By J R Ruaya
Energy and Chemistry Consultant
When Saudi Aramco announced on March 14, 2008 that it is divesting its 40% stake in petroleum refiner and fuel retailer Petron, it created a stir on several fronts. The natural questions arose: Why is Aramco selling out, and why to a little-known (at least outside the investment circles) Ashmore, a London-based investment group? How would it affect the perceived national energy security brought about by supposedly strategic investor Aramco at Petron? Why was there no premium for a strategic stake?
The ultranationalists and the protectionists are quick to demand a re-nationalization, by prodding the government to re-acquire the shares. Under the 1994 agreement upon purchase of the stake from the Philippine government, Saudi Aramco is obliged to supply the oil requirements of the country while the government has the right of first refusal in case Aramco decides to divest.
Up to this time, the government is mulling over its options while the end of the 60-day reprieve to exercise its option is drawing close.
"They must have been cooking this up months ago, when the (stock) price of Petron was P4 or P5. So P6 transaction price already includes premium," says Joey Roxas, president of Eagle Equities when the deal was announced. Petron's price (PSE:PCOR) at the stock market have been languishing for years, and underperforming the index. In the months prior to the announcement, the highest price PCOR could fetch was at around 7.10 pesos in late October last year, but went down to as low as 4.80 in mid-January of this year. For the whole month of January, the prices stayed below 5.50 pesos.
If there was a premium, then Ashmore could have made the decision at around this time, but the premium was not as much as Roxas implied. At some stage, it will have to flip its investment; it doesn't need to own Petron as a prized trophy. Upfront, it would not be expected to overpay as a matter of sound investment policy.
When the deal was announced, there was hardly any ripple in the price. In fact, the bias in price has been downward since.
Is it a good deal?
Vulture and savvy investors make offers when the price of an asset is at its ebb, when there is blood in the streets. They will swoop down upon such animals when they are weakest, when they think that their prey is heavily undervalued and when they think that there is much upside potential, or they can unlock the true value of the asset later.
Petron seems to fall into that category. It is at an industry which is reaping windfall profits from skyrocketing prices of its basic commodity, oil. Of course, much of the money can be had at the upstream end, at production and even petrochemicals, but the bulk of Petron's business is downstream, at refining and retailing when competition is cut-throat and margins are razor thin.
Already, Caltex has pulled out of refining altogether, and the other of the big three, Shell, hasn't have not much appetite for local refining. Whatever refining capabilities we have pales in comparison with say, the Singapore-based refiners.
A PNOC executive speculated that the Company's direction towards petrochemicals could be the icing on the cake for Ashmore, which is supporting the move. In fact, Ashmore is buying the stake through its unit aptly named SEA Refinery Holdings.
Why is Saudi firm Aramco Overseas Corp B.V. selling out? boomed Newsbreak. It has bought the stake for $530 M in 1994, but why is it not asking for more?
"Between then and now, Aramco even earned some dividends. So there is a lot of speculation on why it is only selling at $550 million," said Gio de la Rosa, senior analyst at Deutsche Regis Partners.
"If Petron is doing well, why is Aramco selling its stake?" de la Rosa asked.
Apparently, it is not.
To put it in another perspective, Aramco's investment in Petron is insignificant in its portfolio. Aramco is the largest oil company in the world in terms of production. In 2006, its revenues topped a whopping $168 billion while PCOR's revenues is at measly $5 billion which translates to $2 billion attibutable to Saudi Aramco. No reliable actual figures for Saudi Aramco has been released for 2007.
Aramco might simply want to get rid of it, being just a pain in the neck as an underperforming investment. It is not worth keeping. In terms of volume of business it is generating here, Saudi Aramco simply thinks that the Philippines is too small a market to maintain. It would rather move on to much bigger markets like China.
Enter the speculator
Speculation on the motives of Ashmore, which is tight-lipped on the deal, abound. Simply put, it is making an investment, but why Petron? The only way to catch a gleam of its motives is to study its habits.
"Ashmore Investment Management Limited is one of the world's leading investment managers dedicated to emerging markets with a history of consistently outperforming the market. Ashmore focuses on a number of investment themes including dollar debt, local currency, special situations (incorporating distressed debt and private equity) corporate high yield and equity," declares its purpose in its main web page.
On special situations, its avowed strategy is "bottom-up, value and event-driven strategy. Investments are mainly in corporate restructurings through distressed debt, private and public equity and equity linked securities", and on equity, it "[f]ocuses primarily on liquidity and top-down macro country selection in publicly traded equities and is complemented by a portion of equity special situations".
Based in London, the business started in 1992 as part of the Australia and New Zealand Banking Group. In 1999, Ashmore through management buyout became independent and today manages US$36.3 billion (at 31 March 2008) in pooled funds, segregated accounts and structured products. It is listed at the London Stock Exchange.
Its investment philosophy and results have been recognized by the numerous awards given and top rankings accorded to it by major rating agencies including Lipper and Standard & Poor's. The company won Global Investor's Award for Investment Excellence in Emerging Markets Bonds in 2001, 2002, 2004, 2005 and 2006 and Global Pensions' Emerging Markets Manager of the Year Award in 2006. It is on the same league as its esteemed competitors like Aberdeen Asset Management, Invesco and the MAN Group of Germany.
