: Valuation table is priced as on 22-Nov-10
20
(852) 2800-8578 24 November 2010
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(852) 2800-8578 24 November 2010
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(852) 2800-8578 24 November 2010
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JPM - Crude Reality

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Asia Pacific Equity Research

PT J.P. Morgan Securities Indonesia

• Indorama Ventures J.P. Morgan India Private Limited

• Indian Oil Corporation Brent price ($/bbl)

• Bharat Petroleum Corporation (BPCL)

Oil Markets Weekly: Taking Advantage of

Highlights during the week

Turkmen gas set to flow to central China

Indonesia awards four blocks

Petrobangla plans to double output by 2015

Petronas hands Total deep-water patch

CNPC cuts investment plan

Chemical Reactions – Taiwan

PTT Chemical Public Company

For more details, this report can be accessed on Morgan Markets

PTT Public Company

For more details, this report can be accessed on Morgan Markets

PTT Public Company

For more details, this report can be accessed on Morgan Markets

For more details, this report can be accessed on Morgan Markets

Indian Oil Corporation

For more details, this report can be accessed on Morgan Markets

Oil India Ltd.

For more details, this report can be accessed on Morgan Markets

Hindustan Petroleum Corporation (HPCL)

For more details, this report can be accessed on Morgan Markets

For more details, this report can be accessed on Morgan Markets

Bharat Petroleum Corporation (BPCL)

For more details, this report can be accessed on Morgan Markets

Sector drivers: Upstream

Crude (Brent) Natural Gas (Henry Hub), RHS 25

Source:, Bloomberg. Source: Bloomberg.

Crude spreads ($/bbl) Asian crude spreads ($/bbl)

WTI-Brent Brent-Dubai Brent-Minas Brent-Cinta

Source: Bloomberg. Source: Bloomberg.

Sector drivers: Refining

Source: Bloomberg, J.P. Morgan estimates

GRM Spread: Complex - Simple

Source: Bloomberg, J.P. Morgan estimates

Refined products- Crude(Dubai) spread ($/bbl) China theoretical GRM- US$/bbl

Diesel-Crude Fuel Oil-Crude Gasoline-Crude Source: Bloomberg, J.P. Morgan estimates

Source: Bloomberg, J.P. Morgan estimates

Sector drivers: Petrochemicals

Naptha Ethy lene Propy lene PX

Polyolefins spot margins ($/mt) Aromatics spot margins ($/mt)

Source: Bloomberg. Benzene-naphtha PX-Naphtha

Techno lo gy Chemicals 4.6

Country performance - % Change - 1 Week Country performance - % Change - 1 Month

Other Global Periodical reports

Russia Oil and Gas

Oil Markets Weekly – Global Energy Strategy Team

Oil Markets Monthly – Global Energy Strategy Team

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010

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