Fundamental ViewAS OF 18 Aug 2022
Petron is the largest downstream oil & gas player in the Philippines in terms of refining capacity, and is the third largest in Malaysia. Consequently it is well positioned in two growing economies where fuel demand is rising steadily.
Since retail prices of fuel oils are adjusted on a weekly basis according to international crude oil prices in the Philippines, the company could see its margins getting squeezed as it bought expensive crude oil in 2Q22, and prices have softened now.
Petron operates in a low margin business (EBITDA margins of ~5%) and incurs significant capex to fund its expansion plans, leading to strained free cash flows and elevated credit metrics.
Business DescriptionAS OF 18 Aug 2022
- Petron is the largest oil refining and retailing company in the Philippines, and the third largest player in Malaysia. It maintains a 24% market share in the Philippines (followed by Shell and Caltex) and a 20% market share in Malaysia (Petronas is the largest in Malaysia), based on total sales volumes.
- Petron' has a total refining capacity of 268k barrels/day (bpd) and accounts for about 30% of the Philippines' fuel needs. Its petroleum refining facilities include the Limay Refinery in Bataan, Philippines (capacity of 180k bpd; 67% of total) and the Port Dickson Refinery in Negeri Sembilan, Malayisa (capacity of 88k bpd; remaining 33% of total).
- Petron's refineries process crude oil into a full range of petroleum products including gasoline, diesel, LPG, jet fuel, kerosene and petrochemicals.
- It further markets and retails these fuel products through its fuel service stations located across the Philippines (2,400 outlets) and Malaysia (700 outlets).
- Petron sources its crude oil supplies from third-party suppliers, namely Saudi Aramco, Kuwait Petroleum Corporation and Exxon Mobil, which are bought on the basis of term contracts and in the spot market.
- Petron mainly supplies its petroleum and fuel products to customers in Malaysia and the Philippines (~95% of FY20 revenue).
- Petron is 68% owned by San Miguel Corporation (SMC), one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets. SMC's CEO, Mr. Ramon Ang, is also Petron's CEO.
Risk & CatalystsAS OF 18 Aug 2022
COVID-19-induced restrictions over the past two years have dented Petron’s sales volumes as inter- and intra-city travel were curtailed. Though revenues recovered in 1H22, any new variants of COVID could again impact demand for fuel products.
Petron holds 55 days of inventory, which is on the high side relative to industry standards. This exposes the company to inventory losses attributable to potential short-term swings in crude oil prices.
Prices of fuel products are adjusted on a weekly basis in the Philippines, according to international crude oil prices. The company has bought expensive crude oil in 2Q22, which could impact margins going forward, as it will have to sell fuels at a lower prices as benchmark prices soften.
Petron operates in a capital intensive, low-margin business and incurs significant capex to fund its expansion plans, leading to strained free cash flows and elevated credit metrics.
Petron is highly dependent on its Limay petroleum refining complex that makes up two-thirds of its total refining capacity (67%). Any events that disrupt the refinery’s operations could adversely affect Petron’s total revenues.
Key MetricsAS OF 18 Aug 2022
|PHP bn||LTM 1H22||FY21||FY20||FY19||FY18|
|Debt to Book Cap||73.6%||72.3%||74.3%||72.6%||72.4%|
|Net Debt to Book Cap||63.1%||63.3%||66.3%||62.5%||66.8%|
CreditSights ViewAS OF 18 Aug 2022
Petron is a fuel refining & retailing company in the Philippines & Malaysia. It is majority-backed by San Miguel Corporation, a diversified Philippine conglomerate. It is the largest downstream O&G player in the Philippines in terms of refining capacity; it operates the Limay refinery in Bataan and another refinery in Malaysia (in Negeri Sembilan). It further retails these fuel products through its ~3.1k fuel service stations. The company holds ~55 days of inventory, which exposes it to potential short-term swings in crude oil prices. Considering it operates in a capital intensive business, its leverage remains high and free cash flow generation poor. Its sales volumes have recovered to pre-pandemic levels now. Its bonds trade fairly vs peers. We maintain our Market perform reco.
Recommendation Reviewed: January 05, 2023
Recommendation Changed: January 26, 2022