Ashmore's portfolio in the Philippines includes a stake in Maynilad Water Services and Landco, a unit of Metro Pacific Investments. Until lately, Maynilad was a basket case, while Landco, an unlisted unit, owns premier lots which holds a large upside potential. Like Petron, both fit nicely into Ashmore's avowed strategy.
The Group is publicly traded, and it is not as secretive as one might think. On the contrary, Saudi Aramco, along with Kuwait Petroleum, is ranked by an industry watchdog as the worst offender in revenue transparency among the oil majors.
Therefore, Ashmore is really in for the money, period. Do you have a problem with that?
Dirty hands in the deal?
Boo Chanco, a former Petron and PNOC executive and now a columnist at Philippine Star, fiercely wants PCOR to be in private hands, but not Asmore's, according to his latest (today) May 2 column. He said that " in the current case, it makes sense for government to exercise its right of first refusal in the sale of Aramco’s shares to Ashmore, the foreign investment group. Two things come to mind: the buyer brings nothing to the table other than money. Aramco was a strategic partner that guarantees oil supply which is important in this unpredictable oil market. "
"Secondly, the sale is a bit suspicious… at less than market price. A nice block of shares like that should have even commanded a premium. Is Aramco being forced out? By whom? I don’t even want to consider the possibility I have heard that the sale is a neat way of laundering money that came from here, in the first place. But it is a very real possibility. Why would a foreign investor want to buy those shares when there are obviously better options in the international market for that kind of money?"
"I can guess that the money is coming from a domestic vested interest that’s possibly aligned with the administration. I am not sure we want to allow this party to control a vital energy company. Transco’s privatization already landed it in the hands of you-know-who."
I sympathize with Chanco's apprehension on the second reason, which I cannot add anything more, being out of the loop of the corridors of power, but not on the first.
Admittedly Ashmore brings only money on the table, but look how money can shake things up a staid environment like Petron's.
When the barbarians like Warren Buffett, Kirk Kerkorian or a Mittal are at the corporate gates, the company's cauldron begins to simmer. A laid-back corporate board becomes uneasy, deadwood insiders apparently come to life like zombies, and a teetotalling corporate "strategy" or a shadow of its semblance, righted. These predators could be the adrenaline dose Petron lacks.
"As a matter of public policy, it is better if Petron were owned by more people, more groups," Chanco enthuses. He adds, " Aramco’s exit could be a chance to broaden the ownership structure even more by selling those shares to the the stock market. This would also increase the liquidity of Petron shares."
He cited an editorial of Malaya which he considered to put it aptly: “[G]overnment should determine if there is an opportunity to make money at the price tag. If the assets are worth much more, then the government should exercise its right of first refusal and then turn around and look for another buyer. A few million dollars to be made would not hurt a government in chronic deficit.”
There is a non sequitur here.
First, the government will spend $550 million (that is, P 23.1 billion at P42 to a dollar) upfront acquiring the stake.
Second, I wouldn't bet that government, being now the majority owner at 80%, could increase significantly the shareholder value of the company. So the government wouldn't get a "few million dollars" in the foreseeable future to plug its chronic deficit. Putting a bet on somebody like Ashmore to accomplish this would increase the odds of getting one's money back and more.
If one wants the government to earn from its Petron investment, then let somebody (like Ashmore) increase the company's value, and the government to divest part or all of its stake at the proper time. This will also broaden the shareholder base of the company.
In the interim when the government owns Petron, that is the time when its coffers are prone to abuse by the powers that be, the very possibility Mr. Chanco wants to avoid.
We never learn from experience of government in business. We always fervently try to shoot both our feet all the time.
Supply assurance
In terms of supply security, today is no longer 1973, when the bulk of the free world supply is concentrated in Middle East; communist Russia, the alternative supplier, was still regarded as the devil incarnate; and the OPEC cartel was very much in command. True, oil prices are at all-time high, not because of tight supplies, but on the potential massive supply disruptions brought about by raging bushfires in the geopolitical landscape:
Iraq insecurity, U.S. nuclear posturing against Iran, nationalization threats in some Latin American countries, attacks on oil installations in the Niger delta--you name it.
On the other hand, a vast supply potential is waiting to be tapped from new fields in Latin America, West Africa and the former Soviet states. Here in Asia, Indonesia and Vietnam are opening their doors to foreigners who want to develop its hydrocarbon resources. Due to high prices (law of supply and demand again) oil field development have been on a frenzied pace. In the next few years, chances are oil prices would be going down than up.
With more suppliers other than the Middle East, supply would be less of a concern.
There would be supply apprehensions which can become real, like when U.S.' saber-rattling against Iran becomes a crescendo, when Al Qaida gains an upper hand in Iraq, or when President Chavez of Venezuela actually boots out the foreign infidels in oil production, but no thanks to Saudi Aramco's grip on Petron. The market will ultimately decide decide whether we would have oil or we go back to coconut oil lamps and calesa.
So, who's afraid of Ashmore?
Only the rabid protectionists and those who have shady interests on the deal.
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