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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
2.
3.
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
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
Financial Analysis............................................................................................................................... 8
3.1.
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.
4.
Overall Financial Statement Analysis...................................................................................... 8
Technical Analysis ................................................................................................................... 21
3.3.1.
Stock price trend ..................................................................................................21
3.3.2.
Sale of PCOR shares by PCERP .........................................................................22
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
In million Pesos
Total cash consideration transferred
Non- controlling interest measured at
proportionate interest in identifiable assets
Total identifiable net assets at fair value
Goodwill
Provisionary
Amounts
Final
Amounts
25,928
24,790
3,584
5,445
(18,873)
(20,878)
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.
The Philippine downstream oil industry has been deregulated since 1998. Currently, it is
dominated by two major oil refining and marketing companies: Petron and Pilipinas Shell. Shell
operates a plant capable of refining 110,000 barrels per day. It also owns a third oil refiner and
marketer, Caltex Philippines, which converted its refinery into an import terminal in 2003. Caltex
now operates as a plain marketing and distributing company under the name “Chevron” but
maintains its Caltex brand.
Shell, together with Chevron, jointly operates the Malampaya Deepwater Gas-to-Power Project.
2.2.1 Car Buying Boom
The level of car ownership in the Philippines is among the lowest worldwide. An estimated 47%
of Filipino households do not own their cars – the fifth lowest globally – according to a study by
Nielsen. However, the study also pointed to a more robust automotive demand in the coming
years as more households join the middle class and reach the financial means to make their
first car purchase. The study also revealed that 76% of Filipinos intend to acquire a car within
the next two years. Globally, the rate is at 65%.
Meanwhile, Malaysia posted the third highest level of car ownership globally at 93% and the
highest incidence of multiple car ownership globally at 54% of households who have more than
one car.
With the recent acquisition of Petron Malaysia, Petron is in a good position in both the Philippine
and Malaysian market.
2.2.2 Market Share
As of the end of the first half of 2014, Petron dominates the petroleum business in terms of
market share. The company holds 37% of the market share, as shown in Figure 2.
4
Figure 2. Petroleum Products Market Share, H1 2014
29%
37%
Petron
Shell
Chevron
8%
Other Players
26%
Source: Department of Energy (June 2014)
Moreover, data from the Department of Energy show that small players have been eating up the
market share of major oil companies. These oil firms have collectively lost 11% of market share
to independent oil players since 2008. Petron was the least affected among the three major oil
companies. Chevron was significantly affected with a total drop in market share of 6%.
Figure 3. Market Share Trend
Source: Department of Energy (June 2014)
According to the Philippine Oil and Gas Report by Business Monitor International, the
Philippines will likely remain a small producer of both oil and gas. Due to faster consumption
growth than output increases, the Philippines will continue to be a net importer of crude oil and
oil products, as well as join the ranks of gas importers in the world.
5
Competitive Landscape – Key Players in the Philippine Oil and Gas Sector





The main government upstream vehicle is the Philippine National Oil Company
Exploration Corporation (PNOC – EC), which is a partner of various international oil
companies (IOCs) in key projects, such as the Malampaya gas project, and accounts for
10% of upstream volumes.
Shell has a 25% refined products market share, with 920 retail outlets and 67,000
barrels per day (b/d) of net refining capacity. Together with Chevron, Shell jointly
operates the Malampaya Deepwater Gas-to-Power Project. Both have a 45% interest.
Chevron has around 800 fuel retail outlets and oil storage at the site of its former 72,000
b/d San Pascual refinery.
Although refining capacity will remain flat, upgrades to the country's two refineries will
help improve utilization rates and refined oil output.
Oil consumption will likely trend upwards over the long-term alongside the economic
growth.
2.2.3 Global Oil Market
Oil prices have been dropping sharply for the past three months, with Brent crude now hovering
at $70 per barrel. On November 28, a day after OPEC (Organisation of Petroleum Exporting
Countries) meeting to discuss the matter, prices went into a serious free fall.
The root cause of the decline in oil prices is oversupply, as the US added about 4 million new
barrels of crude oil per day to the global market coming from new drilling techniques like
fracking and horizontal drilling to extract oil from shale formations in North Dakota and Texas.
However, member countries could not agree on how to respond. Thus, OPEC decided to let
prices fall in the hopes that many of the newest drilling projects in the United States will be
unprofitable and will shut down.
