San Miguel buys into Meralco

Food giant San Miguel Corporation (PSE:SMC) finally gets a foot on energy’s door.

In a disclosure to the Philippine Stock Exchange (PSE) San Miguel said it had entered into an agreement with the Government Service Insurance System (GSIS) to acquire 300,963,189 shares in electricity distributor Meralco (PSE:MER) held by the latter.

It has agreed to pay P90 per share for Meralco, more than double the firm’s closing price of P44.50 yesterday, at the very day that the stock market suffered its worst-ever percentage drop.

Under pressure from its shareholders to deliver decent returns, SMC has said that it is spreading its wings out of its comfort zone that is food, to venture into high-growth areas such as mining, infrastructure and power.

The same report also said it was eyeing a stake in Petron Corp. (PSE: PCOR) and had initiated talks with the Ashmore Group, which earlier this year took control of the refiner.

What do beer and electricity have in common? Nothing, really, except that alcohol can at least be used to power vehicles. But energy needs a lot of cash to move forward—and SMC has lots of it.

But will SMC deliver its promised superior returns with its new foray?

Meralco is in a highly regulated industry where margins, through the return on-rate-base (RORB) scheme, are capped. In addition, issues concerning Meralco’s business are highly politicized; there’s not much leeway to increase profits. If ever, Meralco’s profit drivers would be outside its core business such as those in services. Or if Meralco chooses to expand its franchise by acquiring ailing distribution cooperatives like the Albay Electric Cooperative (ALECO) or others contiguous to its franchise area.

Its interest in Petron would be good for the latter since the government would then be completely out of the refiner and fuel retailer. Petron would be less subject to political interference.

Meralco is also pleased to get a monkey off its back; its nemesis in the person of GSIS head Winston Garcia. Now, it can concentrate more on delivering power.

I have mentioned in a previous blog that Ashmore is unlikely to end up with 90% of PCOR even with its right of first refusal when the government decides to unload its stake by November. Now that SMC is in the picture, Ashmore can very well exercise that option now, and offer some of the shares to SMC. It doesn’t have to be the whole of government’s 40% stake. A possibility would be for Ashmore to offer some 25% stake to SMC and keep the 65% which is still an absolute majority control.

To recall, SMC has been trying to get into the energy business. It has participated in the Transco bidding but lost out to eventual winner Monte Oro Resources. It had its eyes on Tiwi-Makban geothermal complex according to newspaper reports, but did not submit a bid.

Now, would you rate SMC a buy?

So far, SMC is sniffing at the more mature portion of the energy industry. Unless it is willing to get its feet dirty by going into “greenfield” energy projects, alternative energy development, mining or oil field development, SMC wouldn’t merit a ratings upgrade. I would rate it a HOLD. MER would still be a SELL.

What about PCOR? Now that its shares are also battered together with the rest of the market, I would also put it at HOLD, while watching how the SMC interest would pan out.

And maybe, an upgrade to a BUY?

(Disclaimer: These recommendations are not based on financials and not by an analyst. These are given as tongue-in-cheek recommendations. Consult your stockbroker for a more learned opinion. The author is not liable for losses as a result of these recommendations.)

EDC acquires Pantabangan-Masiway hydro complex from First Gen

Ho-hum. Yawwn.

Excuse me. I know it is impolite to yawn in front of people but I was trying to make some sense of an M & A activity in the energy sector which was supposed to inject life to two of the hottest players in the industry before I nearly dozed off. Let see…

 Here it is. A week prior to the big announcement, Francis Giles Puno, First Philippine Holdings Corp. (PSE: FPH) chief finance officer told reporters “we have received some strong expressions of interests from both foreign and local companies” to acquire the 112-MW Pantabangan-Masiway complex its subsidiary, First Gen Corp. (PSE:FGEN) owns through the First Gen Hydro Power Corp. (FGHPC).

 Local punters and self-styled analysts expect First Gen to realize between $129 million and $208 million for the asset for a handsome profit. After all, it acquired the hydro plants for a measly $105 million in November 2006 from the Power Sector Assets and Liabilities Management Corp. (PSALM), the privatization arm of the government for the power assets of National Power Corp. (NPC). 

