I have been reading this week's Edge which discusses about Scomi and the challenges that it faces. Under the title "Scomi Group on the Brink", it highlights the predicament that the group is facing as well as giving us an account of its colorful past where it was a vehicle controlled by Datuk Kamaruddin Abdullah, the son of Malaysian 5th Prime Minister, Abdullah Badawi. Of course, the best period experienced by Scomi was when Badawi was PM. After that, it was downhill for the company.
This gives us a lesson and remind us that it is hard to evaluate O&G companies. Why? To me, many O&G companies in Malaysia need a different type of business connection and it is hard to make out their actual strengths and capabilities. That we have seen - the best opportunity for several of the sons of Malaysian PMs to become successful in business is through this sector. It has been proven before.
Whether they are capable business, it is hard to read. This sector however does allow people whom have connections to either our country's oil business, the federal or state government to succeed. O&G is quite a unique business where in many countries, the assets are state owned. This is similar in Malaysia where the asset is owned by Petronas and ultimately the PM's office control.
This was especially so when oil touched $120 per barrel and at that period Petronas was probably more relaxed in developing Malaysian O&G companies. When oil comes down to $60, it will be a different story. I believe Petronas will be more careful. At this period, it will be the time to separate the boys from the men, as someone would say it.
As an investor, it is important to figure out and try to eliminate what is investible and which one is potentially high risk. The retail business is investible and those include PDB and Petron. Then there are the equipment suppliers, companies like Wah Seong, Favelle Favco. Dialog is another one where they have made it successful in the business and they are proven company.
Then there are those that very hard to read, in terms capabilities especially to our Malaysian service providers which largely only supplies towards local projects. Those include Carimin, Perisai, Perdana Petroleum, Dayang, Icon Offshore and few others.
There are several companies that have made it overseas. Those include Yinson, Bumi Armada, Sapura Energy, Wah Seong, MISC. These are the companies that will provide a good basis for us to make our study as this is an international business and the ones that are able to compete internationally shows their competitiveness. The ones that have more than 80% of their business dependent on Malaysian contracts is just too risky.
The recent rise among O&G companies brought back an early exuberant towards the sector but we must be able to separate which are capable to compete and which ones are not. What has not really happened and to my disappointment is the lack of consolidation among the companies. There have been very little M&As within the sector and I feel that there are just too many companies. Although there will be natural attrition, the amount of consolidation is just too few.
I do think that while there seems to be a pick up in the sector, many of these companies will still find it hard to make ends meet. A run through of what the companies say in terms of prospects for 2019 and near term just shows that the good old days are far and between. It is true though that many stocks have touched their all time low. These provides huge opportunities.
To understand the sector, it is not just about how many contracts Petronas can dish out as I believe they are also very careful nowadays. It is about geopolitical. It is also about the politics of Trump and Saudi with Russia in the fray as well. Even the killing of Khashoggi has its impact on the price of oil. Shale from US plays a big role. How will they impact the strategy among the oil majors and OPEC? What about the global initiatives on alternative energy such as solar, electric car etc?
If one is just promoting based on how many rigs Petronas has, I think it is pure shortsightedness and not thorough in their thinking. In this space, one has to be clear on the macro as well as micro economic situation. Is Hengyuan a retailer and refiner? What would the impact of excess supply from US shale brings to their margin?
What about the companies in the exploration space? Are there new activities and are there oversupply among the players. Can I call it the buyers (companies that awards contracts) market?
There are companies that have some debt issues and such are Bumi Armada, Sapura, Perisai Petroleum, Scomi Energy. Can they overcome that? As I have mentioned, some of them are world class competitors. Will they be back stronger if ever they are able to resolve their debt issues?
Then there are some companies which have taken opportunities as they are late entrants in the business when the oil price collapse. When others were struggling with overcapacity and debt, they had just raised new funds and their balance sheet were fresh and unleveraged. Such companies include Hibiscus, DNEX.
All in all, during times of uncertainty there presents opportunities, but we have to be very careful as not all of them are worthwhile.
Showing posts with label Petron. Show all posts
Showing posts with label Petron. Show all posts
Sunday, February 10, 2019
Monday, September 3, 2018
Before providing Government with fuel cards, Petron was already attractive. Now?
Last year, I gave my opinion on Petron over Hengyuan as well as the potential for the stock from a defensive investment perspective or even if we are to look at mid-growth stock. When I was about to collect the stock, there was a craze over an almost similar stock - Hengyuan. Hengyuan had a run until a huge (enough) stock investment community became well-verse about crack spread even though we have never visited any kind of refinery before.
As in all spikes up or down, it will always come to normalcy, this is what happens to a refining business - and it was pretty shortlived. This is also the usual trend of any economic concern especially for the more traditional business. Petrol is now a traditional business with a threat towards its existence - electric vehicle - but not in the next short decade.
In a normal situation, a B2C business is more often a better bet and provide better stability. Petron and Petronas Dagangan (PDB) are the only 2 traded stocks that has that exposure for investors in Malaysian stocks. PDB is trading at around 23x PE while Petron is trading at less than 7x PE.
What causes the difference in valuation? My theory for that is the wealth of our government controlled funds - Khazanah, EPF, KWAP, PNB and few more. They have less options to invest with the continuing strength in their deposit taking. PDB moreover is a Composite stock whereas Petron is not hence making it more reason for government related funds to buy more.
As a value investor, these are what I try to take opportunity of. To me Petron has built its business to be just as good as PDB albeit the size. In fact, I like it more as a private company as opposed to PDB being a government owned business.
The approval for Petron to be a provider to government fuel provider for its fleet of vehicles has also probably allow us to see the change in attitudes towards private businesses as we have been exposed to preference for GLICs and GLCs in the past decades.
As it is Petron has been growing at around 5% to 7% over the last few years, above its peers and from this new business opportunity, I see a spike in its business in the short term.
