Pulling out of Petron

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The recent announcement that Saudi Aramco was in the market to sell its 40-percent share of Petron to the London-based investment fund Ashmore came as no surprise to industry observers and analysts.

To many Filipinos, Petron’s income of late was a sight to behold: billions of pesos! But compared to the telecom companies, Petron’s returns are a pittance. In other words, Petron’s earnings could be a lot greater!

Thus, the question remains: why would a strategic investor such as Saudi Aramco pull out if it were not for the failure of its investment to live up to expected returns and expectations? By any measure – whether it be return on investment, return on rate base, return on capital employed, or return on equity – the Saudis must have ran their numbers and the results came up below par.

Again, why the dismal showing?

A look at Petron’s pricing behavior over the years reveals that the government – through its 40-percent stake in the Philippine National Oil Company – has kept the prices of fuel in the country artificially low. Petron has always been the last to move its prices upwards, even if it needed to do so; it has also been the first to move its prices downwards, even if its costs dictated otherwise.

In 2004, Petron, at the instigation of then Energy Secretary Vince Perez, began offering a one-peso discount to jeepneys. The jeepney lanes are an aberration; being a direct subsidy by the oil companies, the jeepney lanes promote excessive consumption of fuel in an era of global warming and when the price of oil in the global market has skyrocketed to unprecedented heights.  Imagine the impact of these subsidies to the company’s bottom line!

Petron also led the move in Congress to enact the Biofuels Law or Republic Act 9367. For Saudi Aramco’s point of view, the biofuels law effectively displaces a guaranteed market – at least 10 percent of Petron’s crude requirement in the near-term, and about 20 percent in the long term.

With the enactment of the Biofuels Law, Saudi Aramco’s losses are not limited to the displacement of Petron’s crude requirement. In 1995, Petron inaugurated its 10,000-barrel-per-day isomerization unit which, according to the company, “enables the production of high-octane gasoline within the CAA-prescribed limits on aromatics and benzene.”

Since ethanol boosts octane in gasoline, what will Petron then do with its new isomerization unit (which boosts octane in gasoline)? It will become a huge monstrosity, a stranded asset! For sure, the Saudis must have fainted when they saw the losses they incurred for this particular investment and the interest for the loan that Petron undertook!

Add to these the recent calls in Congress to buy back Petron and the proposal to nationalize the oil industry, then the Saudis must have decided it was time to pull the plug before they lose even more money.

Speaking of nationalization and buy-back, just how much would it cost to buy back Aramco’s 40-percent share?

Using the March average price in the stock exchange of Php5.90 and the 3,750,000,009 Aramco shares, this amounts to an astounding Php22.125 billion!

But to match Ashmore’s bid of Php6.82 per share (3,750,000,009 Aramco shares/US$550 million), government would have to shell out an even astronomical amount of Php25.568 billion (Php41.09 x US$550,000,000)!

On the other hand, the administration has sought to downplay the Saudis’ exit and even “welcomed” the entry of Ashmore, saying it is a “vote of confidence” on the country’s economy.

In the meantime, Petron has publicly declared that Saudi Aramco will be a “supplier of choice”. But wait until the Saudi supply contract expires.

What does Petron get with the Ashmore buy in?

Ashmore is not a player in the global oil industry (Read: it’s not an oil company in the league of BP, Chevron, ExxonMobil, PTT, Shell, or Total), so it does not have the technology or the raw materials (i.e., crude oil) to bring to the table.

Put it another way, it merely wants to make money.

On the top of the list, it may close several hundred stations to make Petron’s network more efficient.  It may cut the number of employees and abolish certain positions.

Through its current exposure in another Philippine company, Metro Pacific, Ashmore has holdings in relatively non-“price sensitive” industries such as hospitals (Makati Medical), real estate (Landco Pacific), water concession (Maynilad Water), and telecoms (Smart). Oil is an entirely different ballgame altogether.

Nevertheless, we shall see in the coming days how this situation will unravel. And whether or not Ashmore will do better than the Saudis how did over the past 14 years.

Disclaimer: The views and opinions advanced in this article is the author’s own, and may not necessarily represent the views and opinions of THE LOBBYiST, its editors, or its publishers.

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