Petron now in play—but where are the players?

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.

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.

Gokongweis, JP Morgan eyeing the wrong Petron stake

By J R Ruaya
Energy and Chemistry Consultant

According to today's papers, Energy Secretary Angelo Reyes said Wednesday that the Gokongweis and investment group JP Morgan have expressed interest in buying a 40 percent stake owned by Saudi Aramco in oil refiner Petron Corp.

Well and good. At least it shows that despite its mediocre performance in the past years, the refiner can still command some interest. In the first quarter of this year, Petron had a net profit of P 658 M, down 31 % year- on- year. Really, a silly performance in an industry where the price of its prime product, oil, is at stratospheric levels.

According to the covenant signed when Saudi Aramco acquired the stake in 1994, PNOC has the right of first refusal when the acquirer likes to divest the stake to another party. PNOC can also assign its option to a third party. Its board meets today to decide a course of action.

Let us hope the members of the board have given the matter the deepest thoughts.

The Gokongweis are no stranger to the industry. They have taken a dip into the industry through JG Summit Petrochemicals Corp., a unit of its flagship company, JG Summit Holdings. The petrochemicals unit is said to be the country's first integrated polyethylene and polypropylene plant. Therefore, the Petron stake fits nicely to the Gokongwei's portfolio.

Petron itself hopes to jumpstart its petrochemicals business this year by opening its new facility in Bataan. It hopes to increase its gasoline production and extraction of propylene, a raw material for plastics.

JP Morgan, on the other hand, has made its mark in the financial world as a financial adviser, principally in loan syndication, public offerings, and mergers and acquisition. This time it might be representing some clients, but it is also known for taking direct stakes in target companies with the hope of flipping these later for a tidy profit. Very much like the "dreaded" Ashmore.

Because Ashmore made the offer with only a slight premium, JG Summit and JP Morgan must be salivating over the stake, for they could get it for a song.

But wait. The government need not assign the stake to a third party at the same price as what Ashmore offered. It can, in effect, go through the motions of exercising its right of first refusal and put the stake into play, where anyone, including the known corporate raiders and vulture capitalists can take part in open bidding.

Better still, the Gokongweis and JP Morgan should offer to buy the government's other 40% stake while letting Ashmore partake of the other 40%. Putting both stakes together as a block at 80% would surely command a better price, but this would spark an open revolt from the ultranationalists and protectionists.

This is also the chance for the government to get out of Petron altogether. Many interests still have misty eyes about protectionism, energy security, and semblance of control of oil prices, but look what have we got?

We have tried tight control before and lossening up with partial privatization of Petron, but have we stopped or abated the onslaught of the oil price increase juggernaut? Market forces, like acts of God, are simply too strong to resist. Not by government. Not by a monopoly.

Re-acquiring the Petron stake by the government would run contrary to the vision of broadening the shareholder base of vital corporations such as Petron -- or Meralco, the other vital issue currently in the limelight.

The Gokongweis and JP Morgan are probably eyeing the wrong Petron stake.

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(Note added: After this has been posted, the Gokongweis clarified through a letter from Lance Y Gokongwei of JG Summit Petrochemicals Corporation that they are offering P 26.4 B or roughly 6.55 per share of the government's own stake, not Saudi Aramco's, according to Businessworld).