Last quarter (April to June 2018), we see Petron making around RM92 million net profits and I see this is a number where it is pretty much an average for the company with continuous growth of around 7% to 8%. This is a period where fuel price was fixed at RM2.20 (RON95) for most period of the quarter. This action taken by the new government will also allow petrol station operators to lose less than when they allowed it to float. This is positive for company such as Petron.
Crack margins was also weak for the period in review, hence the allowance for upside is also there.
At its normalcy, Petron should have been a strong defensive stock but in its price as I reiterated, has not shown anything of that. Hopefully yet!
As in all spikes up or down, it will always come to normalcy, this is what happens to a refining business - and it was pretty shortlived. This is also the usual trend of any economic concern especially for the more traditional business. Petrol is now a traditional business with a threat towards its existence - electric vehicle - but not in the next short decade.
In a normal situation, a B2C business is more often a better bet and provide better stability. Petron and Petronas Dagangan (PDB) are the only 2 traded stocks that has that exposure for investors in Malaysian stocks. PDB is trading at around 23x PE while Petron is trading at less than 7x PE.
What causes the difference in valuation? My theory for that is the wealth of our government controlled funds - Khazanah, EPF, KWAP, PNB and few more. They have less options to invest with the continuing strength in their deposit taking. PDB moreover is a Composite stock whereas Petron is not hence making it more reason for government related funds to buy more.
As a value investor, these are what I try to take opportunity of. To me Petron has built its business to be just as good as PDB albeit the size. In fact, I like it more as a private company as opposed to PDB being a government owned business.
The approval for Petron to be a provider to government fuel provider for its fleet of vehicles has also probably allow us to see the change in attitudes towards private businesses as we have been exposed to preference for GLICs and GLCs in the past decades.
As it is Petron has been growing at around 5% to 7% over the last few years, above its peers and from this new business opportunity, I see a spike in its business in the short term.
Last quarter (April to June 2018), we see Petron making around RM92 million net profits and I see this is a number where it is pretty much an average for the company with continuous growth of around 7% to 8%. This is a period where fuel price was fixed at RM2.20 (RON95) for most period of the quarter. This action taken by the new government will also allow petrol station operators to lose less than when they allowed it to float. This is positive for company such as Petron.
Crack margins was also weak for the period in review, hence the allowance for upside is also there.
At its normalcy, Petron should have been a strong defensive stock but in its price as I reiterated, has not shown anything of that. Hopefully yet!
Wednesday, January 17, 2018
Call Warrant: TALES OF PETRON AND HENGYUAN : EIGHT MONTHS OF GAINS, LOSSES, FOMO, AND A FAILURE OF THE IMAGINATION
By Afiq Isa
A call warrant trader's diary
Part I : Who the Hell Fills Up at Petron?
Don't worry, this is not going to be a deep dive into the fundamentals and cash flows of refinery companies. It's just a full, uncensored, transparent account of my experience with two of last year's biggest gems : Petron Malaysia Refining & Marketing Bhd and Hengyuan Refining Company Bhd.
Let me start with a bit of background : At the start of 2017 I was completely biased towards an oil price recovery scenario. I'd love to buy a fundamentally sound oil and gas company, but there didn't seem to be any. For the most part, anybody involved in the upstream segment was still royally screwed. The lag time between crude oil's price recovery and the demand for upstream drilling services is too long (I've read and written many wishful thinking-type stories on this very subject). Or you may count on Petronas as a long term benefactor, but your earnings are constantly sucked into a debt-servicing vacuum.
So who are the oil and gas players who can maintain stable earnings in a benign oil price environment but can quickly report fantastic earnings as soon as oil prices rally? It's the refineries.
As an added bonus : were refineries deeply unloved by investors at the beginning of 2017, as shown by their single-digit PE ratios? Were they being completely ignored by analysts who were averse to being bold?* Yes and yes.
I was enthralled by Petron's potential. Its 4QFY16 results announcement on February 22 caused a spike in the share price the next day : it went from RM4.50 to a peak of RM6.48. The price then stagnated for about a month (the stock prices have been adjusted to reflect dividend payouts during the year).
During this time (of stagnation), I thought long and hard about initiating a position. About half of its FY16 earnings came during 4Q alone, and it was ten times the 4QFY15 earnings. Their respective revenue and gross profit figures suggest that the earnings recovery was real. And this was a single-digit PE company that paid dividends during the bad times!
March 16, 2017 entry on my trading journal.
1) The sloppier the handwriting, the more excited I am about a stock.
2) My best preliminary layman analysis at the time : 'they refine oil and sell it'.
3) The earnings recovery puzzle : did an extra 10,000 people a day started filling up at Petron stations in 4QFY16? Who knows. One clue was that they reported higher sales during a quarter where the government set petrol pump prices were higher compared to the same quarter the year before.
After a slightly more thorough due diligence process, I was confident that a rally of at least 30% is realistic - this is a prediction that Q1FY17 numbers will reflect a continuation of the 4QFY16 recovery trend. I'm aware of what the technical analysts are thinking - they will say that the next 'points of interest' are at RM6.48 (the recent peak) and RM6.70 (the previous peak in 2016). I began accumulating a cheap call warrant, Petron-CC, when the stock was trading at around RM5.70.
Ignore the technical analysis. My parameters for this trade were very simple. It only needs to rally beyond RM6 and stay above that point over the next two months. That's only a 5% increase in the stock. At that 5% gain level my call warrants would already be profitable - from that point on I can stay with the position and rely on the profit buffer. But Petron's stock has to rise over this two-month period, or time decay will start affecting Petron-CC's value.
My deadline for this trade to work was the next quarterly earnings (since this is a one-quarter thematic play). And my conviction was strong enough that I accumulated a massive position gradually; a one sen move in the call warrants translates to a RM2,800 profit/loss. I finished buying by April 1.
