A Warning Shot at the Philippine Oil Industry


Investors should prepare for any backlash spoiled Philippine oil giants may have

Philippine Stocks involved: Petron (PCOR), Pilipinas Shell (SHLPH)

The Philippines’ Department of Energy has identified Petron, Pilipinas Shell, and Chevron as the major oil companies in the country.

As of June 2017, Petron held a market share of 28.6% of total petroleum products, Pilipinas Shell with 20.7%, and Chevron with 6.6%.

At the time of this writing, Petron has a full market value of 90.8 billion pesos, and Pilipinas Shell at 96.7 billion pesos. Talking about some overvaluation for Shell, but this could be further dissected at a separate time.

Chevron Philippines, meanwhile, is not publicly listed but operates nearly 700 Caltex service stations in the country with other business interests including its 45 percent non-operated working interest in the Malampaya gas-to-power project, according to the company’s website.

Using historical data, there was actually an asymmetric pattern response in Philippine retail gasoline price response to crude oil price changes. This was found in a study made by Jaewook Kim in 2012 whereby oil price information was gathered from 2005 to 2010.

(Link to the study: Behavior of Retail Gasoline Prices in the Philippines to Changes in Crude Oil Prices: Is it Symmetric or Asymmetric? Jaewook Kim)

Kim stated that rather than using WTI or Brent oil price in comparison, Dubai crude oil is more fitting when comparing to the Philippines retail gas price.

In a more recent period, Dubai crude price has climbed 4.1% to $55.58 a barrel since January to October 2017, but the Philippine retail gas price has risen 300% more than Dubai’s or at a rate of 12.4% to 48.85 pesos per liter in the same period.

In the United States, where latest oil & gas technologies are being applied, retail gasoline price has risen 4.4% to $2.59 per gallon.

Are these local refiners grinding more and therefore need to raise their prices this much? Or these unified price hikes are just a market manipulation managed by the big oil players in the Philippines?

To boot, the Philippines has not suffered like what Texas to Louisiana areas have to deal with the hurricanes Harvey and Maria recently this year where refineries were shut down and refined products drop afterward.

Nonetheless, one thing Filipinos should hope for and also vigilantly follow is the newly re-assembled investigative team, the Department of Energy and the Department of Justice Task Force, in determining if there are market abuses being employed by the oil companies.

If proven, painful penalties could be a result.

Disclosure: I do not have shares of any of the companies mentioned.

Take Some Profits: Gazprom Neft


Oil and gas company in Russia has outperformed the broader market while positive free cash flow generation remains a challenge

Stock: Gazprom Neft’ PAO (ADR)(OTCMKTS:GZPFY) 

Gazprom Neft, an $18.6 billion Russian oil producer, currently trades 30% off its book value, 4.8 times P/E, and had an attractive 4.8% dividend yield with a healthy 1.2% payout ratio.

In the recent six months of operations that ended in June, Gazprom Neft, which is 95.68% owned by Gazprom PJSC, delivered a strong 24.3% revenue growth (vs. 6.8% at 3-year average) to ₽872.4 billion (Russian ruble) and 23.1% profit growth (4% at 3-year average) to ₽111.3 billion.

The Russian oil producer also had ₽69.8 billion in cash and cash equivalents and had ₽698.7 billion in debt (₽10.6 billion lower vs. its year-earlier period) resulting in debt-equity ratio 0.49 times (vs. 0.57 times a year earlier).

Also, shareholder equity rose by ₽187.3 billion year over year to ₽1.44 trillion.

Meanwhile, Gazprom Neft ADR shares have actually outperformed the broader S&P 500 index so far this year having generated 16.6% total returns vs. the index’s 14.24%.

In the past three years, the oil company allocated ₽1 trillion in capital expenditures, raised ₽110 billion in debt and other financing activities (net repayments), generated negative or free cash outflow of ₽114.7 billion, and provided ₽85.7 billion in dividends.

Analysts have an average overweight recommendation with a target price of $20.64 per ADR share vs. $19.50 at the time of writing.

In summary, Gazprom Neft is currently trading at its value and is a pass.

Disclosure: I do not have shares in Gazprom Neft, but have shares in Gazprom (ticker OGZPY).

Undervalued Russian Oil Company: Lukoil


Foreign exchange losses have been lessened


Lukoil, a $44.8 billion Russian oil company, currently trades at 0.6 times its book value, 7.1 times its earnings, and carries a 6.2% dividend yield at a profit-to-payout ratio of 44.6%.

Also, the 26-year-old Lukoil generated a healthy 10.9% rise in its revenue to ₽2.79 trillion (Russian Ruble) and a far more impressive 90.7% profit increase year over year to ₽201 billion.

As observed, Lukoil recognized ₽58.6 billion less in foreign currency losses compared to its year-ago period which help add hefty amounts of profits for the company.

In terms of performance, it is worthwhile to review Lukoil’s operating segments—1 exploration and production; 2 refining, marketing and distribution; 3 corporate and other business.

1 Exploration and production (E&P)

In the recent half, revenue from E&P grew 0.1% year over year to ₽790 billion (22% of unadjusted revenue) and profit margin of 13.2% compared to 15% a year earlier.

2 Refining, marketing and distribution

Revenue grew 12.5% year over year to ₽2.74 trillion (76.7% of unadjusted revenue) and profit margin of 2.6% compared to 2.3% a year earlier.

3 Corporate and other business

See company filings for further details. I consider this segment less important than the rest brought by its 1.1% revenue contribution as of the recent period.

Sales and profits

In the past three years, Lukoil had 4% revenue growth average, -7.1% profit decline average, and profit margin average of 4.1% (Morningstar).

Cash, debt and equity

As of June, Lukoil had ₽299.7 billion in cash and cash equivalents and ₽648.9 billion in debt with debt-equity ratio 0.19 times compared to 0.22 times a year earlier.

Overall debt declined by ₽50 billion while equity increased by ₽117.8 billion to ₽3.34 billion.

The cash flow summary

In the past three years, Lukoil allocated ₽1.9 trillion in capital expenditures, reduced its debt by ₽72.6 billion, generated ₽551.6 billion in free cash flow, and provided ₽314.6 billion in dividends at an average free cash flow payout ratio of 57%.


Having performed just -2.24% in total losses (including dividends) so far this year does not justify Lukoil’s strong turnaround in its first half of operations. As one of the largest oil companies in Russia, being affected by currency fluctuations greatly affects Lukoil’s bottom line.

Meanwhile, Lukoil has an admirable balance sheet accompanied with prudent dividend payouts compared to its free cash flow generation capability.

Analysts have an average buy recommendation on Lukoil with a target price of $60.84 per ADR share compared to $53.09 at the time of writing.

In summary, Lukoil ADR shares are a buy with a target price of $60.

Disclosure: I have some Lukoil ADR shares.