 A week later, the “foreign and local interests” turned out to be Energy Development Corp. (PSE:EDC)—First Gen’s own subsidiary! The tag price for the complex was a whooping $240 million, more than double the acquisition price.

Actually, First Gen is selling 60% of First Hydro to EDC which is valued at approximately $105 million. First Gen claims that the transaction emanated from an unsolicited offer made by EDC to it. Which is strange, since First Gen effectively owns EDC.

 As if to assure us, bystanders, that the deal is good for EDC, Punongbayan and Araullo, the advisory firm tasked to value the transaction said “this ($240 M) is below the range of values we have derived amounting to $262.9 million to $312.4 million.” The decimal point is real; that’s how accurate they are. And to make sure we understand everything, it interpreted its own finding by saying the lower enterprise value “is favorable to EDC from a financial point of view.”

 Really?

 The higher appraised value of the hydro assets was justified ostensibly because the Lopez group already made some refurbishments that enhanced the operating efficiencies of the two plants.

 What did the Lopez group do aside from holding for almost two years the right to operate the assets since winning the bid? 

 FGHPC has selected Austrian firm Andritz VA Tech Hydro (GmbH) only in February this year to refurbish and upgrade the Pantabangan hydroelectric plant. According to Andritz, the contract calls for the “replacement of the two 52 MW Francis turbines, new generator stator windings and the modernization of the complete electrical equipment including governor system, unit automation with Scada system, new static excitation, generator and transformer protection, new medium-voltage switchgear and low-voltage distribution.”

But the first unit will only be rehabilitated between July and December 2009, while that of the second unit will only be completed by December 2010. There are no misprints of the years mentioned.

 If the assets were that good, why is FGEN shuffling it around? For one, it will get $105 million  in cash which it could use to pare down its heavy debt load. As of end June, FGEN has $1.6 billion of long-term debt against an equity of $1.2 billion for a long-term debt-to-equity ratio of 1.33. For an infrastructure company in a mature market, this is already a disaster in the making. We don’t appear to be very bearish; we exclude the current liabilities of $820 million which if considered would jack up the total debt-to-equity to 2 or a gearing of 200%!

When the dust clears, the scenario would be something like this: FGEN gets $105-M cash from EDC to pay off a small portion of its debt. That would improve its balance sheet somewhat. EDC becomes a trailblazer into hydro--but it has to wait for two years before some profits from hydro starts to trickle in. It will now pay for the rehabilitation of the hydro complex. All without ceding an iota of control to outsiders.

See how accounting could do wonders?

 Because the $105-M cash originates from EDC—surely, the geothermal power producer gets something in return.

 Stephen CuUnjieng, vice-chairman for Southeast Asia at Macquarie, which advised EDC, justified the purchase this way: “This is not just about adding 112-MW of power. The reservoir means the hydro plant can expand without having to build a new dam and there will be internal organic growth over the next five years. So EDC becomes a company offering stability with growth rather than just stability, while keeping its green profile.”

 A report assures the minority shareholders, among them some friends, that the deal is good for them. They cannot say or do anything during the ceremonial special stockholders meeting to approve the deal. Their combined shares are insignificant compared to those of the majority bloc.

 What a brilliant move by EDC. I have always regarded my former employer to be a pro-active and dynamic organization which could seize opportunities the moment they cut across its path, and this should be one of them. So the market (investors) should be jumping for joy.

 After the deal was announced, FGEN’s share price promptly fell 4.8% to P15 per share while EDC’s dropped 5.7% to P3.30. Of course, this has to be nothing to do with the deal considering that the market has slumped so much due to the lingering worry of a global economic slowdown. As it were, the share prices for both listed companies are still expensive.

 Paul Aquino, EDC’s president and CEO chimed in with his view saying “our entry into hydro power clearly complements our portfolio and provides EDC with vast opportunities for growth.”

 But Pantabangan started operating in 1977 and by this time the reservoir should already be highly silted. So First Gen—now EDC—should be hard-pressed to recover the original output of 104 MW.