By May 15 Petron's stock hit RM8.70 - a 52% increase. I hit the jackpot, but I made a pretty big mistake during this time.
Wohoo?
I failed to stick to my own plans - a typical human failing. Instead of selling just before the 1Q earnings (sell on news; trading interest wanes once the anticipated material information becomes public), I decided to stick beyond May. I convinced myself that the warrants can weather any short term decline post-earnings and continue to rally further. Petron's price did recover but I was betting on the wrong horse (warrant) by that point.
May 26 journal entry. By this point I was trapped in a big position as the warrant plummets.
As expected, there was an immediate decline in the stock after its earnings release (the numbers were excellent). It fell from RM8.67 to RM7 in a month - a staggering 20% decline. I then failed to remember that a volatile stock translates to a much more volatile warrant. My holdings fell enough to cut my profits by a third. Note that the warrants never followed Petron's trajectory thereafter. It stagnated until its September expiration date.
This was the end result. I wasn't complaining, but it's normal to feel like an idiot when you threw away thousands of ringgit in profits. In other words, good planning, but terrible execution.
Some RM9,000 in losses were subtracted from this final net gain figure.
By this time (June), the market has begun paying attention towards refineries. Petron continues to rally towards RM9 by August. By then I knew there will be further opportunities to trade.
Part II : Hengyuan Emerges.. and FOMO Strikes!
If you're still reading at this point, I'll reward your tenacity with a brief fundamental background on Petron. It currently has the third biggest market share in the country (from zero brand recognition in 2012), it opened more stations than any other brand in 2015 and 2016 AND 2017, it counts on its big Filipino parent group for support, and it's an integrated downstream player (they refine, sell, and distribute the oil to their Petron stations).
The company owns the bulk of the stations after taking over Mobil's sites, but they also have a franchisee program that offers better rates for vendors than Petronas. Their improved sales numbers seem to come just from having more stations and having better brand recognition among customers - aside from improved selling prices. Geographical focus must have helped too - they focus on underserved locations in states like Johor, Pahang, and Kelantan, not the Klang Valley.
You get the idea.
However, having retail and distribution activities as well as new station openings involve substantial and ongoing non-refinery related capex commitments (it's easier to calculate a 5-year capex when you're just building/upgrading a refinery). Lower gross profits from these other operations can eat up into the fantastic margins reported by Petron's refining and sales activity. So you'll likely get lower gross profit margins at the group level.
So if you really only care about the refinery angle, the solution is to buy Hengyuan shares. They just do refining and sales, and the Shell Group buys their stuff under a long term agreement. It's owned by a Chinese company who bought a 51% stake for the low, low price of RM1.92 a share. On paper the Chinese are currently sitting on a 750% gain in less than two years.
This is all Hengyuan needs to keep doing : take care of the 'products' and the 'pipe'.
'Pure play' (focus on one thing only) companies like Hengyuan promises higher profit margins than integrated players like Petron because its commitments are more concentrated (build refinery, maintain refinery, increase production capacity). They don't have to spend ever-increasing amounts of money on building and operating petrol stations.
I've had a cursory look at Petron's and Hengyuan's respective refining operations and their average production capacities; assuming they're selling the same type of refined products, their gross margins from refining during a typical quarter should be similar.
It's the other stuff that eats you up - old capex, new capex, forex hedging, anything. Petron also does not disclose an earnings breakdown of their refining, retail, and other operations. In each of the past three financial quarters, Hengyuan's profit margins have been consistently better than Petron's.
I just wanted to mention the oil price recovery theme in all of this, but beware of how boring the following sentences are : Improving oil prices are generally good for refiners up to a point ; it depends on their crack spreads. Another variable for these companies is stockholding gains ; higher oil prices translate to higher inventory values on all the stuff they store in their tanks. To reflect improving oil prices, they can recognise the quarterly increase in inventory value as part of their profits. Their selling prices are based on global benchmarks, so a short term supply disruption globally can be good for these guys, even if they predominantly sell oil in the domestic market.
Anyway, Hengyuan has rallied alongside Petron since March, but it didn't have a call warrant. Only in August did one investment bank issue Hengyuan-CA and a few other call warrants, and the market went nuts. External factors didn't seem to have led to this - Brent crude prices were still languishing in the 50s.
Whether by luck or design, the stage was set for speculators to demonstrate their FOMO - they simply can't afford to miss out on another Petron. Hengyuan was hit with a market query just a couple days before Hengyuan-CA was listed. It ensures that the first day of trading on August 2 will be crazy, and so it was. Hengyuan-CA went from 38 sen to 74 sen in two days, or a 138% gain. Speculators, syndicates, crooks, and investment bankers rejoiced (I'm not saying you can't be one but not the other...).
I had a bout of FOMO too - a typical human failing. So I bought some Hengyuan-CA for short term trading. Plus, I had Hengyuan in my watchlist since March - I was preparing myself to trade this thing for about five months, or so I thought.
It turned out to be a very good investment indeed! By now you may have noticed that Hengyuan-CA is worth around RM1.25. That's a 300% increase in about four months.
This was the outcome of my trade in September:
It's like owning bitcoin in 2013 and selling it in 2013.
So what happened? The simplest explanation is that I bought it and sold it at the wrong time. I did not have the confidence to stay invested and my timeline for the trade was all wrong. The warrant remained flat at 30 sen for about two months with no recovery in sight - until November when it skyrocketed. I understood the fundamentals and the sentiment behind Petron, but I failed to do the same kind of due diligence on Hengyuan. It's just hubris - you think you know so much, but you don't. The lesson here is : do your homework.
The whole experience taught me the value of having real convictions and sticking to what I know. In this case, it was Petron.
