After almost two years, locals now have an opportunity to buy shares in one of the country's more profitable energy-related enterprises, Phoenix Park Gas Processors Ltd (PPGPL). Unfortunately, the opportunity is an indirect one as the shares have been "packaged" within a non-operating entity, T&T Natural Gas Liquids (T&T NGL) about which I will say more later.
If one buys an asset for US$600 million, receives dividends totalling US$71 million, then sells 49 per cent for US$226.1 million (US$230 million less 1.7 per cent for selling and related costs), what is the residual value of the remaining 51 per cent?
This suggests that the residual NGC's 51 per cent in T&T NGL, before adjustments, could be worth US$444.9 million. Using an exchange rate of TT$6.35 to US$1.00, this translates to TT$2,825.12 million.
From this result, we deduct the impairment loss of $1,098 million and the exchange loss of TT$51.1 million, which leaves us with TT$1,676.02 million. Relating that result to the remaining (after the IPO) 78,948,000 shares that NGC owns in T&T NGL, we derive a per-share value of TT$21.23. This works out to a "premium" of about 5.8 per cent on the offer price.
Looking at the transaction from this perspective, the Minister of Finance made a reasonable assertion that the deal yields "a little more than what we paid for it".
Despite this explanation, it remains true that part of an asset that was bought at the equivalent of TT$25 per share is now being sold at TT$20 per share; such are the realities of market forces and changed economic times!
The T&T NGL intermediary
Despite this favourable situation, it is inefficient and cumbersome for NGC to use an intermediary company, T&T NGL, to hold the 39 per cent block of shares in Phoenix Park Gas Processors Ltd.
At page 39 of the prospectus, it states: "The company anticipates that it will create shareholder value over the long-term through anticipated future appreciation of its investment in Phoenix Park, and through expected reliable and durable dividends from Phoenix Park."
Very likely, both these objectives can be achieved more reliably by investors having a direct, not indirect, ownership stake in PPGPL.
Effectively, this structure blocks investors from having more thorough access to the workings and affairs of PPGPL. It also creates an unnecessary administrative burden, which cost is borne by shareholders.
The main purposes of this entity are to receive dividends, incur listing, reporting, accounting and auditing expenses before distributing a dividend. Is this really necessary?
At page 52, we are given some details of the monthly fees and allowances of the board members, which are not insubstantial. Since T&T NGL has no business operations of its own, its major activity is to collect dividends from PPGPL. It is not yet in a position to invest any surplus income.
On an annual basis, with one chairman and four directors, these fees are estimated at $267,600.
Information on the initial and continuing costs of its listing on the TTSE can be found on the TTSE's "Going Public" brochure. For starters, the admission fee is set at 0.10 per cent of market capitalisation.
At $20.00 per share, the T&T NGL has an initial market capitalisation of $3.096 billion; consequently, its admission fee is $3.096 million. (This admission fee may be payable by NGC, as part of "advisory and listing fees" as stated on page 31.) There are also annual fees, such as, TTCD annual fee and register maintenance amounting to $35,000. Finally, there is the annual listing fee of $113,000.
Of course, these fees and others are not excessive for an operating company, like PPGPL. However, for a shell company with no real business operations, such as T&T NGL, these and other costs drain its income and reduce the sums available for distribution to its shareholders.
We also learn that NGC has directed PPGPL to pay a monthly dividend to T&T NGL (Refer to page 137 under the "Liquidity" comments.) This arrangement is designed to help T&T NGL "get on its feet" so that it can start paying its expenses on a timely basis. Another benefit is to increase the regularity of conversions of US dollars into TT dollars, which should help (in a small way) the onshore economy's perpetual shortage of US currency.
In an age where we want to foster greater transparency, why are such barriers being erected to investors having a direct ownership stake in an entity?
Such direct ownership will provide access to the real operators of the company, whose job it is to create wealth for the owners (via dividends and capital appreciation) and provide income (including foreign exchange and taxes) to the government.
Who wants to deal with NGC/state-appointed functionaries, who are likely to provide only the most carefully crafted "approved" statements about the operating company's affairs?