 How could the renewable energy portfolio of EDC grow with Pantabangan? It cannot even apply for carbon credits under the Clean Development Mechanism (CDM) of the Kyoto Protocol because it is already there. It fails the basic requirement of additionality. The term means that a carbon offset credits should be “in addition to” to what is avoided greenhouse gas (GHG) emissions if the project were not implemented in the first place.

 EDC is supposed to be developing a wind farm for up to 86 MW in Burgos, Ilocos Norte for years now. Northwind Development Corp. which came in later into the industry, promptly erected the 24-MW Bangui Bay, Ilocos Norte wind project way back in 2006. Now its majestic photos appear frequently on Philippine postcards and on Flickr.

 Now would you blame me for falling asleep? Wait, that’s a fine idea. Please wake me up at 10 minutes before 5 or when the boss comes to our cubicles, whichever comes first.

Obama-McCain debates elevate energy issues to highest levels

One crucial item that bodes well for America from the debates between the U.S. presidential contenders Republican John McCain and Democrat Barack Obama is that issues concerning energy—energy security and climate change among others—have been elevated to the highest levels of discussion.

On energy, Obama said that the country could attain energy self-sufficiency within ten years if it aggressively focuses on developing its renewable energy resources and new drilling could remove the shackles from Middle Eastern and Venezuelan oil. With declining production from Mexico and Canada, their wishes are unlikely to be granted in the foreseeable future.

McCain is seen to be friendly to big oil, and his rallies are punctuated by cries of “drill, baby, drill!”

"We can't simply drill our way out of the problem," Obama countered, noting the US consumes nearly 25% of the world production, but contributes only 3% of the supply.

Obama even puts energy on top of his presidential agenda, ahead of health care and Social Security reform, two of the most emotional issues confronting Americans. And he is willing to commit $150 billion for a rational alternative and renewable energy program.

On the final debate, fully 72% of the viewers agreed with host Bob Schieffer to put energy as a priority topic. This is just below the rating of education (78%) and abortion (74%).

McCain on the other hand, is pushing for massive nuclear development. On the attendant issue of nuclear waste disposal, he simply waived the problem by saying if the Japanese, French and Canadians could do it so does the U. S. He is however silent on the specter of a wider nuclear proliferation.

Perhaps the most pleased American watching the debates could be T. Boone Pickens, who recently unveiled his Plan to wean America from foreign oil by displacing all of electricity from natural gas by wind energy and using the former to fuel the millions of road vehicles. And he made no bones (no pun intended) of aiming earlier to put the energy situation on top of the issues during the current presidential campaign.

Apparently, he is succeeding.

During the heat of the campaign, scientists, military veterans, corporate executives, clergy, Native Americans, movie stars and others have signed a letter to both McCain and Obama to call for and urgent comprehensive action to address global climate change upon taking office as president. The call is inextricably tied to the issues concerning energy usage and policies.

"We must act quickly to invest in a new energy economy that not only generates all the power we need while dramatically reducing greenhouse gas emissions, but also produces millions of new jobs, new industries, new revenues and new opportunities," the letter said.

With the looming presidential elections in 2010 in this country, it doesn’t hurt if we start a campaign now to place our precarious energy situation as the top issue like what is happening in the U. S.

We are more than dependent on foreign oil; with insignificant amount of local production. The much-touted Galoc oil is but a drop of our needs.

The renewable energy bill has just been approved by both the House and the Senate and all it needs is a signature for it to become a law. While the bill leaves much to be desired, at least we have a legal platform now to vigorously push for our own alternative and renewable energy development.

If anything, the Obama-McCain debates should spur us, especially our legislators and politicians aspiring for the highest offices, to examine the energy situation before it gets much worse.

Galoc gushes oil at 22,000 barrels a day--hold off the parties

The Galoc field off Palawan started producing oil at an initial rate of 22,000 barrels of oil per day (bopd) last October 9, Malacanang, as reported by Energy Secretary Angelo Reyes, gleefully announced during a news conference.