Back to August 2017 : the mania in Hengyuan warrants (Hengyuan-CA was just one; CB, CC, CD equally went nuts) sparked a resurgence in Petron call warrants. The stock has well and truly recovered from its post-earnings lows and the upsurge in sentiment toward Hengyuan is benefiting Petron. I should note that in this situation this is a sentiment trade, it is strictly not a fundamentals-backed trade - I'll explain this strategy another day.
I anticipated this and quickly bought some new Petron warrants (Petron-CC was too close to expiry). The end result from a trade lasting 20 trading days:
The second lesson is : stick to what you know and understand. Also, there are few clean outcomes in investing or trading. But you'll come out ahead if your gains (correct analysis and optimal execution) outweigh the losses (sheer foolishness).
* By this time it's not a bold call anymore.
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- Everything you need to know about structured warrants can be found on Macquarie Malaysia's excellent knowledge portal : https://www.malaysiawarrants.com.my/home
- Search for all currently available structured warrants on Bursa Malaysia on N2NConnect's database : https://plc.asiaebroker.com/NSS/warrant.jsp?from=G&to=H&rate=300&
- i3investor is the best source for market chatter on all Bursa Malaysia stocks : http://klse.i3investor.com/index.jsp
- I use iTrade@CIMB for all my trades (stocks and futures). Their online trading interface, price charts, real time P&L calculator and broker execution are second to none : https://www.itradecimb.com.my/index.php?ch=st&pg=st_prod&ac=1
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Dislaimer : This is an investment newsletter outlining my market views on trading, Bursa Malaysia, economics, global markets, currencies, and other financial topics. On a regular basis, this will be an outlet for expressing somewhat contrarian views backed with some empirical research and personal market experiences. From time to time, I will also share the progress of ongoing trades and what I think of them, but they should not be construed as stock tips.
I hope to provide thought provoking content and investment ideas which you may not find elsewhere, as well as some that you may vehemently disagree with. Feel free to berate me with your thoughts and thanks for reading.
Brief background on the author : I'm a finance journalist who has worked with The Edge and StarBiz, two of Malaysia's top business publications for a number of years. I started out as a remisier, but I'm glad to say I was a terrible one (don't take your remisier's advice seriously; your economic incentives are misaligned). I've been trading for about four years, although my focus is more on longer term holdings nowadays instead of day trading.
I'm currently based in Hong Kong working on bank risk management practices and European financial market regulations. Look up my professional profile here .
Monday, July 17, 2017
Why I would buy Petron over Hengyuan
There is no doubt that I like companies that tend to be able to control their own destiny. I also like companies that are operating in oligopolistic arena, but yet they act like it is open competition. These kind of companies will tend to do well as they are competitive. Some of the petrol retailing companies are such in nature.
As I have mentioned before in previous articles over here and here, Petron may have some advantage due to its competition that exists. In this business, there are 5 players (in the order of size) - Petronas Dagangan, Shell, Petron, Caltex and BHP (under Boustead). It is also quite obvious that we can see they are sized up in such order. Petronas being the local player and supported by Petronas in terms of supply. Shell has been one of the largest and earliest player. It also had a refinery which can produce 156,000 barrels per day (bpd) - which was sold to Hengyuan.
Petron exists from its acquisition of Exxon Mobil's (merger from the two) retail operations. Caltex is a unit of Chevron and understandably it gets its supply through import. BHP is a smaller unit owned by Boustead where it purchased from BP (British Petroleum).
From above, it sounds like it is a crowded market. It is true that it is a crowded market especially if one does not have the supply and support. Hence, I believe that all the players have their own supply support. It is also known that Petron's supply comes from Exxon as highlighted below.
Hengyuan bought the refinery which on paper can produce 156,000 bpd from Shell Refinery. In that exercise, Hengyuan took over a RM1 billion debt from Shell from that operation. In return, Shell which still operates more than 900 petrol station in Malaysia promises purchase contracts so that its supply is guaranteed. What Hengyuan now needs to do is to make sure that its petrol is Euro 4M compliant and it has to meet that deadline by next year.
It is also a known fact that if the sale to Hengyuan did not materialise, Shell could have converted the refinery into a storage facility. That was a drastic business change and this could also mean that Shell was not willing to invest further in Malaysia. Having Hengyuan picking up and willing to invest have changed Shell's direction. It is now buying the refined oil from Hengyuan for its Malaysian operations. This also means that it trust the quality that Hengyuan's produces.
I have also wondered what makes Shell not interested in the refinery but it will continue to operate the retailing business. Like Exxon, it could have also sold the Malaysian retailing arm - but understandably this is not the direction Shell's went for.
That could mean that the IRR is not attractive enough for an oil giant such as Shell but good enough for Hengyuan, a smallish refinery back in China. At the same time as well, Chinese companies are busily acquiring assets overseas and they could have good support from their government.
Although it looks like quite similar, the two exercises - Petron and Hengyuan - have vast differences in terms of post exercise strategy.
Petron will need to obtain the trust from the final retail customer as the brand is not a name which we are familiar with. It needs to work on many things on the B2consumer front. On the other hand, Hengyuan needs to invest more on the refinery - getting good margins from the crack and sell to Shell at a predetermined price (MOPS).
Needless to say Petron, while still needing to get its refinery efficient as well, will have the harder task. The reward however is more fulfilling as it "can control its own destiny" better. The more it gets consumer trusts, the better it will become. As the final price at the pump is now based on a certain formula - largely following MOPS, margin volatility could also be lower for Petron - as it is less dependent on the demand and supply of crude at any point of time as its produce is sold at the final pump price.
Hengyuan on the other hand is like the furniture manufacturer for Ikea where Ikea controls the supply and demand. Raw wood will be supplied by Ikea - the furniture manufacturer will try to manage the costs - and later sell the manufactured furniture to Ikea back. I do not like this kind of position although one can also make good money.
I like the position where one buys the raw crude from Exxon and I determine myself how one sells its finished products. Do I go aggressive by signing more commercial contracts and opening more stations or do I go slower.
