UNIVERSITY OF THE PHILIPPINES DILIMAN – VIRATA SCHOOL OF BUSINESS Petron Corporation Case Presentation Michelle Therese Diaz | Christian Ernest Santos | Abigail Dy | Wilson Ramos | Christian Villar 1 December 2014 Contents The Company ............................................................................................................................................. 2 1.1. Overview ...................................................................................................................................... 2 1.2. Ownership Structure .................................................................................................................. 2 1.3. Business Strategy ...................................................................................................................... 3 1.3.1. Expansion of regional presence in the Asia Pacific ............................................... 3 1.3.2. Leveraging on refining assets to achieve competitive advantage .......................... 3 1.3.3. Ensuring market dominance over the long-term .................................................... 3 2. The Oil Industry in the Philippines ................................................................................................... 4 2.1 The Philippine Economy ........................................................................................................... 4 2.2 The Oil Industry .......................................................................................................................... 4 2.2.1. Car Buying Boom .................................................................................................. 4 2.2.2. Market Share ........................................................................................................ 4 2.2.3. Global Oil Market .................................................................................................. 6 2.2.4. Industry-specific risks ............................................................................................ 7 3. Financial Analysis ............................................................................................................................... 8 3.1. Overall Financial Statement Analysis ...................................................................................... 8 3.1.1. Financial Performance .......................................................................................... 9 3.1.2. Financial Position .................................................................................................10 3.1.3. Cash Flows ..........................................................................................................10 3.1.4 Industry Ratios .....................................................................................................11 3.2. Significant Accounts and Related Accounting Policies ...................................................... 12 3.2.1. Sale of Goods ......................................................................................................12 3.2.2. Accounts Receivable ...........................................................................................15 3.2.3. Trade Payables ....................................................................................................17 3.2.4. Inventories ...........................................................................................................18 3.2.5. Property, plant and equipment .............................................................................19 3.3. Technical Analysis ................................................................................................................... 21 3.3.1. Stock price trend ..................................................................................................21 3.3.2. Sale of PCOR shares by PCERP .........................................................................22 4. Investment Recommendation and Justifications ......................................................................... 22 1 The Company 1.1. Overview Supplying almost 40% of the country’s oil requirements, Petron Corporation is the largest oil refining and marketing company in the Philippines. The company operates an oil refinery in Limay, Bataan, which processes crude oil into a full range of petroleum products. These include gasoline, diesel, liquefied petroleum gas (LPG), jet fuel, kerosene, fuel oil, and petrochemical feedstock benzene, toluene, mixed xylene, and propylene. From the refinery, Petron transports its products mainly by sea to more than 30 depots and terminals nationwide. The company supplies fuel oil, diesel, and LPG to various industrial customers, as well as jet fuel to key airports for international and domestic carriers. Petron retails its products in 2,200 service stations all over the country. These products include Petron Blaze 100 Euro 4, XCS, Xtra Advance, Super Xtra Gasoline, Turbo Diesel, and Diesel Max. The company’s LPG brands, Gasul and Fiesta, are sold to households through a wide retail network and to industrial customers. Petron also operates a lube oil blending plant at Pandacan Oil Terminal, where it manufactures lubes and greases. These are also sold through Petron’s service stations and sales centers. 1.2. Ownership Structure Petron is a public company listed in the Philippine Stock Exchange (PSE). Philippine food and beverage giant San Miguel Corporation (SMC) owns 68% of Petron’s shares--a 50% indirect ownership through SEA Refinery Corporation and an 18% direct ownership. The public holds the rest of the stakes. Presented in Figure 1 is Petron’s ownership structure. Figure 1. Petron’s Ownership Structure Source: Philippine Stock Exchange (2013) 2 1.3. Business Strategy 1.3.1. Expansion of regional presence in the Asia Pacific The Company gained a foothold in the Malaysian oil market in 2012 through Petron Malaysia, which has 16.6% share in the Malaysian oil market. In March 2012, Petron completed the acquisition of 65% of Esso Malaysia Berhad, a publicly listed company, and 100% of ExxonMobil Malaysia Sdn Bhd., and ExxonMobil Borneo Sdn Bhd. The acquisition included the 88,000 barrel-per-day Port Dickson Refinery (PDR), 550 service stations, and seven storage terminals. In 2012, Petron used provisionary fair values of the identifiable net assets in calculating the goodwill as at the acquisition date. In 2013, Petron completed the purchase price allocation exercise. As a result, Petron restated the amounts of net assets acquired, non-controlling interest and goodwill recognized in 2012. Table 1. Goodwill from Petron Malaysia Acquisition Provisionary Final In million Pesos Amounts Amounts Total cash consideration transferred 25,928 24,790 Non- controlling interest measured at proportionate interest in identifiable assets 3,584 5,445 Total identifiable net assets at fair value (18,873) (20,878) Goodwill 10,639 9,357 Source: Petron’s Annual Report (2013) 1.3.2. Leveraging on refining assets to achieve competitive advantage In 2011, Petron launched its $2-billion refinery expansion project – the Refinery Master Plan Phase 2 (RMP-2), which is designed to transform Petron Bataan Refinery (PBR) into one of Asia’s most modern refineries. Once completed, the project will give Petron greater flexibility to process cheaper crude oil varieties from non-traditional sources. RMP-2 will also enable PBR to convert most of its fuel oil production into higher value white products, such as gasoline and diesel. At the same time, petrochemical production will significantly increase. The project also equips Petron’s refinery with advanced technologies to produce Euro IV-standard fuels - the global clean air standard. In a disclosure to PSE, Petron reported that on September 30, 2014, it “oiled in” one of RMP-2’s major units, the Vacuum Pipestill 2 (VPS 2), in preparation for full commercial operation in early 2015. 1.3.3. Ensuring market dominance over the long-term In 2009, Petron launched the Bulilit Station Micro Filling Station Program to fulfill the fuel demands of far flung, rural areas in the country. The Bulilit Station is an easy-to-build gasoline station with a two- to three-product pump operation that can be easily expanded as demand increases in growth centers. It is ideal for far-flung areas because of its low investment cost. As part of Petron’s expansion program, these new micro-stations will reach more Filipinos. This program also provides business opportunities for small entrepreneurs. 3 2. The Oil Industry in the Philippines 2.1 The Philippine Economy The Philippines may have experienced an economic slowdown in the third quarter of 2014, posting a 5.3% growth, compared to 7% in the same period in 2013 (NEDA, 2014). However, the economic outlook for the country remains positive in 2015. The Asian Development Bank predicts that the country’s gross domestic product will grow by 6.4% next year.While this figure is slightly lower than the previous 6.7-percent economic outlook, it is still the highest among the Southeast Asian nations (Bloomberg, 2014). 2.2 The Oil Industry The oil industry is divided into two sectors – the upstream and the downstream sectors. The upstream sector is involved in the exploration, development, and production of crude oil. On the other hand, the downstream sector is the part of the industry involved in purifying crude oil and refining it into different products. It also involves the transportation and marketing of crude oil and its products. Petron belongs in the downstream sector.