 The news comes at a time when the country is shrouded by a pall of gloom as a result of the financial meltdown currently experienced around the globe. It also comes on the heels of the spiraling fuel prices this past year before the price rally was abruptly stopped on its tracks by a looming global economic slowdown.

 The main operator said that the production could be in the vicinity of 20,000 bopd which is “equivalent to roughly six percent of the daily oil demand of the country,” Secretary Reyes said.

 The palace subalterns are quick to strut like peacocks as if the country has been resurrected from its economic grave.

 “The President is optimistic that this new development will positively impact on the administration’s efforts to reduce the country’s annual oil importation of $6 billion,” Presidential Executive Secretary Eduardo Ermita said. This would also translate to about $1.4 billion in foreign exchange savings for the country, for the oil well’s lifetime estimated at about three to five years, he added.

The oil field is developed by Galoc Production which is a joint venture owned by a subsidiary of the Vitol Group and Otto Energy Ltd. It formed a consortium composed of Nido Petroleum Pty Ltd., Oriental Petroleum and Minerals Corp., The Philodrill Corp., Forum Energy Philippines Corp., Alcorn Gold Resources Corp. and PetroEnergy Resources Corp.

GPC, which holds Service Contract 14C, owns 58.29 percent of SC 14, while Australia-based Nido Petroleum Ltd. owns 22.28 percent.

 So, is it now time to party as a thanksgiving to our new-found fortune?

 “We embrace this significant development as this will help immensely in our pursuit to be energy self-sufficient... We are on the right track in utilizing our indigenous sources,” Reyes said.

 Hold on. Before one gets drunk at the news, one should take a second look at the situation while still sober.

 The amount quoted was only obtained during initial flow tests which normally do not represent the long-term production potential of the well. At 2,200 meters, the reservoir will not be easily tapped, and at 320 m deep sea water, the location is not exactly shallow.

 Galoc’s crude, dubbed Palawan Light, contains undesirable high sulfur at 1.64% which makes it difficult to sell in the open market

 The Galoc field was discovered in 1981 by Philippine Cities Service Inc., a wildcatter, and initial oil production between 7,500-10,000 bopd per well was not deemed too attractive for full development due to the low oil prices at the time (about $20 per barrel) and perceived operational risks.

 The initial production value can easily sink to unprofitable levels if one studies the history of oil production in the area.

 Let us review the history of nearby West Linapacan field. Both fields are within the same service contract area.

 At a water depth of 350 m, West Linapacan is situated slightly deeper than Galoc. The field was discovered in October 1990 and was put into commercial production in May 1992.

 For the first well, the flow test recovered 2,900 bopd but actual initial production was at 1,700 bopd. Two more well were drilled and these initially produced oil at a total rate of 9,170 bopd. For the whole field the initial production was pegged at 18,700 bopd, which is slightly lower than the projected production of Galoc.

 But by December of the same year, the West Linapacan production dropped significantly. For the next few years, the field was just coasting along until 1996 when the field was shut down as production was no longer economical.

 The main culprit was inflow of sea water to the production well which makes extraction more difficult and costly. The Palawan oil reservoirs are in a fractured area and sea water contamination is to be expected. 

For Galoc, the oil-water interface is tagged at 2,100 m.

 The operator of the Malampaya gas field has had misgivings in extracting the oil portion beneath the gas reservoir precisely because of the risks involved which are similar to those at West Linapacan and Galoc.

 The delays in Galoc production, which was originally scheduled to start April, already bloated the cost from $86 million to over $210 million.

 If the government has readied the food and drinks for the Galoc coming out party, better hold off the corks and just donate the food to the needy.

 An unpleasant surprise from Galoc may be in the offing in the next few months.

Selling the tarnished crown jewel

The government is planning to sell the rest of its holdings in Petron which is held by Philippine National Oil Company (PNOC) by November. It will first be offered to London-based Ashmore Investments who earlier bought the shareholdings of erstwhile partner Saudi Aramco. As a majority shareholder, Ashmore has the right of first refusal for any of the shares which would be divested by PNOC.