At the end of the day, if I sell the produce where my brand is carried that should worth more money. This is like if you are a Nestle and carry your branded products rather than being white labelling company providing processed chilli sauce for Maggi brand - which you think would be more valuable at the end of the day?
Of course, to sell your own brand - it is a different strategy altogether. Hence, I do not think one should do an apple to apple comparison based on a similar PE.
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| The downstream operations of O&G for the listed companies in Malaysia |
Petron exists from its acquisition of Exxon Mobil's (merger from the two) retail operations. Caltex is a unit of Chevron and understandably it gets its supply through import. BHP is a smaller unit owned by Boustead where it purchased from BP (British Petroleum).
From above, it sounds like it is a crowded market. It is true that it is a crowded market especially if one does not have the supply and support. Hence, I believe that all the players have their own supply support. It is also known that Petron's supply comes from Exxon as highlighted below.
It is also a known fact that if the sale to Hengyuan did not materialise, Shell could have converted the refinery into a storage facility. That was a drastic business change and this could also mean that Shell was not willing to invest further in Malaysia. Having Hengyuan picking up and willing to invest have changed Shell's direction. It is now buying the refined oil from Hengyuan for its Malaysian operations. This also means that it trust the quality that Hengyuan's produces.
I have also wondered what makes Shell not interested in the refinery but it will continue to operate the retailing business. Like Exxon, it could have also sold the Malaysian retailing arm - but understandably this is not the direction Shell's went for.
That could mean that the IRR is not attractive enough for an oil giant such as Shell but good enough for Hengyuan, a smallish refinery back in China. At the same time as well, Chinese companies are busily acquiring assets overseas and they could have good support from their government.
Although it looks like quite similar, the two exercises - Petron and Hengyuan - have vast differences in terms of post exercise strategy.
Petron will need to obtain the trust from the final retail customer as the brand is not a name which we are familiar with. It needs to work on many things on the B2consumer front. On the other hand, Hengyuan needs to invest more on the refinery - getting good margins from the crack and sell to Shell at a predetermined price (MOPS).
Needless to say Petron, while still needing to get its refinery efficient as well, will have the harder task. The reward however is more fulfilling as it "can control its own destiny" better. The more it gets consumer trusts, the better it will become. As the final price at the pump is now based on a certain formula - largely following MOPS, margin volatility could also be lower for Petron - as it is less dependent on the demand and supply of crude at any point of time as its produce is sold at the final pump price.
Hengyuan on the other hand is like the furniture manufacturer for Ikea where Ikea controls the supply and demand. Raw wood will be supplied by Ikea - the furniture manufacturer will try to manage the costs - and later sell the manufactured furniture to Ikea back. I do not like this kind of position although one can also make good money.
I like the position where one buys the raw crude from Exxon and I determine myself how one sells its finished products. Do I go aggressive by signing more commercial contracts and opening more stations or do I go slower.
At the end of the day, if I sell the produce where my brand is carried that should worth more money. This is like if you are a Nestle and carry your branded products rather than being white labelling company providing processed chilli sauce for Maggi brand - which you think would be more valuable at the end of the day?
Of course, to sell your own brand - it is a different strategy altogether. Hence, I do not think one should do an apple to apple comparison based on a similar PE.
Monday, July 3, 2017
Why was Esso sold to Petron
As discussed in my earlier article, Exxon would probably be lesser interested in downstream operations of a mid-size country. My biggest question when Exxon sold the Malaysian downstream operations to Petron - was why would Petron be sold at RM3.59 per share or at total valuation of RM939 million back in 2012.
If one is to refer here, Exxon basically sold a 88k/bpd refinery (albeit an old one), 560 petrol station business where 420 assets are owned (a very valuable asset), 10 fuel distribution terminals (very valuable as well) and the rights to the retailing business (even more valuable) rather than one starting and building the business one by one - which is almost impossible. Think about it. That to my surprise was sold at a valuation of below RM1 billion.
If one can remember, Petron Philippines which bought the 65% stake, subsequently offered to purchase all the remaining 35% shareholders at the similar RM3.59 offering. About 8+% took up and that is why they now hold 73+% of Petron Malaysia. I made a reference to the Independent Advise by Kenanga during then, which one can read them here and here. Basically, what Kenanga advised was for the 35% minority shareholders to not accept the deal as it was deemed unfair.
For those whom do not intend to read the advise, basically Kenanga based upon the advise from Esso Malaysia's past performances and dividends that it had provided prior to 2012. Needless to say, I am not impress with the information that was provided as they have not much data to provide beyond the past performances.
Something more that was amiss that it missed out in the advise. Esso Malaysia was sitting on very old assets which probably have not been revalued. I am not able to determine what are the Revised Net Asset Value (RNAV) for these assets as most probably these assets are never revalued. It is good to note that for Esso or Petron now, these revaluation is not important as the exercise would probably benefits WTW or Raine and Co rather then the shareholders. However, during a disposal, usually these are done - but in this exercise during 2011/12 it was not considered at all.
In the last probably 9 years of Petron's / Esso's disclosure, these assets are not revealed but I managed to dig through and see what was disclosed in 2005. Many of those assets were bought decades ago and how much would they be valued now? Note that there are 420 of these petrol station assets.
The ones which I picked are a portion of what they revealed in the 2005 Annual Report. Subsequent to that, Esso (later Petron) just picked the top 10 assets to disclose. Anyway, as in many businesses, I would agree that these assets are for its business and there are little possibilities Petron would be selling them - unless they are really strategic or the assets may not produce the return that is expected of them from the petrol marketing business.
Another key point in the agreement between Exxon, the seller and Petron is the supply. What probably is key is that (as provided below) Petron gets its continuous supply from ExxonMobil. This works both ways as Exxon gets to have its product taken up while Petron's refinery continuously gets its supply. One should note that for a refinery, consistent supply is very important if one is not able to get the supply from its own fields (which Petron does not have any).
