TTNGL: Is It A Fair Deal?

28 August 2015


150828 TTNGL Valuation - Logo

 

 

 

 

 

 

Note to reader: Throughout this analysis, you can click on the images to enlarge them.

Trinidad and Tobago NGL Limited (TTNGL) was incorporated on September 13, 2013. At present TTNGL is wholly owned by the National Gas Company of Trinidad & Tobago Limited (NGC).

TTNGL’s primary purpose is to hold NGC’s 39% shareholding in Phoenix Park Gas Processors Limited (PPGPL) acquired from ConocoPhillips T&T Holdings Inc in August 2013. As per the Government of the Republic of Trinidad & Tobago (GORTT) mandate to expand public investment opportunities via the stock exchange NGC is proposing an Initial Public Offering (IPO) for 49% of the company’s share capital.

Securities being offered

NGC is offering 75,852,000 Class B shares in TTNGL to the public at a price of TT$20.00 per share. In total TTNGL has in issue 38,700,000 Class A shares and 116,100,000 Class B shares. The Class A and B shares are subject to the same rights, privileges, restrictions, and conditions except for the right to appoint the Company’s Directors.

Post IPO the ownership structure of TTNGL and the underlying asset PPGPL would show as per figure 1:-

Figure 1 – Ownership Structure of TTNGL & PPGPL Post IPO

150828 TTNGL Valuation Discussion Figure 1

 

 

 

 

 

As seen above the driver of TTNGL’s value is its investment in PPGPL.

PPGPL Analysis

PPGPL’s core business consists of natural gas processing and exporting natural gas liquids (NGLs). It is the largest producer and marketer of propane, mixed butane, isobutene and natural gasoline in T&T. PPGPL’s three (3) major revenue streams include:-

  1. The processing of wet gas supplied by NGC and Petrotrin
  2. The fractionation of NGLs purchased from Atlantic LNG (ALNG)
  3. The provision of processing capacity to ALNG and Petrotrin

Effectively PPGPL is owned by four (4) state entities as shown in Table 1 below:-

Table 1 – PPGPL Share Ownership Structure

150828 TTNGL Valuation Discussion Table 1

 

 

 

Key PPGPL Risk Factors

As the underlying asset within the TTNGL investment vehicle it is important to understand the key risk factors encountered by PPGPL and how they are managed to preserve and increase the company’s value. Table 2 below discusses these risks in sections:-

Table 2 – PPGPL Key Risk Factors 

150828 TTNGL Valuation Risk Factors 1

 

 

150828 TTNGL Valuation Risk Factors 2

 

 

150828 TTNGL Valuation Risk Factors 3

150828 TTNGL Valuation Risk Factors 4150828 TTNGL Valuation Risk Factors 5

 

 

 

 

 

 

 

 

 

 

PPGPL Financial Performance

For the period 2011 – Q1 2015 PPGPL has experienced a consistent decline in profitability and Return on Equity (ROE). For the period under study PPGPL has encountered a triad of operating and market challenges including:-

  • The consistent decline in commodity prices due to demand and supply conditions within the global economy
  • A continual decrease in the volume of gas supplied by NGC for processing
  • A continued decline in the composition of the gas supplied by NGC leading to the extraction of less liquids from the gas supplied

The above three factors have led to a decline in net profit margin and asset efficiency. Compounded with minor deleveraging of the organisation ROE has declined from 97% in 2011 to 54% in 2014. Q1 2014 and Q1 2015 comparisons also show a fall-off in ROE from 14% to 5%.

Consistent with the fall-off in profitability PPGPL over the period has recorded lower cash flows generated from operations and as such lower dividend payments to its shareholders including TTNGL. Table 3 below shows financial highlights for the period 2011 – Q1 2015.

Table 3 – PPGPL Financial Highlights 2011 – Q1 2015

150828 TTNGL Valuation Discussion Table 3

 

 

 

PPGPL Valuation

As noted previously TTNGL’s value is driven by the performance of PPGPL. PPGPL’s valuation was conducted utilising both discounted cash flows and comparables methodologies. The valuation utilised an eleven (11) year forecast broken into three (3) periods as follows:-

  • 2015 – 2018 – continued contraction within the energy sector
  • 2019 – 2024 – recovery within the sector
  • 2025 – terminal year assumptions

The base case assumptions within each period are shown on Table 4 below:-

Table 4 – PPGPL Forecasted Cash Flows Base Case Assumptions

150828 TTNGL Valuation Discussion Table 4

 

The Weighted Average Cost of Capital (WACC) was derived from the prospectus. The required rate of return on equity (ROE) was derived internally as follows:-

  • Risk free rate – US$10 Yr Treasuries 2.20%
  • S&P 500 index annualised 10 Yr growth – 5.46%
  • Beta – 1.20
  • Damodarran equity risk premium for T&T – 8.15%

Incorporating the above assumptions and discount rates PPGPL has the following intrinsic values:-

  • As per Free Cash Flows (FCF) – TT$7.328B
  • As per Equity Cash Flow (ECF) – TT$5.727B

The tables below detail the forecasted cash flows for PPGPL:-

Table 5 – PPGPL Eleven Year Forecasted Statement of Financial Performance 2015 – 2025

150828 TTNGL Valuation Discussion Table 5

 

 

 

 

Built upon the projected Statement of Financial Performance is the derivation of FCF and ECF.