 The PNOC stake in Petron comprise of 3.75 billion shares which represents a 40% interest is reportedly offered for some P26 billion. At the current exchange rate, this would amount to some $650 million which is higher than the purchase price of $550 million by Ashmore.

 In peso terms the government’s offer price translates to 6.93 per share which is far above the recent price quote of 5.20 at the Philippine stock exchange now that stock prices all but collapsed due to the global financial meltdown.

 Ashmore has an effective holding of some 50.7% of Petron as a result of the mandatory tender offer to minority investors when it acquired the 40% chunk from Saudi Aramco which puts the former as the majority shareholder.

 So, would Ashmore bite the offer?

 Unlikely. It already has effective control and besides it could increase its holdings to have an absolute control of the board by simply scooping the shares thrown out at the open market at much cheaper prices. It would be somewhat tricky however, not to push the prices up too much since the amount of float shares is only just below 10% of the total outstanding shares.

 ON another note, there are still people who cling to the illusion that Petron is (or used to be) a crown jewel of the government and should not have been sold off in the first place. But there is nothing sparkling about Petron—either getting money for the government coffers or controlling the oil price hikes through the years.

 It is more like a liability.

 For Petron has not had any dominant position in the industry ever since. Unlike other national oil companies like Pertamina of Indonesia,  the Iranian National Oil Company or Hugo Chavez’ Petroleos de Venezuela, Petron does not own any oil producing field either here or outside the country which it can use as a bargaining chip.

It is a refining company where margins are razor thin and are subject to the vagaries of oil price movements. It doesn't even have a significant oil transport business.

Its other main line of business is in retailing which is cutthroat also and highly regulated, with more players entering the market. In this area, customers flock to where service is better among competitors--and my own experience is, Petron service stations do a disservice to the term.

 At least Chavez can stand up against the U.S. using his oil, and the Iranians can rattle the market by simple nuclear posturing.

 So, what’s so strategic about Petron?

 It is better for it to be sold off; at least the government gets some loose change to shore up its perennial budget deficit.

 But then, it is doubtful whether the government can command the same price as the price paid for by Ashmore.

 It is a basic tenet of investing to sell when you are ahead. Selling the government Petron stake now is more like selling at the bottom of the market.

The U.S. also bails out its renewable energy industry

Buried within the 400 or so pages of sweeteners that were added to the recent $700 billion bailout package for the U.S.  financial sector that has been signed into law by President George W. Bush is a provision which breathes life to an anxious nascent renewable energy industry.

This is the extension of the Production (PTC) and Investment Tax Credits (ITC) which was unexpectedly passed as part of the Emergency Economic Stabilization Act of 2008 (H.R. 1424), as the bailout plan is officially known.

For months renewable energy practitioners--developers, investors, manufacturers and would-be users--could only wring their arms in anguish as they watch the spectacle of legislators bickering among themselves whether to extend or not the tax credits.

They view these tax credits as a lifeline to the whole renewable energy industry--solar, wind geothermal, and now the marine energy technologies--before it gets to its own maturity. The provision will extend the PTC for one year and the ITC for eight years.

The other highlights of the package include:

• Eliminating the $2,000 capon the residential ITC
• Allowing utilities to obtain ITC
• Authorizing $800 million for clean energy bonds for generating facilities using renewable sources
• Creating an ITC for so-called marine energy technologies which include tidal, wave current and ocean thermal

The solar energy industry is particularly ecstatic. The legislation "will enable (solar) companies to continue to invest in American production, American jobs and America's energy independence," said Mark Finocchario, president of SCHOTT Solar.

The wind industry considers the tax credits essential to the growth of the industry. In the geothermal sector, these credits encourage aggressive growth and support rapid deployment strategy for building geothermal plants within the decade, said Brent Cook, CEO of geothermal developer Raser Technologies.

That such incentives are vital to the industry can be seen in recent history. In 1999, 2001 and 2003 when Congress didn't renew the tax credits, wind power installations dropped by 93% in 2000 and by 74% in 2004.