Figure 4. Prices of Crude Oil, 2014 Trend
Source: New York Stock Exchange (2014)
6
2.2.4 Industry-specific risks
Petron follows an enterprise-wide risk management framework for identifying, assessing, and
addressing inherent risk factors that affect or may affect its business called Petron Risk
Management System (PRisMS).
The Group’s risk management process is a bottom-up approach, with each risk owner
mandated to conduct regular assessment of its risk profile and formulate action plans for
managing identified risks. As the Group’s operation is an integrated value chain, risks emanate
from every process, while some could cut across groups. The results of these activities flow up
to the Management Committee and, eventually, the Board of Directors through Petron’s annual
business planning process.
The PRisMS considers incidences as major risks if it has a relatively high probability of
occurrence and has a material adverse impact to its financial performance.
Table 2. Major Business Risks
Major Risks
Financial risks due to interest and foreign
exchange fluctuations that may lead to
losses
Actions Taken


Commodity price volatility risks due to
changes in the price of crude oil products


Operational risks due to disruptions that
arise from accidents, processes or
machinery failures, human error, adverse
events outside of human control, and
delays in major capital expansion projects


Dollar-denominated liabilities
hedging using forward, other
derivative instruments and
generation of dollar-denominated
sales.
Real-time awareness and response
by monitoring through an
enterprise-resource-planning
system
Commodity hedging activities to
protect profit margins with the
authority to lock-in product and
refinery margins to protect
company profits
Effects of crude oil price changes
are passed to the market in a timely
manner as Petron operates in a
fully deregulated industry.
Effective maintenance practices
and inculcation of a culture of
continuous improvement
Corporate-wide health, safety, and
environmental risk management
program
7
Regulatory risks due to changes in the
policies of national and local government

Actively maintaining lines of
communications with the public,
government agencies, and other
stakeholders at both local and
national levels to identify and
respond to potential risk factors.
$100-million refinery facilities to
ensure compliance to the stricter
Clean Air Act restrictions
Scale down program to reduce
tankage capacities, joint operation
of facilities, and relocation plans to
address changes in zoning
ordinances by local governments


Source: Petron’s Annual Corporate Governance Report (2012)
3. Financial Analysis
3.1. Overall Financial Statement Analysis
Table 3. Financial Highlights
In Million Pesos
(Except per Share
and Sales Volume
Data)
2009
2010
2011
2012
2013
Net Revenues
Net Income
176,531
4,259
229,094
7,924
273,956
8,930
424,795
1,780
463,638
5,092
Fixed Assets
Total Assets
Earnings per Share
Sales Volume (in MB)
Operating Margin
(ROS)
Return on Assets
Return on Equity
34,784
112,742
0.45
44200
34,957
161,816
0.77
48290
50,446
179,122
0.78
46700
104,111
280,333
0.08
74277
141,647
357,458
0.28
81545
2.41%
3.78%
12.09%
3.46%
5.77%
17.51%
3.26%
5.24%
15.42%
0.42%
0.77%
2.55%
1.10%
1.60%
5.39%
Source: Petron’s Annual Reports (2011, 2012, 2013)
Common size analysis reveals that property, plant and equipment; trade and other receivables;
and inventories make up the bulk of Petron’s total assets in 2013. Property, plant and
8
equipment comprise almost 40% of the company’s total assets, while trade and other
receivables are second to the largest contributor, with 18.93%. Inventories constitute nearly
15% of Petron’s total assets. The significant contributions of these assets were attributed to the
company’s major capital projects such as the RMP-2 and network expansion, as well as Petron
Malaysia’s rebranding of service stations.
Table 5. Common Size Analysis (Assets)
Property, plant and equipment
Trade and other receivables
Inventories
AMOUNT (IN
MILLIONS)
141,647
67,667
51,721
%
39.63%
18.93%
14.47%
Source: Petron’s Annual Report (2013)
Petron’s liabilities, on the other hand, are composed mainly of short-term loans and long-term
debt. Short-term loans, which account for 28% of the company’s total liabilities, were used to
finance the importation of crude oil and petroleum products, and working capital requirements.
The company also funded its several capital projects by availing of additional long-term debt,
which is 16.23% of the total liabilities.
