Think big oil

Think big.

If you want to get ahead in life and be wildly successful in business, this is the counsel of the inimitable Donald J Trump in his book of the same title.

San Miguel Corp  (PSE: SMC) president Ramon Ang must have taken heed of this counsel when he recently declared that his diversifying conglomerate is looking for a big oil or natural gas field as its next target for acquisition.

“If we are able to buy one of those, it would be like printing money forever,” Ang said as a matter- of- factly.

Well, not exactly. That could happen if you execute your plan flawlessly. While big oil is big business, it has its share of gargantuan risks. One thing, nation owners could suddenly gain epiphany that the resources that lie within their borders belong to their people (clap! clap! for the grandstanding) and seize your oil assets. Look at what happened to Venezuela when Hugo Chavez—bless his soul—seized control of the country. Or to neighboring Argentina when its president Cristina Fernandez forcibly took control of ownership of Spain-owned YPF Repsol.

Or you could have a blow-out as in the Gulf of Mexico resulting to oil spill that cost the oil rig owner billions of dollars in damages, or you tanker runs aground somewhere in Alaska and oil spills out causing catastrophic environmental damage.

There are also risks caused deliberately.  Militants may attack your facilities as in Algeria, or the Arab spring erupts in your area of operations as in Libya and Syria.

All of these are surely at the back of Ang’s mind when he uttered those words. But, if your business has to grow, take heed of Trump’s next piece of advice: Take chances. Be a doer, not only a dreamer.

“We have a full force of people pursuing these deals,” Ang reveals.

Surely, he must be kind enough to help develop our struggling miniscule oil field prospects off the coast of Palawan? Oh, no, “those are toys”. Kind of small for his taste.

Credit and salutation should go to Ang just for thinking along those lines if one were to think about the future of this country. We are one of the few countries in Asia which do not have an oil champion seeking oil production outside the borders. Even our small neighbours are doing that. Malaysia has Petronas combing for opportunities and Thailand’s PTT following a similar plan.

It seems Ang is dead serious about his plan, no matter what the costs. Even if he has to let go of major assets like its brewery business or its power generation projects under SMC Global Power Holdings which are only taking off as we write.

“In business there is no such thing as sentimental value”, Ang mused.

Let’s sit and watch Ang’s designs unfolding.

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.)