Prior to the signing into law of the bailout package, wind developers have been putting projects on hold because financial institutions have been reluctant to fund these projects with only a glimmer of hope that the tax credit will be renewed, said Leon Steinberg, CEO of National Wind, a leading wind energy developer.

The solar industry relies on a 30% credit on new investments. If the credits were not renewed, the solar market could collapse, and solar-technology firms could end belly up,  according to an industry insider.

Our honorable senators and House representatives should take heed of the lessons from the U.S. situation. Their dilly-dallying of passing the renewable energy bill has cost the country enormous amount of opportunity losses.

Now that the bill will become law upon its signing, our legislators should realize that their job has only begun. We need to put some substance into the skeleton bill that they have just passed.

Making energy experts out of our legislators

The Senate has finally passed the renewable energy bill on the third and final reading after languishing for eons at the committee level. Now, it is up for Congress to reconcile both the Senate and House versions before the bill could be signed into law.

The news is a welcome whiff of fresh air; a respite from endless bickering among senators and parade of scandal accusations.

Why should our lawmakers take years to "read" important pieces of legislation? Due to delays in reading,  some bills are overtaken by events that they are no longer relevant. An example is the law dismantling the telecommunication monopoly years back. That law requires the new entrants to put up x kilometers of landlines if they wanted a piece of the action. Due to delays, the wireless revolution made many of these landlines virtually useless and nearly drowned those who did the mandatory roll out.

Nowadays in the U.S., energy issues occupy as much prominence and generate as much debate as Iraq and Afghanistan. In July for example, a bill to curb excessive speculation on oil was sponsored at the height of the oil price madness. This comes on the heels of a landmark passing of the energy bill of 2007. On the pipeline are a highly complex legislation on carbon emission through a cap-and-trade program and a carbon tax.

These pieces of legislation are highly involved and demand extensive research and voluminous background material.

What makes the U.S. energy lawmakers seemingly expert in this area whom I would imagine to be of similar breed as our local donkeys?

The September-October issue of EnergyBiz, a leading and award-winning publication in the energy sector, offers an explanation. On complex issues like futures trading, emission offsets and incentives to alternative energy developers, members of Congress usually turn to little-known Congressional Research Service (CRS) office.

Located across the Capitol, the CRS is one of the three major agencies that help Congress perform its job well; the other two being the Government Accountability Office (similar to our Commission on Audit) and the Congressional Budget Office which assists in determining the cost of legislation and other budgetary matters.

What makes it different from the energy committee staff for example, is that it is non-partisan and is not associated with any of the political parties or with the executive branch. The CRS listens to lobbyists but considers their position with healthy skepticism. It shifts through contradictory reports, verifies the veracity of data sources, and is ready to shoot down assumptions forwarded if need be.

For example, during the debate of the Clean Air Act of 1990, the CRS both examined the wide gap between the Environmental Protection Agency's cost estimate of $25 billion for the industry as against a claim of $80 billion by the National Association of Manufacturers.

We need a similar body to advise our honorable ladies and gentlemen in Congress on such matters as energy policies, alternative energy incentives, science development, consumer protection in the face of melamine and endosulfan scares, drugs policy and the like.

On energy, the Department of Energy can only do little, as it is beholden to its boss at Malacanang, and is subject to political machination come appointment time and budgetary allocation.

Like its U.S. counterpart, this proposed body should be composed of experts in energy, and doing full-time work in support of energy legislation. Its professionals should constantly monitor the radar screen of energy development, energy innovation and worldwide trends in energy policy.

If one observes a senate session during those few times when its members are actually talking about sensible legislation, much of the time is spent on points of clarification simply because our lawmakers are not well-grounded on the subject at hand. All the finer points of legislation should have been resolved even before a proposed legislation is brought before the members of a committee--not during a plenary session.

One cannot just pull out an academic teaching heat transfer and declares him a resource person and an expert on energy efficiency. Or hire a fresh graduate in science and ask her to research on energy policy.

Creating meaningful energy legislation cannot be relegated to the same level as the congressmen's favorite bills of renaming streets and towns in honor of their deceased forebears.