Table 6. Common Size Analysis (Liabilities)
Short-term Loans
Long-Term Debt
AMOUNT (IN
MILLIONS)
100,071
58,032
%
28%
16.23%
Source: Petron’s Annual Report (2013)
3.1.1. Financial Performance
Full year 2013 consolidated revenues reached an all-time high of Php463.64 billlion, which is
9% higher than previous year’s level of Php424.80 billion. This was generated from total sales
volume of 81.5 million barrels (MMB), up by 7.2 MMB from 2012 due to the full consolidation of
Petron Malaysia. Cost of goods sold also increased but at a lower rate of 8% from Php406.80
billion in 2012 to Php440.48 billion in 2013.
Sales and Administrative Expenses amounted to Php11.48 billion in 2013, Php1.34 billion more
than the Php10.14 billion expenditures in 2012.
Petron closed 2013 with a consolidated net income of Php5.09 billion, which is a significant
improvement from its 2012 results of Php1.78 billion.
In 2012, Petron’s operating margin dropped to 0.42% from 3.26% the previous year. This was
due to volatility in crude and product prices in the global market.
9
Figure 5. Financial Performance.
1,000
10%
800
8%
Operating Expense
600
6%
400
4%
Cost of Goods Sold
Net Revenues
Gross Margin
200
2%
-
Operating Margin
0%
2009 2010 2011 2012 2013
Source: Petron’s Annual Report (2011, 2012, 2013)
3.1.2. Financial Position
Petron’s consolidated assets, as of December 31, 2013, amounted to Php357.46 billion. This is
28% higher than the Php280.33 billion level at end of December 31, 2012 due largely to the
increases in property, plant and equipment, as well as cash and cash equivalents. Property,
plant and equipment surged by 36% from Php104.11 billion to Php141.65 billion because of the
company’s major capital projects and network expansion, as well as Petron Malaysia’s
rebranding of service stations.
Cash and cash equivalents rose by 87% or Php23.43 billion to Php50.40 billion essentially
sourced from internally generated funds and proceeds from loans.
Total liabilities increased by 21% from Php203.43 billion to Php245.57 billion traced to trade
payables to crude suppliers and contractors of ongoing capital projects. The company also
availed of additional long-term debt to fund various capital projects.
3.1.3. Cash Flows
Petron had better cash flows in 2013, which helped finance working capital requirements and
capital projects.
Table 7. Cash Flows
In Million Pesos
Operating activities
Investing activities
Financing activities
Effects of Forex
Net Cash Inflow (Outflow)
2013
33,752
(43,329)
32,539
471
23,433
2012
1,854
(63,321)
65,407
(438)
3,502
2011
790
(22,637)
1,658
28
(20,161)
Source: Petron’s Annual Report (2013)
10
3.1.4. Industry Ratios
Petron bested its main competitor, Shell, and other companies in the industry in terms of growth
rate. Petron’s sales grew by 9% in 2013, compared to Shell’s 4.58% and the industry’s 4.36%.
Moreover, because of Petron’s various capital projects, its capital expenditure is more than four
times larger than the industry, dwarfing Shell’s -26.88-percent capital spending.
From a financial standpoint, Petron is generally less risky than Shell. In financing its growth with
debt, Petron is less aggressive compared to Shell and other companies in the industry, as
evident in its relatively low debt to equity ratio of 2.34 (compared to Shell’s 5.27 and industry’s
84.7).
Petron’s quick and current ratios are also above the industry benchmark. This means that
compared to other companies within the industry, Petron is more able to pay its short-term
obligations (using its liquid assets, in the case of quick ratio). However, the Petron’s current ratio
is still below Shell’s 1.2 and the ideal ratio of 2:1.
While greater than Shell’s, Petron’s interest coverage ratio of 1.27 is way below the industry’s
37.81. This means that Petron may be hardly meeting its interest expenses.
In the efficiency department, Petron’s turnovers are greater than Shell’s and the industry
average. However, Shell collects its receivables almost twice faster than Petron.
In terms of management effectiveness, Petron fared better than Shell. This means that Petron
manages its assets and shareholders’ money to generate profits better than Shell. However,
Petron’s ratios are still below the industry benchmark. The ratios of Petron, Shell, and industry
are presented in Table 8.