Without yet looking at the business profitability and future prospects, one should note that these are very key features for Petron Malaysia to continue to position itself among the downstream players.
My observation is that Petron Malaysia at this stage - its hardest period is perhaps a thing of the past. The early 3 years, I felt that it was at the stage where it had to prove to people as Petron is a new brand in Malaysia - it could have gone the Projet direction, and maybe not as well received as we see in BHP. The way I see it is that Petron is now at ramping up stage.
I have also been asked on my observation on Hengyuan (which purchased the Port Dickson refinery from Shell) as against Petron Malaysia. Again, I am not an expert in this, but based on what I am able to gather Hengyuan seems to be a capable refiner (which is why the Shell petrol that you buy in Malaysia most probably all of them come from Hengyuan's refinery). However, on its operational efficiency, that has yet to be seen as Hengyuan which fully completed the acquisition in early 2016, it seems to me has yet to make the upgrades towards the current refinery.
On the other hand, Petron Malaysia has done so after taking over the business since 2012. It has managed to be Euro4 compliant. To me, at this stage Petron seems to be the safer hands for an investor but that does not necessarily mean that Hengyuan will not be a good investment in the long term.
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| The final Net Asset value on the books for Esso Malaysia before sold to Petron |
If one is to refer here, Exxon basically sold a 88k/bpd refinery (albeit an old one), 560 petrol station business where 420 assets are owned (a very valuable asset), 10 fuel distribution terminals (very valuable as well) and the rights to the retailing business (even more valuable) rather than one starting and building the business one by one - which is almost impossible. Think about it. That to my surprise was sold at a valuation of below RM1 billion.
If one can remember, Petron Philippines which bought the 65% stake, subsequently offered to purchase all the remaining 35% shareholders at the similar RM3.59 offering. About 8+% took up and that is why they now hold 73+% of Petron Malaysia. I made a reference to the Independent Advise by Kenanga during then, which one can read them here and here. Basically, what Kenanga advised was for the 35% minority shareholders to not accept the deal as it was deemed unfair.
For those whom do not intend to read the advise, basically Kenanga based upon the advise from Esso Malaysia's past performances and dividends that it had provided prior to 2012. Needless to say, I am not impress with the information that was provided as they have not much data to provide beyond the past performances.
Something more that was amiss that it missed out in the advise. Esso Malaysia was sitting on very old assets which probably have not been revalued. I am not able to determine what are the Revised Net Asset Value (RNAV) for these assets as most probably these assets are never revalued. It is good to note that for Esso or Petron now, these revaluation is not important as the exercise would probably benefits WTW or Raine and Co rather then the shareholders. However, during a disposal, usually these are done - but in this exercise during 2011/12 it was not considered at all.
In the last probably 9 years of Petron's / Esso's disclosure, these assets are not revealed but I managed to dig through and see what was disclosed in 2005. Many of those assets were bought decades ago and how much would they be valued now? Note that there are 420 of these petrol station assets.
 |
| Some of petrol station assets in KL |
 |
| Some of assets in Selangor |
 |
| Even more petrol station assets in Selangor |
 |
| Assets in Perak |
 |
| Assets in Negeri Sembilan |
Another key point in the agreement between Exxon, the seller and Petron is the supply. What probably is key is that (as provided below) Petron gets its continuous supply from ExxonMobil. This works both ways as Exxon gets to have its product taken up while Petron's refinery continuously gets its supply. One should note that for a refinery, consistent supply is very important if one is not able to get the supply from its own fields (which Petron does not have any).
My observation is that Petron Malaysia at this stage - its hardest period is perhaps a thing of the past. The early 3 years, I felt that it was at the stage where it had to prove to people as Petron is a new brand in Malaysia - it could have gone the Projet direction, and maybe not as well received as we see in BHP. The way I see it is that Petron is now at ramping up stage.
I have also been asked on my observation on Hengyuan (which purchased the Port Dickson refinery from Shell) as against Petron Malaysia. Again, I am not an expert in this, but based on what I am able to gather Hengyuan seems to be a capable refiner (which is why the Shell petrol that you buy in Malaysia most probably all of them come from Hengyuan's refinery). However, on its operational efficiency, that has yet to be seen as Hengyuan which fully completed the acquisition in early 2016, it seems to me has yet to make the upgrades towards the current refinery.
On the other hand, Petron Malaysia has done so after taking over the business since 2012. It has managed to be Euro4 compliant. To me, at this stage Petron seems to be the safer hands for an investor but that does not necessarily mean that Hengyuan will not be a good investment in the long term.
Whether Petron Malaysia is expanding its refinery business, that has yet to be finalised. I believe the management would have weighed the situation carefully and smartly. Malaysia itself has enough refinery capacity for our own usage especially for gasoline consumption. And at the moment, Petron's 88k/bpd seems to be not fully utilised. Or it could be going for a much efficient one in the long term. From what I have read, Petron may look for other downstream opportunities from the potential new refinery - i.e. petrochemical products.
Friday, June 30, 2017
Petron Malaysia has a bright future ahead if...
Back in 2004, I remember I invested into a stock which would have provided a 10 bagger. That stock was Digi - where at that point of time after the acquisition of the telco from Vincent Tan by Telenor, it had made a dramatic turnaround from losing market share and eating up cashflow to drastically improving its cashflow until it was debt free within 2 years. That Digi which was bought at RM5 during then has split into 10 shares and many "x" of dividends. I of course being not very clever, sold most of them off much too early although I made some good returns.
That discovery will not come very often and once a while, I thought I have seen some resemblance of the same kind of stock or company - but either I was too slow and stupid to make decision or it actually created a false sense of happiness. In any case, we do not need to find a 10 bagger but my believe is to continue to look for a stock which has that similar track.
