Petron Corporation (PSE: PCOR) is now officially in play.
That is the investment jargon when a company is in the middle of ownership transition.
On Monday last week, San Miguel Corporation (PSE: SMC) said it is eyeing Ashmore Investments’ 50.1% interest in Petron. That sent PCOR shares flying which made it the top gainer among the listed stocks. It surged by more than a fifth to settle at P5.30 a share by Friday.
The sentiment is up on Petron since San Miguel is perceived to be a big and experienced company that could reverse the fortune of Petron which has been buffeted by intense competition in an industry where margins are razor-thin.
At the same time, Petron announced that it would likely be in the red this year to the tune of P 2 billion owing to falling oil prices. Petron, as well as other oil retailers, also groaned under rising oil prices early this year. That it suffers under which way oil prices are going is not entirely illogical; it is part of the nature of the business. Because oil is a politically- sensitive commodity, retailers cannot easily adjust pump prices in response to oil price movements.
When prices are falling and there is loud clamor for rollback, slow-footed refiners and retailers like Petron are saddled with inventory purchased at higher prices. Likewise, in a regime of rising prices, increases in pump prices cannot be easily implemented owing to political pressures. It is reported that among the major oil players Petron has the largest inventory and the slowest turnover. If so, its present inventories have been purchased at higher prices than current.
In this business, the lean and nimble has a greater chance to survive going forward.
It used to be that the industry is perceived to be lucrative to the big three in oil (Shell, Petron and Chevron) when the scene was like a cartel. With the liberalization of the industry, new players have grabbed a chunk of the pie and the nimblest, most efficient and deep-pocketed among them are continuously making inroads into the turf of the big three.
Among the most aggressive of the new players is Total—which is not exactly a small fry. In the global market, it is considered among the majors. Amidst the gloom brought about by the lingering financial crisis, it has announced a massive expansion of its outlets especially in Luzon and the Visayas. And it can rely upon its mother firm to supply it with enough financial firepower in case of an all-out war which seems to be already unfolding.
In the hinterlands of Mindanao and parts of the Visayas where the tentacles of the big three have tenuous hold, independent player Phoenix Petroleum (PSE: PNX) has spread its wings, slowly increasing its reach.
When it recently signed up boxing hero Manny Pacquiao as its main endorser, it is sending signals to its competitors that it is ready to climb up the oil’s boxing arena for a long fight. It is also reported that Pacquiao will be operating one of Phoenix’ service centers in General Santos City.
If SMC ultimately gains majority ownership of Petron, it would be up against formidable opposition. True, SMC has considerable marketing clout—which is why investors seem to cheer at its entry—but it is becoming more like a lumbering brontosaurus than a springy springbok, even in the food business.
Which is probably why it has announced that it will ultimately get out of its core food business.
In the process, investors have punished SMC since it announced that it is entering businesses like energy, telecoms and infrastructure where it has limited experience. In energy, it has acquired 27% of electricity retailer Meralco (PSE: MER), but failed at getting Transco and geothermal developer Energy Development Corporation (PSE:EDC) which ended up in the hands of the Lopezes. It tried to grab Indonesian coal miner Bumi Resources but apparently bowed out to local interests.
SMC’s erratic moves have not escaped notice from credit ratings agencies. Moody’s Investor Service has downgraded SMC’s local currency rating to negative from stable after it bares its plan to acquire majority control of Petron.
In a statement, the global credit watcher warned of a rating downgrade if San Miguel pursues the investment plan, which it said could hamper the group’s ability to service its debts.
Now it is partnering with—of all companies—Qatar Telecoms for joint projects. Why not any other of the major telecom players?
Now, why is Ashmore selling to SMC when it has exercised it right to acquire the government shares?
Ashmore is about to end up with 90% ownership of Petron after it has indicated that it is exercising its right of first refusal when the government has put up its 40% interest up for grabs. By relinquishing management to a perceived knowledgeable entity in retail, it feels it has a better chance of recovering its investments (with some profits of course). In the first place it is an investment fund, not a management company.
More importantly, it is paving its exit from Petron. By selling a majority block to SMC it can extract concessions from the buyer. Like for example, it can require the buyer to purchase its remaining shares at a later date once it decides to divest completely from the refiner.
We have already considered this scenario in a previous blog entry; only the numbers are somewhat different.
The struggle for Petron ought to be exciting were it not for the circumstances under which it is played as outlined above.
No wonder other players are nowhere in sight.
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