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Petrotrin’s Galicia Moment reexamined
In the episode entitled “The Key” of the political satire “Yes Minister”, Cabinet Secretary Humphrey comments that politicians like their cabinet notes simple so that they can make decisions easily. Unfortunately, the real world is complicated and there are many shades of grey. Petrotrin is such a complex issue.
Petrotrin is portrayed as a loss-making, bottomless pit that the State cannot afford. It is burdened with loans of US$850 million and US$750 million (the Ultra-Low Sulphur Diesel and Gas Optimisation project) which come due in 2018 and 2019 respectively. The company is overstaffed, staff highly paid, even the cleaners earning more than many of us. Also, the company is a net foreign exchange loser by importing crude oil which it refines at a loss. To make matters worse, it does not pay its taxes (royalties really).
Having painted such a negative picture, it is easy to arrive at the conclusion that the refinery is the weak link in Petrotrin’s operations and will be closed, its assets transferred to a company of “opportunity” and refined products imported. The “new slim lined” Petrotrin will focus on exploration and production, exporting all the crude it produces, which will make it profitable and enable the company to pay its debts.
The narrative has been completely skewed to support such a conclusion. No one doubts that staff cuts, cost-cutting and process improvements are required. But is there additional information and are there alternatives?
The Financials show declining operating margins from 2013 with operating losses from 2014-17 made worse by the size of the debt and associated interest costs. This speaks to operating inefficiencies reflected in a high cost of production. But Petrotrin wasn’t always losing money. It raised the US$1.6 billion without a government guarantee on the strength of its profits and its projections. Between 2010-2016, Petrotrin paid TT$20.3 billion in taxes, royalties and other statutory obligations to Government, surpassed only by bpTT with TT$37.1 billion and NGC with TT$32.3 billion.
We should see accumulated losses in the financials. Instead, there are retained earnings of $732 million as at June 30, 2018, albeit down from $8.3 billion at September 30, 2015. The 2017 loss was primarily due to “significant non-cash adjustments” which included the following:
1. Impairment of the Point-a-Pierre Industrial Estate, the unfinished corporate headquarters and Trinmar Marine Field.
2. Expensing of capitalised borrowing cost of the ULSD project as construction was suspended since 2014
3. The Deferred Income Tax Asset resulting from the Refinery and Marketing loss generated in 2017.
4. A provision for obsolescence in the inventory carrying cost.
This information is culled from a memo from Financial Accounting dated March 5, 2018. The memo goes on to note that net cash generated from operations amounted to $2.5 billion. In July 2018, chairman Wilfred Espinet announced a profit of $85.6 million for the quarter ending June 30, 2018, due to cost reductions et al.
Petrotrin’s profitability had been declining since 2013. Since these are group financials and not management accounts, the reasons for the deterioration are not clearly identified; is it refinery throughput or E&P lifting costs or inefficiencies in both areas? This speaks to the viability of the suggested solution; an E&P which simply exports crude oil.
It is noteworthy that Repsol exited T&T and sold its operations as its lifting costs (cost of winning each barrel of oil) were high at US$36 per barrel (its purchaser has done much better). Petrotrin has a similar weighted average lifting cost, which is much higher than the barrel of oil equivalent calculations for other operators like BP, Shell etc. In the context of “lower for longer” oil prices, the cost structure of the proposed E&P entity is critical; how will the relatively high lifting cost associated with Petrotrin/Trinmar allow it to survive? Further, Petrotrin’s acreage is largely associated with high Sulphur content oil which will attract discounted pricing, as it not benchmarked internationally.
Assuming that the new company can pass these hurdles and generate free cash, it still needs an estimated cash injection of $7-8 billion conservatively and the existing debt restructured. These are tall hurdles to cross not counting the unknowns that will arise.
The reasons for the declining profitability of Petrotrin can be found in all state enterprises; weak management and political interference are at its core. Management got it right when it held the line on 0% increases but lost the battle due to political intervention which mandated a 5% increase in January 2017. What will make Government’s approach to this new E&P company different? Government has not changed its approach to the management of state enterprises. Last week the rebranded TTT, come CNMG, come TTT, was launched; it will continue to lose money.
The error of the CLF bailout is now clear in retrospect, $25 billion dollars later. Petrotrin clearly needs a turnaround exercise, not a bailout or a sellout. The case against an inefficient refinery has been made; the case for a stand-alone E&P is doubtful, especially with all the other unanswered questions that are cropping up. Leadership and management inside the company, not outside, will be critical to creating a new dispensation.
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