Petron is a stock which I stumbled upon when reading several comments on the oil retailing stocks. Since then, and over the last 2 - 3 weeks, I have taken an interest to understand the petroleum retail business after at first looking at Petron Malaysia's financials for the first time (in detail).
I am not an expert in oil and gas businesses, however I believe I am good enough with my observation as well as investment research if I put enough efforts to understand the business.
[I had a similar stock which I had bought - PDB probably back in 1996 (or sometime around then), I had the stock for around RM3. Again, I did not wait long enough to reap its RM24 today (and a lot more of its dividends). During then, also I was way too raw to understand these kind of businesses.]
In mentioning oil and gas, actually Petron - unlike companies like Icon Offshore, UMW O&G, Bumi Armada etc. etc. - is in a much different type of business. It is in the retailing business which Lazada, Amazon or 11street cannot replace. (It can be threatened by Tesla or BYD though)
Just to get things started, what makes me spending time to look at Petron is basically because of the below - its net cash or debt position over a short period of time. Of course in investment, it is not as simple as that, but the below signifies strong and consistent free cashflow.
Before, we even look at numbers in detail - many would have (as well as me), been wondering why would I invest into a Philippines controlled oil and gas company where firstly the country does not even have a strong O&G industry.
Then, as I have seen what really happened to BP (which turned into BHP, under Boustead) as well as Projet (if anyone remembers - which was later sold to Shell) - the same could happen to Petron. It is not an easy business. This is not entirely a technology business but involves operational execution strength and marketing - which is what San Miguel, the parent company of Petron is strong at.
One may also say that Petron is also doing refinery then retailing. Correct. That is one of the concerns, but it seems that it is able to cope well. Its 88,000 barrel/day refinery in Port Dickson is smaller than competitors like Petronas (obviously) and Hengyuan (bought from Shell) at 156,000 barrel. However, it manages to bring back profitability from the refinery - which is important.
What is questionable is that why was it Esso which sold the entire business (refinery and retail) to Petron back in 2012 could not really make much money from this refinery - but Petron could as it has shown especially over the last 8 quarters.
Of course, when one questions oneself - if it could be such a good business, why would Esso sell. And in that same period Shell sold its refinery to Hengyuan while BP has left the country having sold the retailing arm to Boustead. These are the oil majors leaving the country in the downstream operations except for Shell and Caltex (owned by Chevron) which keeps the retailing business.
That answer lies in them being "focused" and the Malaysian market being not big enough. However, what is not big enough for Esso is big enough for San Miguel. In the era of consistent and extreme competition, the big giants can only focus on few things that they think they can be better and make much more money than others. ExxonMobil, Shell and BP are strong in exploration and pretty much the upstream business - an area which not all players can be deemed to be good at. Beyond technology, it is also involving geo-political relationship. Why would then, a CEO of Exxon-Mobil be given a Secretary of State position...
At the same time, as many would know - this business is getting challenged from the shale guys (using a different technology and business model). They are also being challenged from the alternative energy guys such as solar, battery technologies, wind, biofuel etc. Hence, downstream, refining especially is the least of their problem.
It is like manufacturing to Apple and Google.
Petron actually was having a similar deal back in 1973 when Esso sold its business to the government of Philippines. Today, Petron is the largest petrol station operator in Philippines with 40% of market share and operating 1900 stations. In Malaysia today, Petron has close to 600 by now being the 3rd largest player after Petronas (1000+) and Shell (900+). That 600 stations over time, however may bring in very significant return to San Miguel group as one must note that Malaysian oil consumption is about 600,000 barrels a day while in Philippines it is below 300,000 (if I am not wrong).
With that backdrop, more importantly to us investors, Petron is willing to invest in a competitive ground with the backdrop having players like Petronas and Shell. It is growing at a pace of 30 - 50 stations a year now while the likes of Shell is growing in teens. Caltex (400+ stations) and BHP are even further behind, if I am not wrong.
Although the petrol retailing business is growing at just an average 3 - 5% yearly, Petron is probably the ones that has the highest growth. Fighting against negative perceptions in the first few years of its operations, it is now growing faster than Shell and Petronas (which I will show in my future article). This is probably as I believe, the other guys have a larger giant to slay. Shell, Caltex have much bigger agenda to worry about than Malaysia's petrol station business while Petronas will continue to worry over the low oil price environment and its revenue contribution to the government. BHP? Well nothing much to say. Maybe not so competent.
Further from the very nice cashflow which I shown above, Petron is now trading at just below RM2 billion (RM7.25) market capitalisation. Against the significantly bigger giant of about 2.6x revenue larger, Petronas Dagangan - it is really cheap as PDB is now trading at RM24 billion market capitalisation. Translating into PE over last 12 months, it is even a nicer story. Nevertheless, I am also careful over the fluctuation in the oil price which will have some impact to the bottomline numbers - hence I am not reading too much into the profit numbers over the last 2 - 3 quarters. I believe the rise and drop in oil price has some impact as it has certainly has some inventories to hold. When oil price drops, the inventory value will drop, vice versa.
Over time, however this should not be an important benchmark - as we cannot do a projection over the price of oil into the future. The more important benchmark is whether their refinery is creating a healthy margin and secondly - is it able to sell through its petrol pumps as most of the oil that it refines - goes to the pump - if not mistaken. THAT, over the last 2 years have shown mark improvement for Petron - and it is a very important denominator for this business.
I know, I am a bit late in the game - as Petron climbed from around RM5 - RM6 last year - at its current valuation and if it is manages to continue its growth momentum, this is not expensive at all. In fact, it is cheap.
(Over next articles, I may want to discuss the impact of technology - electric cars etc. and introduce more financial numbers towards this business. Obviously, I do not have all the answers.)