Table 8. Petron, Shell, and Industry Ratios
Growth rates (2013 vs
2012)
Sales
Capital Spending
Financial Strength
(MRQ)
Quick ratio
Current ratio
LT Debt to Equity
Total Debt to Equity
Interest coverage
(2013)
PETRON
SHELL
INDUSTRY
9%
23%
4.58%
-26.88%
4.36%
5.58
0.76
1.07
71%
2.34
0.63
1.20
130.04%
5.27
0.73
1.03
45.91%
84.7
1.27
-0.30
37.81
11
PETRON
SHELL
INDUSTRY
Efficiency
Receivable turnover
Inventory turnover
Asset turnover
7.39
8.70
1.45
13.55
6.74
0.51
4.72
8.58
1.02
Management
Effectiveness (2013)
Return on Assets
Return on Equity
1%
5%
-1.19%
-6.91%
3%
8%
Sources: Reuters (2014), Shell’s 2013 Financial Statements, Petron’s Annual Report (2013), 3Q and Petron’s
Quarterly Report (3Q 2014)
MRQ – Most Recent Quarter – End of 3Q 2014
3.2. Significant Accounts and Related Accounting Policies
3.2.1. Sale of Goods
Revenue from sale of goods in the course of ordinary activities is measured at the fair value of
the consideration received or receivable, net of returns, trade discounts, and volume rebates.
Revenue is recognized when the significant risks and rewards of ownership of the goods have
been passed to the buyer, which is normally upon delivery, and the amount of revenues can be
measured reliably.
Petron’s Sources of Revenue
The management of Petron identifies segments based on business and geographic locations.
The Group/s major sources or revenues come from sales of petroleum which include gasoline,
diesel, and kerosene. These are offered to motorists and public transport operators through the
station networks all over the Philippines.
Revenue also includes insurance premiums from the business and operation of all kinds of
reinsurance, both on sea and on land, of properties, goods and merchandise, of transportation
and conveyance, against fire, earthquake, marine perils, accidents, and all other forms and lines
of insurance authorized by law, except for life insurance.
Revenue also comes in the form of lease of acquired real estate properties which are used for
petroleum, refining, storage and distribution facilities, gasoline service structures, and other
related structures.
12
Table 9. Petron’s Sources of Revenue
Source: Petron’s Annual Report (2013)
Breakdown of Petron’s Petroleum Business
The biggest contributor in revenue is the reselling of fuel, with a value of P245.8 billion or 53%
of total revenues. Almost 30% comes from industrial revenues, amounting to P132.46B. Other
sources of revenues account for 12%. Gasul has a contribution of 5% or P24.8B, while lube
comes in with a value of P3.086B or 1% of revenues. Revenue sources are presented in the pie
chart below.
Figure 6. Revenue Sources
Revenue Sources
12%
Reseller
Lube
29%
53%
Gasul
Industrial
Others
5% 1%
Source: Petron’s Annual Report (2013)
13
For geographical segments, 80% comes from the local market which is equivalent to P284.5B.
Twenty percent or P72.5B comes from international sales. The pie chart below presents
Petron’s geographical segments.
Figure 7. Petron’s Geographical Segments
Geographical Segments
20%
Local
International
80%
Source: Petron’s Annual Report (2013)
Sales Trend
Gross profit margin has been decreasing since 2009, as shown in the table below.
Table 9. Petron’s Sales, Cost of Goods Sold, Gross Profit, and Gross Profit Margin
2013
463,638
440,479
23,159
5%
Sales
Cost of Goods Sold
Gross Profit
Gross Profit Margin
2012
424,795
406,798
17,997
4%
2011
273,956
251,610
22,346
8%
2010
229,094
209,280
19,814
9%
2009
176,531
161,583
14,948
8%
Source: Petron’s Annual Report (2011, 2012, 2013)
The Company showed an unusually high growth rate in 2012 due to the consolidation of newly
acquired Petron Malaysia operations.
Table 10. Growth Rate of Petron’s Sales, Cost of Goods Sold, and Gross Profit
Sales
Cost of Goods Sold
Gross Profit
2013 vs
2012
9%
8%
29%
2012 vs
2011
55%
62%
-19%
2011 vs
2010
20%
20%
13%
2010 vs
2009
30%
30%
33%
Source: Petron’s Annual Report (2011, 2012, 2013)
14
Effect of Supply Agreement with NPC and PSALM
The Parent Company entered into various supply contracts with National Power Corporation
(NPC) and Power Sector Assets Liabilities Management Corporation (PSALM). According to the
contract, Petron will supply the bunker fuel, diesel fuel oil, and engine lubricating oil of selected
NPC and PSALM plants, and NPC-supplied Independent Power Producers (IPP) plants.
