The composite index of the T&T stock market declined by 2.87 per cent in 2014 and several of the most widely held stocks on the local market experienced double digit declines.
Sagicor Financial Corporation—which had over 16,000 shareholders resident in T&T at the end of 2013—declined by 17.66 per cent; First Citizens by 7.5 per cent and Scotiabank by 15.2 per cent. Among the widely held shares that were worth more at the end of 2014 than at the beginning were Republic Bank, which was up by 3.37 per cent, Neal & Massy by close to 14 per cent and Unilever by about 15 per cent.
This means that 2014 was the first down year since 2009, when the composite index declined by 9.21 per cent. In 2010, the composite index increased by 9.19 per cent, in 2011 by 21.21 per cent, in 2012 by 5.14 per cent and in 2013 by 11.27 per cent.
For what it is worth, I would advise local shareholders not to lose faith in the ownership of stocks as the best source of long-term wealth generation and not to be discouraged into selling their shares based on what may turn out to be a temporary decline in T&T’s energy-based exports, this country’s main source of tax revenue and foreign exchange.
In fact, investment experts always say that the best time to buy shares is when prices are declining rather than when they are rising. In 2015, most of the local share-owning fraternity would be looking forward to the initial public offering of shares in Phoenix Park Gas Processors (PPGPL), which is based on the Point Lisas Industrial Estate.
PPGPL extracts natural gas liquids from raw natural gas delivered to its facility from the existing natural gas pipeline system and fractionates the liquids into three components: propane, butane and natural gasoline. The propane and butane are marketed in the Caribbean and Central America and the natural gasoline is marketed internationally. I am on record as describing PPGPL as one of the best run companies in T&T and it is certainly one of the most profitable.
In a ratings review dated December 19, 2014, the regional credit rating agency, Caricris, noted that PPGPL generated US$808.3 ($5.1 billion) in revenue in 2013 and recorded after-tax profits of US$202.6 million ($1.3 billion) in 2013. The rating agency stated that in 2013, PPGPL’s revenue declined by 4.2 per cent and its after-tax profit by 5 per cent compared with the year before.
These declines were as a result of lower propane and butane sales to the regional market, “coupled with the gas supply curtailments in the upstream energy sector, as bpTT and BGtt undertook major maintenance works in the third quarter of 2013, which negatively impacted natural gas liquids production.”
According to Caricris: “Notwithstanding the fall in profit after tax, PPGPL’s margins remained healthy and largely unchanged from the previous year with PAT, gross profit (GP) and earnings before interest, tax, depreciation and amortization (EBITDA) margins of 25.1 per cent, 42.7 per cent and 39.4 per cent in 2013, compared to margins of 25.2 per cent, 42 per cent and 43.7 per cent respectively in 2012.”
Also, in 2013, PPGPL recorded return on equity of 64.6 per cent, return on assets of 33.6 per cent and return on capital employed of 75.2 per cent. This means that while the company experienced a marginal reduction in sales and profits in 2013, it is still extraordinarily profitable with profit margins that would make Digicel owner Denis O’Brien blush and without the regional telecom company’s huge, and potentially crippling, debt burden.
But, as everyone knows, the world has changed since this time last year and the assumptions that might have held when PPGPL was supposed to go to market in June/July 2014 are not the same assumptions of July 2015.
There are several issues that are likely to have an impact on the valuation of PPGPL by the time that 100 per cent state-owned NGC gets around to offering the shares on the local market:
• The gas curtailment issues that affected revenue and profits in 2013 are expected to continue until 2017, when bpTT’s Juniper platform begins production. The extent to which the gas curtailment will continue to impact on PPGPL is unknown, but hopefully will be properly quantified in the company’s prospectus;
•As everyone in this country should know, oil prices have plummeted by more than 50 per cent between June 2014 and today, with West Texas Intermediate for February delivery closing last week down US$0.43 to settle at US$48.36 barrel on the New York Mercantile Exchange.
Since PPGPL products are viewed as crude oil replacements, there would be some relationship between declining crude oil prices and reduced prices for PPGPL’s propane, butane and natural gasoline exports.
According to a January 5, 2015, report out of Houston by the Platts magazine: “The price of US Gulf Coast propane at the Enterprise terminal in Mont Belvieu, Texas, for January-dated barrels traded as low as 46.00 cents/gal Monday on the IntercontinentalExchange, a more than 15-year low for spot propane, sources said. “The last time Platts assessed spot Gulf Coast propane at the level seen trading Monday was on October 12, 1999.”
The publication also stated that Mont Belvieu propane price on January 5, 2015, was 62 per cent lower than one year ago, which is significant as PPGPL uses Mont Belvieu as a benchmark for its Caribbean and Central American exports of cooking gas.
Hopefully, the impact of lower prices on the company’s revenue and earnings will be properly quantified and outlined in the PPGPL prospectus and reflected in the valuation of shares offered to the T&T public as, clearly, the valuation considered when the company was ready to go public last year cannot be the same valuation if the company is placed on the market this year;
• One of the issues that all economy-watchers in T&T need to keep on their radar is the ongoing debate in the US to loosen the 40-year old ban on the export of most American petroleum products.
According to a Bloomberg report on Friday, the Obama administration “opened the door for expanded exports of an ultra-light type of crude oil known as condensate that has gone through minimal processing. The Commerce Department published guidelines on its website for such exports Dec. 30, the first public explanation of the rules involved.”
Last week, it was also announced that two US Senators, Democrat Martin Heinrich and Republican John Barrasso, were going to sponsor the LNG Permitting Certainty and Transparency Act, which is bipartisan legislation that will speed up the approval process for exports of liquefied natural gas (LNG) to countries that do not have free trade agreements with the United States.
If the US goes ahead and loosens the US export ban on most petroleum products, including LNG, that would be an existential threat to the T&T economy that would be much more significant that the 50 per cent decline in oil prices.
That’s because if US producers get the greenlight to start exporting LNG, T&T’s newest markets for the product—Argentina, Brazil, Chile, Puerto Rico and Mexico, which together took 60 per cent of LNG exports from Trains I, II and III between January 1 and October 31, 2014—will be gravely impacted both in terms of the price of LNG and the volumes available.
If the export by American producers of LNG is taken along with the prospect that the opening up of the new locks on the Panama Canal could allow US east coast producers of LNG to send their production to Asian markets, such as South Korea and Japan—which accounted for 8 per cent of LNG exports from the three trains in the first ten months of last year—then the long-term picture for T&T’s main earner of revenue may turn out to be decidedly grim.
This long-term outlook should also be reflected in the valuation of the PPGPL shares.
In assigning PPGPL with its highest credit worthiness corporate credit rating last month, Caricris said: “The ratings on PPGPL reflect its strong operating efficiencies manifested in very low operating costs and low breakeven prices for natural gas liquids (NGLs) relative to historical prices.
“PPGPL’s good financial performance evidenced by strong though declining profitability levels, and comfortable debt protection measures as well as the likelihood of support from its parent, the National Gas Company of Trinidad and Tobago Ltd (NGC), also support these ratings.
“These strengths are tempered by the company’s declining market share as a result of increased shale gas production in the USA and the potential for increased earnings volatility, together with the loss of the North American market due to high levels of sulphur and arsenic in the natural gasoline.
“With the acquisition by NGC of Conoco Phillip’s 39 per cent stake in PPGPL in August 2013, CariCRIS also recognizes that there are some potential consequences that PPGPL may now face as a state-owned enterprise.”