That discovery will not come very often and once a while, I thought I have seen some resemblance of the same kind of stock or company - but either I was too slow and stupid to make decision or it actually created a false sense of happiness. In any case, we do not need to find a 10 bagger but my believe is to continue to look for a stock which has that similar track.
Petron is a stock which I stumbled upon when reading several comments on the oil retailing stocks. Since then, and over the last 2 - 3 weeks, I have taken an interest to understand the petroleum retail business after at first looking at Petron Malaysia's financials for the first time (in detail).
I am not an expert in oil and gas businesses, however I believe I am good enough with my observation as well as investment research if I put enough efforts to understand the business.
[I had a similar stock which I had bought - PDB probably back in 1996 (or sometime around then), I had the stock for around RM3. Again, I did not wait long enough to reap its RM24 today (and a lot more of its dividends). During then, also I was way too raw to understand these kind of businesses.]
In mentioning oil and gas, actually Petron - unlike companies like Icon Offshore, UMW O&G, Bumi Armada etc. etc. - is in a much different type of business. It is in the retailing business which Lazada, Amazon or 11street cannot replace. (It can be threatened by Tesla or BYD though)
Just to get things started, what makes me spending time to look at Petron is basically because of the below - its net cash or debt position over a short period of time. Of course in investment, it is not as simple as that, but the below signifies strong and consistent free cashflow.
 |
| Net Debt improved dramatically from RM1 billion in 1Q14 to almost no debt now |
Before, we even look at numbers in detail - many would have (as well as me), been wondering why would I invest into a Philippines controlled oil and gas company where firstly the country does not even have a strong O&G industry.
Then, as I have seen what really happened to BP (which turned into BHP, under Boustead) as well as Projet (if anyone remembers - which was later sold to Shell) - the same could happen to Petron. It is not an easy business. This is not entirely a technology business but involves operational execution strength and marketing - which is what San Miguel, the parent company of Petron is strong at.
One may also say that Petron is also doing refinery then retailing. Correct. That is one of the concerns, but it seems that it is able to cope well. Its 88,000 barrel/day refinery in Port Dickson is smaller than competitors like Petronas (obviously) and Hengyuan (bought from Shell) at 156,000 barrel. However, it manages to bring back profitability from the refinery - which is important.
What is questionable is that why was it Esso which sold the entire business (refinery and retail) to Petron back in 2012 could not really make much money from this refinery - but Petron could as it has shown especially over the last 8 quarters.
 |
| Petron has turnaround from losses in 2013 - 2014 to strong profits over last few quarters |
That answer lies in them being "focused" and the Malaysian market being not big enough. However, what is not big enough for Esso is big enough for San Miguel. In the era of consistent and extreme competition, the big giants can only focus on few things that they think they can be better and make much more money than others. ExxonMobil, Shell and BP are strong in exploration and pretty much the upstream business - an area which not all players can be deemed to be good at. Beyond technology, it is also involving geo-political relationship. Why would then, a CEO of Exxon-Mobil be given a Secretary of State position...
At the same time, as many would know - this business is getting challenged from the shale guys (using a different technology and business model). They are also being challenged from the alternative energy guys such as solar, battery technologies, wind, biofuel etc. Hence, downstream, refining especially is the least of their problem.
It is like manufacturing to Apple and Google.
Petron actually was having a similar deal back in 1973 when Esso sold its business to the government of Philippines. Today, Petron is the largest petrol station operator in Philippines with 40% of market share and operating 1900 stations. In Malaysia today, Petron has close to 600 by now being the 3rd largest player after Petronas (1000+) and Shell (900+). That 600 stations over time, however may bring in very significant return to San Miguel group as one must note that Malaysian oil consumption is about 600,000 barrels a day while in Philippines it is below 300,000 (if I am not wrong).
With that backdrop, more importantly to us investors, Petron is willing to invest in a competitive ground with the backdrop having players like Petronas and Shell. It is growing at a pace of 30 - 50 stations a year now while the likes of Shell is growing in teens. Caltex (400+ stations) and BHP are even further behind, if I am not wrong.
Although the petrol retailing business is growing at just an average 3 - 5% yearly, Petron is probably the ones that has the highest growth. Fighting against negative perceptions in the first few years of its operations, it is now growing faster than Shell and Petronas (which I will show in my future article). This is probably as I believe, the other guys have a larger giant to slay. Shell, Caltex have much bigger agenda to worry about than Malaysia's petrol station business while Petronas will continue to worry over the low oil price environment and its revenue contribution to the government. BHP? Well nothing much to say. Maybe not so competent.
Further from the very nice cashflow which I shown above, Petron is now trading at just below RM2 billion (RM7.25) market capitalisation. Against the significantly bigger giant of about 2.6x revenue larger, Petronas Dagangan - it is really cheap as PDB is now trading at RM24 billion market capitalisation. Translating into PE over last 12 months, it is even a nicer story. Nevertheless, I am also careful over the fluctuation in the oil price which will have some impact to the bottomline numbers - hence I am not reading too much into the profit numbers over the last 2 - 3 quarters. I believe the rise and drop in oil price has some impact as it has certainly has some inventories to hold. When oil price drops, the inventory value will drop, vice versa.
Over time, however this should not be an important benchmark - as we cannot do a projection over the price of oil into the future. The more important benchmark is whether their refinery is creating a healthy margin and secondly - is it able to sell through its petrol pumps as most of the oil that it refines - goes to the pump - if not mistaken. THAT, over the last 2 years have shown mark improvement for Petron - and it is a very important denominator for this business.
I know, I am a bit late in the game - as Petron climbed from around RM5 - RM6 last year - at its current valuation and if it is manages to continue its growth momentum, this is not expensive at all. In fact, it is cheap.
(Over next articles, I may want to discuss the impact of technology - electric cars etc. and introduce more financial numbers towards this business. Obviously, I do not have all the answers.)
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