Share analysis: Petron Corporation – Oil refining

THE COMPANY: Petron Corporation (PCOR) was incorporated in 1966, with a 68% controlling interest held by San Miguel Corporation. PCOR refines imported crude oil and is involved in the marketing and distribution of a variety of petroleum products in the Philippines and Malaysia.

PCOR is the largest integrated oil refining and marketing company in the Philippines, maintaining its industry leadership with a market share of nearly 37% and supplying almost 40% of the country’s oil requirements. The company operates the largest oil refinery in the country, the Petron Bataan Refinery (PBR), with a rated capacity of 180,000 barrels per day (bpd). They also have 30 depots and terminals scattered across the country, as well as over 2200 service stations, supplying assorted petroleum goods to resellers and industrial customers.

PCOR acquired ExxonMobil’s subsidiary and downstream business, Esso Malaysia, in March 2012, renaming it Petron Malaysia Refining & Marketing (PETM). It is the third-largest oil company in Malaysia, with a market share of almost 17%, behind Petroliam Nasional and Shell Refining Company.

PETM operates the Port Dickson Refinery (PDR), which has a rated capacity of 88,000 bpd and produces an array of petroleum products. They also have seven depots and terminals across Malaysia, with more than 560 service stations nationwide, providing commercial, industrial and retail fuels.

PERFORMANCE: PCOR’s net income grew by a robust 168% to P3.14bn ($70.65m) in the first half of 2014, driven by greater sales volumes, a higher average selling price, better margins and a reduction in non-operating charges. The sales volume of the company’s Philippine and Malaysian operations increased by 10% and 6% y-o-y, respectively, to 25.1m and 18m barrels each, on stronger industrial sales and a widening service station network.

Meanwhile, the impact of non-operating charges on the company’s bottom line over the period was relatively significant, dropping from P2.91bn ($65.48m) to P1.82bn ($40.95m).

GROWTH DRIVERS: PCOR’s $2bn Refinery MasterPlan Phase 2 is 98% complete and on its final stages, with full commercial operations expected in 2015. It will utilise 100% of the 180,000-bpd capacity of PBR, which is currently operating below 80%, producing less than 144,000 bpd. The upgraded refinery will provide the necessary flexibility to import and process cost-efficient crude oil varieties from different country sources and convert low-margin fuel output into a broader range of white gas products, such as liquefied petroleum gas, diesel and gasoline. This will also make PCOR the only company capable of producing Euro-IV-compliant fuels.

In addition, PCOR plans to increase its service station network by 560 per year, to reach 5000 stations by 2018, up from the current 2200 stations nationwide. The strategy is to initially build micro-filling stations with just a few dispensing pumps that can be easily scaled up as demand strengthens.

Turning to its international operations, PETM is upgrading the capacity utilisation of the PDR, which is currently operating at 51% of its 88,000-bpd capacity. At the same time, PETM is converting, renovating and expanding its service station network in Malaysia. About $1.2bn will be invested in PDR, with another $800m allotted for the service stations.

On the local front, stable demand for gasoline has been seen, and vehicle sales for 2015 are expected to increase to 300,000 units, up from an estimated 250,000 units in 2014. According to data from the IMF, the Philippines has indeed entered the motorisation stage, having reached a real GDP per capita of $4961.67 as of April 2014.

LOOKING AHEAD: Lower oil prices are likely to result in a squeezing of margins for PCOR. Furthermore, inventory losses are possible, as the company is exposed to a 30-45 day lag between the pricing of crude oil and the sale of refined petroleum products.