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Sunday, January 27, 2013

Petron Corporation (PCOR)

Company Profile

Petron Corporation (PSE:PCOR) was incorporated in 1966 as Esso Philippines, Inc. and later renamed to Petrophil Corporation when the Philippine National Oil Company (PNOC) acquired Esso. In 1994, PNOC sold 40% of its shares in PCOR to Aramco Overseas Company B.V. (AOC), a wholly owned subsidiary of Saudi Arabian Oil Company (Saudi Aramco).

PCOR's principal business involves the refining of crude oil and the marketing and distribution of refined petroleum products, mainly for the domestic market. The Company sells a full range of refined petroleum products, including industrial fuel oil, diesel, gasoline, liquefied petroleum gas (LPG), jet fuel, kerosene, asphalt, solvent and mixed xylene and propylene. Straight-run fuel oil, diesel, and mixed xylene and propylene are exported while lubricating oils and greases are manufactured at PCOR's Lube Oil Blending Plant at the Pandacan Terminal. From the refinery, PCOR moves its products mainly by sea to its 31 depots and terminals situated all over the country. Through this nationwide network, PCOR supplies fuel oil, diesel, LPG and jet fuel to various industrial customers, power companies and international and domestic carriers.

As of end of December 2011, Petron's major shareholders comprised of Sea Refinery Corporaion, Petron Corporation Employees' Retirement Plan (PCERP), and San Miguel Corporation.

At present, PCOR has seven subsidiaries, namely, New Ventures Realty Corporation, Petrogen Insurance Corporation, Overseas Insurance Corporation, Ltd., Petron Foundation, Inc., Petron Freeport Corporation, Petron Marketing Corporation, and Petron Singapore Trading Pte. Ltd.

Income and Operations

After posting a P2.1 billion loss in the 2nd quarter of 2012 for its consolidated operations, the company managed a turnaround in the 3rd quarter recording a modest P500 million net income. For the first three quarters of 2012, Petron realized a consolidated net income of P932 million even while the company
continued to experience depressed margins because of volatility in global oil markets in the 2nd and 3rd quarters of 2012.  The Malaysian operation contributed P155 million in consolidated net income.

Looking at Petron Corporation's Revenue-Net Income chart, its revenue from the 2nd quarter of 2012 is slightly higher than 3Q, but it reported a net loss of P2.057 billion, mainly because of lower gross profit.

Why did PCOR report a net loss for the 2Q of 2012? Its 2.16% gross margin is too low to cover administrative expenses. Another factor is the high interest expense and financing charges. PCOR recorded P5.124 billion for the full year 2011, but as of 2012, its IEFC has already reached P5.76 billion. The higher finance charges were attributed to losses from commodity hedging transactions. It is common practice for volatile commodities such as oil to hedge its prices as protection from price movements and market conditions. It is a double-edged sword though, as the financial situation may move in an entirely different position than what you hedged it for.

Stocks Valuation

PCOR has been moving sideways for most of 2012. It currently trades at a very high 123x PE, but seems to have found a strong support at P10.20-P10.40.

What's to Like?

Petron Corporation is still one of the leading oil companies in the country today. The reputation and the network they built can't easily be outdone and temporary setbacks will not bring this company down. Its somewhat disappointing results may prove to be a good entry point if you're patient enough to wait.

Why Get Cautious?

The drastic decline in gross profit brings into question the management ability of the company. Granted most of it can be pinned to their petroleum products' higher average cost per barrel, but they can easily pass the charges to their customers as the oil prices are still deregulated. I also view their losing hedging positions as uncalculated risk given that it has continually dipped for the past few years.

Buffett Recommends...

How much trust are you willing to put on its management, particularly San Miguel Corporation, its largest stockholder, that they can turn this situation around? That should be the main question you should ask if you are considering investing or is currently invested in Petron Corporation. If you are not confident that the current management is doing their best to run this company, then no amount of profit can satisfy you no matter how patient you get.

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