In her address to the nation two Thursdays ago, Prime Minister Kamla Persad-Bissessar seemed to indicate that the continuation of the Government's public offerings programme would generate $2.9 billion. She said that repegging the 2015 budget at US$45 a barrel and the natural gas netback price at US$2.25 a unit would lead to a revenue shortfall of $7.4 billion.
Of that amount $4.5 billion is expected to be saved in three ways:
�2 by curtailing unfunded infrastructure projects;
�2 reducing non-critical purchases of goods and services and allocations to selected ministries by 15 per cent; and
�2 a $1.4 billion reduction in the allocation for the fuel subsidy.
"Any shortfall will be met from revenues generated as a result of our continued public offering programme," she said, adding: "This programme will continue with the National Gas Company (NGC) offering to the national community 49 per cent of the shareholding of Trinidad and Tobago NGL Ltd, which holds the 39 per cent shareholding of the NGC in Phoenix Park Gas Processors.
"This will be the first ever listing of an energy stock on the local stock market, giving citizens a direct stake in our energy sector."
NGC paid ConocoPhillips US$600 million ($3.8 billion) to acquire the 39 per cent stake in Phoenix Park in September 2013.
If the Government's plan is to divest 49 per cent of the shareholding in T&T NGL (the company that holds the 39 per cent stake), then if the shares are sold at the price that NGC paid for them, the result would be an IPO of $1.88 billion.
This would leave the Government with a $1 billion funding gap ($2.9 billion–$1.88 billion) from the public offering programme, which could be extracted from NGC in the form of a special dividend or by way of the Government's interest in the T&T Mortgage Bank–the entity to be formed from the merger of the Home Mortgage Bank and the T&T Mortgage Finance.
But the more fundamental issue is whether the sharp reduction in the price of Phoenix Park's products–most of which are exported to markets in the Caribbean and Central America–will have an impact on the valuation of the company at the IPO and the attractiveness of the offer to the national community.
And there is no doubt that in the last year, there has been a sharp decline in Phoenix Park's products–which are propane or cooking gas, butane (mainly used for gasoline blending) and natural gasoline (also added to gasoline).
In the week of January 20 to 24 last year, the FOB spot price of propane at Mont Belvieu ranged between US$1.48 and US$1.52 a gallon, according to data on the US Energy Information Agency web site. Last week, the price was US$0.45, which means that the price of propane today is about 70 per cent lower than it was a year ago.
Natural gasoline traded at US$0.93 a gallon this week at Mont Belvieu, which is a port in Texas that serves as a major natural gas liquids (NGLs) storage and fractionation hub and as the hemispheric benchmark for NGLs. In January 2014, natural gasoline traded at over US$2 a gallon, which means there has been a more than 50 per cent reduction in the commodity.
The cash commodity price for butane trading at Mont Belvieu was US$1.60 a gallon in the week of January 20, 2014, according to ICE via WSJ Market Data Center. The commodity traded at US$0.72 on Tuesday, which means that the benchmark has suffered a 55 per cent decline since a year ago.
It's estimated that 40 per cent of Phoenix Park's output is natural gasoline, 35 per cent propane and 25 per cent butane.
So there is little doubt that the export prices of Phoenix Park's products today are significantly lower than the prices a year ago. In the absence of a commensurate cut in operating costs, generally a reduction in a company's selling price means a decline in revenue, profit margins and after-tax profits.
The investing public has a right to insist that the local Securities and Exchange Commission ensures that NGC, which is selling the 49 per cent stake in T&T NGL, provides clear and independent guidance on the impact of lower product prices on Phoenix Park's fortunes.
So, will the sharp decline in the prices of propane, butane and natural gasoline impact the value of the Phoenix Park shares for the IPO and the amount of money the Government can raise from the share issue?
That question was put to Finance Minister Larry Howai by e-mail on Wednesday morning and his response was: "The decline in prices may have some impact but the valuation is done on the basis of expected long-term average prices. As you would know, in the energy markets long term means just that long (seven to ten years).
"And we need to determine if the current decline in prices is a permanent/long-term thing.
"Currently an audit is being conducted on Phoenix Park. This is expected to be completed by the first week in February after which it will be submitted to the SEC. Then, if and when the SEC approves, the IPO will be issued."
The same question was put to NGC president Indar Maharaj, who responded: "At this point I cannot give any details on the pending IPO for obvious reasons. However, we do not expect to do the issue at a price lower than what we paid for the asset.
"The valuation is based on a 15-year forecast in which it was anticipated there will be some amount of volatility and cyclical market behaviour. We did not use 'moment in time' prices. These market behaviours would have been built into our valuation model. I must say that we were very conservative in forecasting the product prices.
"Therefore, I do not see any significant impact on the valuation, at this time."
Thankfully, both Mr Howai and Mr Maharaj were crystal clear in their responses: Given that the valuation was done based on long-term price forecasts, they do not expect that the current low product prices will have a significant impact on the valuation of Phoenix Park at the IPO.
But, notwithstanding the long-term price forecasts, it seems to me that the local investing public would/should be a tad cautious making an investment in a company based on forecasts, even if those forecasts are robust, exhaustive and took into consideration every possible eventuality.
Is NGC prepared to make those forecasts available to the investing public before the IPO?
Also, do NGC's forecasts take into consideration the possibility that what transpired in the global energy market in the fourth quarter of 2014 represents a structural rather than a cyclical change?
Caution is advised because forecasts are generally based on assumptions about the future. And the way even the best forecaster views the future is sometimes coloured by the past and the present. In other words, it seems to me that an assumption about Phoenix Park's future made in January 2014, when the price of butane was US$1.60 a gallon, may be different to an assumption made in January 2015, when the price of butane is US$0.72 a gallon.
Also, it is useful to know that the management of NGC, as reflected by president Maharaj, does "not expect to do the issue at a price lower than what we paid for the asset."
In the final analysis, one wonders whether the price at which a company sells a major asset is a decision for the management of a company...or its board, which in NGC's case, being a 100 per cent state-owned company, would be politically appointed.
And one questions whether the members of the local investment consortium–that together acquired a ten per cent stake in Phoenix Park for US$168 million from GE Capital in November–are as bullish about the company's future today as they were just two months ago.
It is useful to recall that that consortium comprised the nation's top institutional investors–National Insurance Board (NIB), National Enterprises Limited (NEL) and the Unit Trust Corporation (UTC)–in which billions of dollars of the life savings of the entire population are invested.
It is my responsibility to raise these issues, isn't it?