It can be concluded that this agreement helped secure guaranteed sales for Petron. For NPC
alone, it has secured P1.43B sales since 2009, while PSALM has contributed P659M since
2012. While it may not be the huge chunk of their annual sales, these still have a significant
impact. For 2013 alone, their revenue from NPC stood at P1.3B and P42M from PSALM.
Combining these, they constitute 0.37% of the total revenue.
3.2.2. Accounts Receivable
Petron’s trade receivables are “noninterest-bearing and are generally on a 45-day term.”
Government receivables refer to duty and tax claims, such as duty drawback, VAT and specific
tax claims, as well as subsidies receivable from the Government of Malaysia. These include
receivables of more than 30 days but less than one year amounting to P6.3 billion and P14.8
billion in 2013 and 2012, respectively.
Table 11. Petron’s Receivables
Source: Petron’Annual Report (2013)
Accounting Policies
Subsequent to initial measurement, receivables are carried at amortized cost using the effective
interest rate method less any impairment in value. The company recognizes any interest earned
on receivables and periodic amortization as part of “interest income” account in the consolidated
statements of income on an accrual basis. Calculating amortized cost includes any discount or
15
premium on acquisition and fees that are part of the effective interest rate. When receivables
are derecognized or impaired, gains or losses are recognized in profit or loss.
The company maintains allowance for impairment losses on trade and other receivables at a
level considered enough to provide for potentially uncollectible receivables. The level of
allowance is based on past collection experience and other factors that affect collectability.
When the company identifies accounts receivable to be worthless after exhausting all collection
efforts, impaired accounts receivable are written off. An increase in allowance for impairment of
trade and other receivable adds to the Group’s recorded selling and administrative expenses
and decrease current assets.
Accounts Receivable Aging
In 2013, 41% of unimpaired trade account receivables were not collected during the 31- to 60day period. This is a little improvement compared to the previous year when the company failed
to collect about 46% of the unimpaired receivables during the 61- to 90-day period. Presented in
the table below is the age of past due but not impaired trade accounts receivable, as of
December 31, 2013 and 2012:
Table 12. Petron’s Past Due But Unimpaired Trade Receivables
Source: Petron’s Annual Report (2013)
Based on the company’s past collection experience, there is no need for allowance for
impairment for these past due but unimpaired trade receivables. There are no significant
changes in credit quality. Thus, these amounts may still be recovered.
Petron collects its receivables 7.39x, which is above the industry’s 4.72 receivable turnover.
However, Petron’s main rival, Shell, is more efficient in collecting its receivables, with a turnover
of 13.55x.
16
Table 13. Petron’s, Shell’s, and Industry’s Receivable Turnover
Receivable turnover
Petron
7.39
Shell
13.55
Industry
4.72
Source: Reuters, Shell’s 2013 Financial Statements and Petron’s 2013 Annual Report
Collection Period and Credit Risk
In general, “the maximum credit risk exposure of trade and other receivables is its carrying
amount without considering collaterals or credit enhancements, if any.” However, Petron has no
significant credit risk concentration because its trade customers are largely homogenous. Below
is the credit risk exposure of the company based on receivables, as of December 31, 2013 and
2012.
Table 14. Petron’s Credit Risk Exposure
Source: Petron’s Annual Report (2013)
To monitor trade receivables and credit lines, Petron records real-time daily sales and collection
transactions of all customers. The company also requires collateral to minimize credit risks in
trade receivables. Moreover, Petron adopts a comprehensive credit rating system based on
financial (i.e., customer’s financial standing) and non-financial (e.g., customer’s nature of
business, industry background, and payment habit) assessments of its customers.
3.2.3. Trade Payables
Petron’s accounts payable are liabilities to haulers, contractors and suppliers that are
noninterest-bearing and are generally settled on a 30-day term. These also include provisions,
retention payable, accruals of selling and administrative expenses, and deferred liability on
customer loyalty program that are normally settled within a year.
Trade payables to crude suppliers and contractors of ongoing capital projects contributed mainly
to the 21-percent increase in total liabilities from 203.43 billion to 245.57 billion in 2013.
