17 August 2015

In the week since the prospectus for TTNGL has been released, there has been intense discussion regarding the initial public offering, ranging from valuation concerns to questions about revenue and profitability, among others.

All of these concerns and questions are valid, and must be carefully considered by investors before arriving at an investment decision.

Firstline made a recommendation that TTNGL is an appealing investment for investors with capital allocated to take on additional moderate (and by extension, higher) risk, and who are prepared to weather some short term volatility and temporary downside in exchange for attractive dividends relative to other available options.

Therefore, if you have set aside $100 to invest in PPGPL under the assumption that it is a “safe” investment inoculated from global commodities prices fluctuations, then it may well be time to revisit the amount of money you initially planned to allocate and invest. The new amount might be $20 or $ 50 as opposed to $100. In other words:  the amount you allocate directly correlates with your risk tolerance, time horizon, existing portfolio composition and exposure, and ability to absorb any short term volatility.

Additionally, we are unlikely to see the immediate sharp pop up in values that we saw with FIRST. Nevertheless, this does not take away from some of the positives of TTNGL, which must also be considered along with the risks.

Profitability Outlook

MB Average 2014 and 2015 prices

Like most other energy related commodities, LPG (propane and butane) and gasoline have taken a beating in 2014 and 2015.
At Firstline we were only able to obtain market prices for PPGPL’s commodities from late February 2014 through August 14th 2015. Based on the average 2014 prices from the dataset, and the average 2015 prices year to date, there have been declines of between 42% and 52% in the prices of PPGPL commodities.


MB Futures Curves



MB August Futures Prices










Despite the recent decline in prices, the futures curve is still showing increased prices going out several years—in other words, the market still expects prices to be higher in the future. This has positive implications for PPGPL’s profitability—however, we must emphasize that the futures curve can change very rapidly due to market sentiment and should only be taken as a gauge of the market’s opinion at a particular point in time. Interestingly, the market is currently pricing in sharp declines in 2019 for butane and natural gasoline, for reasons that are not entirely clear to us at the moment.
It is worth noting that the futures curve also seems to go counter to what has been claimed in the prospectus that prices will recover for PPGPL’s commodities after 2018. However, we are not LPG or natural gasoline market experts and are not in a position to discuss in detail why that divergence between the market and government’s expectations exist.
The key takeaway is that prices are expected to improve sometime in the next 2-3 years, which would have implications for profitability and would also reverse some of the impairments and write downs that have occurred over the past year.

Valuation Concerns

There has been a lot of commentary regarding whether or not TTNGL is overvalued. Based on Fiscal Year 2014 earnings, it would appear to be reasonably valued given the current domestic equities environment, at around nine times earnings and just over one times book value.

However, several commentators have mentioned that based on projected earnings (calculated using various and individual methodologies, without much input or guidance from TTNGL, PPGPL or NGC data or not necessarily linked directly to industry/market conventions) the valuation is far too high. Figures provided by the commentators have generally been around 20 times earnings.

A common misconception that has appeared repeatedly, is that Q1 2015 results could simply be multiplied by four to get fiscal year 2015 results.

This is not the case.

There are a number of caveats and considerations that must be taken into account to properly and defensibly formulate fiscal year 2015 results, including but not limited to:

  • Maintenance: planned or unplanned maintenance can disrupt feedstock supply, affect production and therefore revenue.
  • Feedstock Supply: planned or unplanned feedstock supply outages, and varying quality and liquids content of feedstock supply over time.
  • Seasonality: seasonal demand for natural gasoline as well as LPG varies substantially from quarter to quarter, and also depending on the destination of exports.
  • Production Mix: we do not have any real sense of what the production breakdown for LPG and natural gasoline is, and how that fluctuates, has fluctuated, or will fluctuate for 2015. This affects revenue as product pricing can diverge from time to time.
  • Pricing: pricing of PPGPL’s commodities is relatively opaque—we are not sure what the feedstock is being bought for, what it is being sold for, and what the price arbitrage is. We are also unsure of what the pricing terms are for the other revenue streams beyond the exports/sales of products that PPGPL controls directly.

This uncertainty regarding what methodology was best or most accurate around projecting earnings was one of the reasons we focused on downside from impairment losses, which is much more clearly defined in the prospectus: for every 1% decline in underlying commodity prices, there is a corresponding TTD 37.4 million impact on the carrying value of the investment in the joint venture (i.e. the underlying shares in PPGPL).

It is far from perfect and shares some caveats with multiplying first quarter numbers in that it implicitly assumes that production was similar to the previous year but that pricing is lower. However it is a much more linear and in some ways more defensible way to address downside risk in this particular investment.

If we were to use the PE multiple (~20) from multiplying quarterly numbers, TTNGL would still compare favourably valuation-wise and dividend-wise to National Enterprises Ltd (“NEL”) which is the original government holding company / yield-co.

NEL has a PE of 21.3 based on last fiscal year’s earnings per share of TTD 0.80, and an August 14thprice of TTD 17.09.

Even with the expected 45% decline in profitability, TTNGL would still be able to pay a dividend of TTD 0.85 per share, or 4.23% – better than NEL’s trailing dividend yield of 2.92% (TTD 0.50 dividend per share over TTD 17.09 per share).

That being said, NEL’s risk profile compared to TTNGL is much more diversified and less susceptible to commodity price risk. It is a lower risk company overall than TTNGL due to its ownership in National Flour Mills, TSTT and other state entities that have performed well recently.

TTNGL also stacks up favourably against Petrotrin in several ways, namely:

  • Profitability: not accounting for impairments (which is a non-cash charge), TTNGL turned a profit while Petrotrin did not. This would also mean that Petrotrin’s return on equity was negative.
  • Leverage: PPGPL had a debt to equity ratio of 0.27 versus Petrotrin’s 1.16; the debt to equity ratio was calculated using the short plus long term debt divided by shareholder equity.
  • Liquidity: PPGPL’s current ratio was 2.64 versus Petrotrin’s 0.87 during FY2014.

It is worth noting that PPGPL has not been downgraded by the major credit agencies, while Petrotrin has, unfortunately. Additionally, most Petrotrin bonds are richly priced with low yield and significant downside from higher interest rates.

By way of a short aside, for our bond investors out there: Petrotrin has two bonds outstanding:

  • 6% amortising, maturing May 2022, currently trading a little above par to yield 5.90%; and
  • 9.75% bullet, maturing August 2019, currently trading at 114.30 as of the time of this analysis, yielding 5.70% with 4 years to go before it trades at 100. (Should 2019 still find us in a depressed oil market, this US$850MM bond may potentially pose a problem for repayment)

In addition, Petrotrin requires at least US$ 1.25B to correct major infrastructural deficiencies as evidenced by severe, costly pipeline leakages in 2014. Trinmar, Petrotrin’s highest producer, has 300 structures dating back to 1955. It would not be a surprise for some, should Petrotrin return to the capital market to fund the above stated expenses and with their recent downgrade and depressed (projected flat) oil prices, they may well be borrowing at a significant premium.

Lastly, Petrotrin’s future profitability—actual economic profitability, not accounting profitability—will be hampered by commodity prices as well as a number of other issues which we won’t delve into here.

In our next installment we will conduct a discounted cash flow analysis of PPGPL to determine its value using that methodology. We will also look at how PPGPL stacks up to similar companies involved in NGLs in the United States.

We still maintain that TTNGL could be a good addition to portfolios of those who have room for moderate to high risk. Let Firstline help you figure out how much capital to allocate to this offering.


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