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.