17
3.2.4. Inventories
Accounting Policies
Inventories are carried at the lower of cost and net realizable value (NRV). For petroleum
products, crude oil and tires, batteries and accessories (TBA), the net realizable value is the
estimated selling price in the ordinary course of business, less the estimated costs to complete
and/or market and distribute. For materials and supplies, net realizable value is the current
replacement cost.
Petron uses the first-in, first-out method in costing petroleum products, crude oil, and other
products. Cost is determined using the moving-average method in costing lubes and greases,
waxes and solvents, materials, and supplies inventories.
Table 15. Petron’s Inventories
Crude oil and others (2013 – at NRV; 2012 – at
cost)
Petroleum (2013 – at NRV; 2012 – at cost)
TBA products, materials and supplies:
Materials and supplies – at NRV
Tires, Batteries, Accessories – at cost
2013
2012
2011
25,509
24596
22,182
25955
19,322
17,378
1584
32
1418
27
1,033
30
51,721
49,582
37,763
Source: Petron’s 2013 Annual Report.
The cost of these inventories amounted to Php53 million and Php50 million as of December 31,
2013 and 2012, respectively.
Inventories charged to cost of goods sold amounted to P433 million, P398 million, and P245
million in 2013, 2012 and 2011, respectively. Inventory write-down included in cost of goods
sold amounted to Php737 million in 2013.
Table 16. Inventory Level
Inventory Turnover
Ave. Age of Inventory
Petron
Shell
MIR*
8.52
6.57
-
42.70
54.8
30.00
*MIR – Minimum Inventory Requirement
Source: Reuters, Shell’s 2013 Financial Statements and Petron’s 2013 Annual Report
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Inventory Management
For petroleum products, Petron has two major projects aimed at improving the delivery to
customers–the Inventory-Driven Delivery System (IDDS) and the Global Position System
(GPS). Eighty percent of its accounts and service stations have been enrolled in the IDDS from
only 18% in 2012. IDDS is a program that ensures the stable supply of petroleum products at
Petron’s service stations. This resulted in an optimum utilization of its tank trucks. Meanwhile,
88% of the company’s contracted tank truck fleet is already equipped with GPS tracking system
which allows real-time monitoring of deliveries. These initiatives and the continuous Tank Truck
Modernization Program enabled the company to improve the safety, product integrity, and
delivery reliability of its operations. These also ensured that dealers have sufficient supply at all
times, ultimately benefiting customers.
Minimum Inventory Requirement
Effect of Crude Oil Prices
Since inventory is measured at NRV, with the current trend of decreasing crude oil price, there
is a risk that the crude oil value may be written down.
Figure 8. Effect of Crude Oil Prices
Source: NYSE (2014)
3.2.5. Property, plant and equipment
Accounting Policy
Property, plant and equipment (PPE), except land, are stated at cost less accumulated
depreciation and amortization and any accumulated impairment in value. Such cost includes the
cost of replacing part of the PPE at the time that cost is incurred.
19
Construction in progress (CIP) represents structures under construction and is stated at cost.
This includes the cost of construction and other direct costs. Borrowing costs that are directly
attributable to the construction of PPE are capitalized during construction period. CIP is not
depreciated until such time that relevant assets are ready for use.
Depreciation and amortization, which commence when the assets are available for their
intended use, are computed using the straight-line method.
Table 17. Property, Plant and Equipment
Buildings
and
Related
Facilities
Refinery,
Plant and
Equipment
Service
Stations and
other
Equipment
Computers,
Motor and
Office
Equipment
Land and
Leasehold
Improvement
Construction
in Progress
TOTAL
December 31, 2012
22,457
48,743
14,276
4,142
11,754
57,591
158,963
Additions
Disposals/reclassifi
cations/Acquisition
of subsidiaries
Currency
translation
adjustment
December 31, 2013
DEPRECIATION
AND
AMORTIZATION
December 31, 2012
869
60
831
88
243
49,494
51,585
4,081
771
510
(124)
265
(14,741)
(9,238)
455
73
52
51
40
(76)
595
27,862
49,647
15,669
4,157
12,302
92,268
201,905
13,343
28,095
9,152
2,747
1,515
-
54,852
Additions
Disposals/reclassifi
cations/Acquisition
of subsidiaries
Currency
translation
adjustment
December 31, 2013
1,310
2,389
1,175
313
66
-
5,253
1,021
(251)
(687)
(172)
18
-
(71)
129
51
33
9
1
-
224
15,803
30,284
9,673
2,897
1,600
-
60,258
December 31, 2012
9,114
20,648
5,124
1,395
10,239
57,591
104,111
December 31, 2013
12,059
19,363
5,996
1,260
10,702
92,268
141,647
COST
NET BOOK VALUE
Source: Petron’s Annual Report (2013)
The most significant item is the “Construction in Progress” which refers to the P92.3B – RMP2
Project.