In this context, we recall that the prices at which companies receive and sell natural gas and related products still seems to be a "state secret". Opening up the ownership of PPGPL in a direct way would have been a unique educational opportunity for investors and the country to have a better understanding of this price information.
Lack of financial projections, but indirect tips
At no point in the 300-page plus document does the prospectus make any meaningful effort to provide financial projections for future years accompanied by some discussion about the factors that inform such estimates.
Are potential investors supposed to guess as to what dividend they might receive?
What are the continuing challenges that the operating company (PPGPL) faces and how does that impact investors' expectations?
To be sure, there are several references to the many price variables that impact on PPGPL's operations. These include a general discussion on pages 64 through to 68.
A key statement is found at page 102: "Selling prices of NGLs are expected to recover from the depression in the current market conditions in year 2018 and steadily increase year on year." If we can "ride out" the next three years or so, imagine how profitable PPGPL could become post-2018!
On the product sale side, we learn that Mont Belview (MBV) price variability will impact its earnings. For its three main products–propane, butane and natural gasoline–prices have fluctuated significantly over the past five years.
At page 3 in last week's Sunday Business Guardian, we were shown a table, which combined data from page 282 of the prospectus and was updated with information from page 297. The last line showed the weighted average price differential.
This figure represents the difference between the reference price (MBV) and the FOB price Phoenix Park charges or is able to charge for its products. Starting in 2011, this differential has been increasingly positive, reaching as high as 18.79 as at March 2015.
This suggests that PPGPL has a growing leeway to increase its product prices as contracts come up for renewal. At paragraph 2 on page 166, this point is further expanded.
A more complete picture would have shown which specific products, propane, butane or natural gasoline, commanded the highest differential.
Dividend projections
Much has been made about PPGPL paying out more than it earns in the years 2012, 2013 and 2014. However, if we look at the five years, 2010 to 2014, PPGPL's net profit totalled US$1,150,673,000. Over this same period, dividends paid equal US$1,111,000,000. This means that its five-year profit still exceeds its dividend payments.
The last column in the table tries to show a "worst case" result for PPGPL for 2015.
I have assumed, for example, that revenues will fall by 40 per cent and the net profit margin declines to 22 per cent from the close to 25 per cent achieved in recent years. In keeping with recent trends, I have estimated that the entire profit will be paid out as dividends.
Following through on that unscientific estimate, we can project that TT NGL could receive a total divided of US$35,967.75 (39 per cent of US$92,225,000.) This translates to almost TT$228 million (converted at TT$6.33 to US$1.00).
After costs and adjustments, we might assume a payment percentage of 80 per cent or about TT$182.4 million. Based on T&T NGL's issued shares of 154.8 million, that sum signals a total dividend of TT$1.18. How realistic is this projection?
Based on the IPO price of $20, the estimated dividend of $1.18 equates to a yield of 5.9 per cent. Many investors are happy with a yield as low as three per cent, so it is conceivable that the share price could reach as high as $39.33. ($1.18 divided by three per cent).
Conversely, at a future date, some institutional investors may require a higher dividend yield to compensate for the larger risk inherent in the underlying asset (PPGPL). This would be based on freshly updated financial and market information. For example, they may demand a yield of say eight per cent. That expectation suggests a share price of $14.75! ($1.18 divided by eight per cent.)
Even after peaking in 2011, PPGPL continued to provide significant sums via taxes and foreign exchange to its shareholders, the government and the wider economy; this is evident from the table above.
More than most listed companies, it is exposed, at the input and output levels, to global competitive forces and sometimes harsh price swings. Despite this, in the cases of both the supply of raw materials and the sales of finished goods, it mostly operates with medium and long-term contracts, which gives it a degree of price stability while limiting its down-side risks. This is a significant source of PPGPL's strength.
Partly because it is not yet officially listed, it seems unlikely that TT NGL will issue its second quarter results to June 2015 before the IPO closes. (Does its absence constitute a valid excuse or qualify as a material omission?) That document would have given us a better gauge as to its current and near-term prospects.
For investors who can tolerate an above-average level of share price and dividend variability, an investment in the T&T NGL IPO could be a good deal; enjoy the ride!