Table 6 – PPGPL Eleven Year Forecasted Statement of Free Cash Flows 2015 – 2025

150828 TTNGL Valuation Discussion Table 6

 

 

 

Table 7 – PPGPL Eleven Year Forecasted Statement of Equity Cash Flows 2015 – 2025

150828 TTNGL Valuation Discussion Table 7

 

 

 

Table 8 below presents a summary of the FCF and ECF valuations as follows:-

Table 8 – DCF Valuation Summary

150828 TTNGL Valuation Discussion Table 8

 

 

 

 

An exchange rate of TT$6.3 / US$1.00 was utilised to convert PPGPL’s USD value to TTD. TTNGL being a thirty-nine percent (39%) shareholder effectively carries a value within the range TT$2.174B to TT$2.857B.

Based on TTNGL’s 154.8M shares in issue the value per share is as follows:-

  • As per Equity Cash Flow – TT$14.04
  • As per Free Cash Flow – TT$18.46

Given an issue price of TT$20.00 per share a discounted cash flow analysis does not recommend this investment.

Comparables Analysis

A comparables analysis was also utilised to determine the viability of a TTNGL investment. To determine a comparables analysis Earnings per Share (EPS) for year end 2015 were calculated based on the Statement of Financial Performance detailed in Table 5. Table 9 below detail TTNGL’s EPS:-

Table 9 – TTNGL Earnings per Share Year End 2015

150828 TTNGL Valuation Discussion Table 9

 

 

 

 

 

 

TTNGL’s EPS is estimated to be TT$1.72 per share.

Book value per share was calculated as at the March 31, 2015 position and is estimated to be TT$19.07 per share.

Three (3) comparable metrics were utilised to determine TTNGL’s valuation:-

  1. The Trinidad & Tobago Composite Index (TTCI) – this metric measured the overall P/E and P/B ratios for the market in which TTNGL is to be listed
  1. The next two (2) comparables are US listed companies within the same midstream sector as PPGPL. The companies were measured for market capitalisation and the selected entities held values between US$450M – US$750M. PPGPL’s total asset value is approximately US$517M as at March 31, 2015.

The selected comparables were Cone Midstream Partners LP (CNNX) and Midcoast Energy Partners (MEP)

Table 10 details the comparable valuation analysis.

Table 10 – TTNGL Comparable Valuation Analysis

150828 TTNGL Valuation Discussion Table 10

 

 

 

Placing reliance on P/E analysis the valuation range for TTNGL is within TT$21.10 – TT$28.99. Of the two (2) US corporates CNNX is larger with a market capitalisation of US$752M and MEP at US$536M.

From a P/E analysis TTNGL is valued fairly.

Other Items to Consider

In addition to the quantitative analysis of TTNGL there are a number of qualitative factors to be considered before investing:-

  1. This IPO will not figure as a capital raising exercise to TTNGL. The funds will be held by NGC for its corporate use. Therefore the inability to have the issue fully subscribed will not compromise TTNGL’s operations.
  1. PPGPL already has as its shareholders the NIB, NEL and UTC. These entities may view the IPO as an opportunity to gain a larger stake within PPGPL. NIB & UTC may also benefit by participating in the IPO at a lower cost than their initial entry positions.
  1. As an operating entity TTNGL receipts are in USD and its cash outflows are in TTD. As such there should be a direct correlation between a depreciating TTD and an increase in the value of TTNGL.
  1. The current impairment position carried by TTNGL has brought into question its ability to pay a dividend. The company will be guided by Section 54 of the Corporations Act 1995 and its dividend policy.

Section 54 of the Corporations Act prohibits a dividend to be paid in the event the company is unable to pay its liabilities and/or the realisable value of assets after the dividend is less than the aggregate value of its liabilities and stated capital.

As at March 2015 TTNGL hold current liabilities of immaterial value which should not compromise their ability to pay dividends.

It must also be noted that to the extent PPGPL is able to maintain its dividend stream to TTNGL the carrying value of the impairment will be reduced maintaining a positive equity position.

TTNGL’s dividend policy adds back to distributable profit impairment charges and non-cash expenses to determine profits available for distribution negating the effects of an impairment.

As such TTNGL’s ability to pay dividends should remain intact.

  1. TTNGL acquired its stake in PPGPL at approximately TT$25.00 per share. Following the EY valuation exercise of April 2015 the company marked down the value of the asset by TT$1.097B or TT$7.09 per share for an effective carrying value of TT$17.91 per share.

This value is within FSL’s own internal valuation and as such it is difficult to see TTNGL taking further impairments of material value save for a significant fall-off in commodity prices.

  1. PPGPL expects gas production to improve beyond 2017 as the gas fields Juniper and Starfish come online. PPGPL’s growth potential could also improve significantly if:-
  • Agreements are finalised for the cross border fields between T&T and Venezuela
  • A PPGPL 2 is constructed in La Brea to service the Massy/Mitsubishi methanol plant

 

Conclusion

An investment in TTNGL is a considerably risky investment subject to the cyclicality of the energy market. However, TTNGL presents an opportunity to the long term investor to diversify their portfolio, enter the energy market at fairly depressed prices and capture gains as market conditions improve and PPGPL’s capacity expands based on the growth prospects outlined above.

TTNGL is recommended for the long-term risk-aware investor.

Osmond Prevatt | Portfolio Manager | Firstline Securities Limited

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