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The RMP Project
RMP-2 is Petron’s $2-billion project that allows the full utilization of the PBR’s 180,000 barrelsper-day capacity, therefore enhancing the country’s supply security. Petron will convert lowvalue fuel oil to high-value white products, such as LPG, gasoline, jet fuel, and diesel. The
construction of this project is set to be fully commissioned by early 2015.
The parent company has signed and executed a US$480 million (2011: $1=P43.31, Php20.79B)
term loan facility which is amortized over 5 years and is subject to a floating interest rate plus a
fixed spread. Interest capitalized in 2013 and 2012 amounted to Php3,529 million and Php886
million, respectively. Capitalization rate used for borrowings was at 6.22% and 5.71% in 2013
and 2012.
Tax Incentive
On June 3, 2011, the Board of Investments approved Petron’s application under RA 8479 as an
existing industry participant with a new investment in modernization/conversion of Bataan
Refinery’s RMP-2. The BOI is extending the following major incentives: income tax holiday for
five years, minimum duty of 3% and VAT on imported capital equipment, tax credit on domestic
capital equipment, and exemption from real property tax and contractor’s tax.
3.3. Technical Analysis
3.3.1. Stock price trend
Towards the end of the first quarter of 2014, Petron stocks (PCOR) dropped by 15% from
Php13.40 on March 26 to Php11.7 the following day. This movement was repeated on August
18 when Petron’s stock price fell from Php12.70 to Php11.78
Figure 9. Petron Stock Price Trend January 1 to November 28, 2014
Source: Philippine Stock Exchange (2014) PCOR OHLC Stock Data
21
3.3.2. Sale of PCOR shares by PCERP
Petron’s two separate disclosures on March 27 and August 18, 2014 stated that one of the
company’s major stockholders, Petron Corporation Employees’ Retirement Plan (PCERP), sold
470 million and 380 million Petron common shares, respectively, at a price of Php11.50 per
share through the facilities of the Philippine Stock Exchange pursuant to a placement
agreement.
4. Investment Recommendation and Justifications
Based on quantitative and qualitative analyses, it can be concluded that Petron is a “Buy”
investment. Moreover, the company’s strong operating revenue growth and cash flows,
improved operational efficiency, acquisition of Petron Malaysia, and high potential upside justify
this recommendation.
4.1. Strong Operating Revenue Growth and Cash Flows
Petron’s cash flows significantly improved in 2013. This trend is expected to continue provided
that oil prices stabilize. Moreover, the high demand forecast in the coming years, as driven by
an expected car buying boom, will solidify the company’s growth targets.
4.2 Improved operational efficiency
RMP-2 will allow PBR to maximize its production capacity, process a wider range of crude oil,
and eliminate the production of low margin fuels. One of the units will also have a by-product
called petcoke, which, because of its high-heating value, makes it a good fuel for the newly
operational Refinery Solid Fuel-Fired Boiler. This, in turn, will generate steam and power for the
refinery, lowering refining costs due to self-reliance on power generation.
The risks of the capacity of the domestic market to absorb the additional volume are mitigated
as the Philippines remains to be a net importer of finished products. Petron can also offer to
service the requirements of other petroleum retailers through competitive pricing agreements,
as buyers will have no freight cost.
4.3 Petron Malaysia, a good investment
The acquisition of Petron Malaysia is a good strategic decision because of Malaysia’s robust
economy. Moreover, Malaysia’s per capita consumption of fuel is two times larger than that of
the Philippines (World Bank, 2014).
4.4 High potential upside
Less than four months away from the full completion of RMP-2, it is a good time to buy the
stock. Since the sale of PCOR shares held by PCERP, the stock has traded at a range of
Php11.10-Php11.98 from January’s high of Php14.40. This could mean a 20-40% potential
upside.
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