A Firstline Securities Limited Blog by: Jody Hernandez
Petrotrin’s financial position over the past three years has been unimpressive. Revenues have declined and there have been no improvements to operating efficiencies that might have offset or reduce the negative impact on the bottom line. The poor performance has been driven by continued lower oil prices (sub USD 55) and declining production of local oil over the period reviewed. Assets have declined in value as liabilities increased, thereby increasing the company’s debt to asset ratio from 27.677% in 2015 to 28.791% by 2017. Cash from operations has also steadily declined.
Despite the recent dismal performance, oil prices have recently been on the increase and have been consistently over USD 60 per barrel since September 2017. Also, in September 2018 the government expressed its intent to ‘exit’ the Refining business and focus on exploration, production and terminalling. Should they proceed with the exit plan and be successful in its attempt to increase oil production in the near term, the higher price environment will help reduce the company losses and potentially even begin generating profits in the medium term.
To date, not many details have been revealed about the government’s intention, other than they wish to exit the Refining Operations of Petrotrin on October 1st. How they go about the sourcing and marketing of refined products is very much still unknown but should not be a problem as this a basic function common throughout the region. The Refining & Marketing assets of Petrotrin were valued at a net of TTD$16.726 billion as stated in the company’s September 2017 consolidated financial statements. The government has no guarantee how much it will be able to generate should it decide to sell off these assets.
There are numerous options available to them. They could offer it to the employees, they could invite external investors to purchase or lease some portion of the refinery while retaining an ownership interest themselves, or they can even attempt to sell off the asset completely to the highest bidder. There are also other options available; however, whichever path is chosen will have negative and positive repercussions. The country will be informed in due course of the preferred method chosen by the government as the date of October 1st is set to be the last day of operations at the Refining Plant.
There is a high possibility that assets for such a specialised facility may be difficult to sell and may force them to be potentially sold at extremely low values. If we were to consider this occurring, then we can look at the recent sale of Petrotrin assets to Niquan in 2018 where Niquan was able to acquire the World GTL assets for USD35 mill or approximately 8.75% of its book value. All other bidders were lower for scrap purposes. If a similar situation were to occur Petrotrin’s refining assets could be sold for TTD1.46 billion which would be USD209 million. This is only 25% of the outstanding USD debt; the shareholders would be liable for the difference.
Note the Government has not disclosed their intentions or plan for the mothballed assets other than making them available to the union or others for “opportunity” and the above discussion seeks only to discuss some of the possible outcomes.
Currently Petrotrin has two large USD debts in the form of eurobonds outstanding. A bullet payment of USD850 million is due on the 14th of August 2019 and the other finally matures on the 5th of August 2022 but interest and principal are currently being repaid semi-annually and there is an estimated 250 million U.S. dollars still outstanding.
There are three primary issues we considered when evaluating these bonds. First the shareholders or company’s ability or willingness to repay, in doing so we firmly believe that the debt will be repaid at maturity either by sale of the refining assets which have book values enough to cover both the 19s and 22s, by restructuring, refinancing or shareholder injection. Based on the recent success the government has had with issues such as the National Investment Fund, Trinidad Generation Unlimited and Trinidad and Tobago Government Bonds, it is likely that there will be an appetite for any issue backed by the government with strong interest coming for local sources.
Second, we looked at the open market demand and confidence in the bond. Since the Government’s announcement of its exit intention the Petrotrin 19s have experienced a decline in price from $99.7 (yielding 10.08%) to 93.00 (yielding 18.48%) as at September 17th 2018. This has attracted several of the largest holders of the bond to increase their holdings. JP Morgan, BlackRock and Prudential Financial, three of the four largest holders have all increased holdings with the fourth party not changing its position. This activity by major players in the global investment community acts as an indication that there is confidence in the market of the shareholder’s ability to repay the debt.
Third is the issue of uncertainty and potential further negative credit events. At the time of the government’s announcement the 2019 bond was rated by S&P BB and Moody’s B1, but since then Moody’s have placed Petrotrin under review for a downgrade. The prices in the market reflect a S&P rating of B or Moody’s B3 rating and lower. This suggests that the market has already priced in an additional negative credit event and the uncertainty that may develop beyond October 1st when the Refinery closes its doors, presumably for good.
The bottom line here is that the Government of Trinidad and Tobago has been the only shareholder of Petrotrin and has appointed the board members, top management and exercised control for a very long while and therefore cannot escape the responsibilities and obligations of ownership.
At this stage any investment into these bonds are speculative as we await further information which we expect in the coming budget.
For further information, feel free to contact Firstline Securities Limited at:
1 868 628 – 1175; firstname.lastname@example.org.