Home' Trinidad and Tobago Guardian : January 25th 2015 Contents In this space on Thursday, in a commen-
tary headlined "Will product prices affect
Phoenix Park IPO?" it was demonstrated
that the prices of the propane, butane
and natural gasoline sold by Phoenix
Park Gas Processors had declined by over
50 per cent between January 2014 and this
For most companies, an average 50 per
cent decline in product prices is likely to
mean a commensurate decline in their rev-
enue, EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) and
net profits as well as associated margins.
Because Phoenix Park only produces
propane, butane and natural gasoline (in out-
put splits of 35 per cent, 25 per cent and 40
per cent) it seems likely that the company's
revenue, EBITDA and profits at least for the
first few months of 2015 will be substantially
lower than in 2013.
But the point needs to be made that
Phoenix Park will still be a very profitable
The CariCris analysis of Phoenix Park,
published last month, states that the com-
pany generated US$202.6 million ($1.3 billion)
in 2013, but that its profit after tax had fallen
an average of 19.5 per cent over the previous
According to CariCris: "Notwithstanding
the fall in profit after tax, Phoenix Park's
margins remained healthy and largely
unchanged from the previous year with profit
after tax, gross profit (GP) and earnings before
interest, tax, depreciation and amortization
(EBITDA) margins of 25.1 per cent, 42.7 per
cent and 39.4 per cent in 2013, compared
to margins of 25.2 per cent, 42 per cent and
43.7 per cent respectively in 2012."
The rating agency also said that it expected
the volatility in the natural gas liquids (NGL)
prices would continue into 2015, which it
expected to be another profitable year for
"Even under CariCris' stressed scenario,
the company is expected to generate a profit
of the order of US$97.3 million (in 2015).
Interest cover and DSCR should remain com-
fortable, although falling to 25.5 times and
6.2 times respectively," the rating agency
stated. DSCR is the debt service coverage
ratio (DSCR), also known as "debt coverage
ratio," which is a measurement of the amount
of cash that a company has to make its inter-
est, principal and lease payments. A DSCR
of 6.2 means that even if it generates less
than half of the 2013 after-tax profit of
US$202.6 million in 2015, Phoenix Park would
still be able to generate cash that would be
more than six times its debt payments.
Part of the reason for its inherent prof-
itability, according to CariCris, is the fact
that Phoenix Park buys nearly 100 per cent
of its natural gas from its parent, NGC, under
a gas processing agreement in which Phoenix
Park pays NGC for the British Thermal Unit
(BTU), or heat content, it removes from the
natural gas stream in the form of natural gas
CariCris stated: "The price (per million
BTUs) is 50 per cent indexed to the average
Mont Belvieu (MB) price. As the company
also sells its NGLs at prices based on MB
prices, the indexation of the cost of natural
gas supplied by NGC provides a partial hedge
against commodity price risk ensuring a pos-
itive operating margin."
This means that the lower the price for
its propane, butane and natural gasoline it
sells on the regional and international mar-
kets, the less it pays NGC for its natural gas
In other words, if Phoenix Park sold its
propane at the Mont Belvieu price of US$1.50
in January 2014, it paid NGC US$0.75 and
it had US$0.75 to pay all of its operating
expenses such as its employees, taxes, the
interest on its debt and dividends. But if
propane was sold at a Mont Belvieu price of
US$0.45 in January 2015, Phoenix Park would
have to pay NGC US$0.225 and it would
have US$0.225 to meet all of its commit-
This is not an entirely happy picture.
But the NGC president Indar Maharaj said
he does not expect T&T's 100 per cent state-
owned natural gas distribution and marketing
company to issue shares in the Initial Public
Offering for "at a price lower than we paid
for the asset."
As NGC is selling 49 per cent of the shares
in Phoenix Park that it acquired from US
energy giant ConocoPhillips for US$600 mil-
lion in August 2013, this means the expec-
tation is that NGC would generate US$294
million ($1.88 billion) from the initial offer-
According to Mr Maharaj: "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."
Options for IPO pricing
Now, if NGC is insistent that it wants to
generate $1.88 billion from the IPO, and if
the price per share at the offering is $25 per
share, NGC would need to issue 75.2 million
shares. It could achieve the same result (gen-
erating $1.88 billion from the IPO), by issuing
94 million shares at $20 per share.
But if NGC decided to issue 75.2 million
shares at $25 a share (thereby rasing $1.88
billion), there is a good chance the IPO would
be undersubscribed and the price of the share
could fall to $22 or less in the medium term.
This option would suit the Government,
which has said that it views the sale of
Phoenix Park as a means of raising revenue
to partly fund the $7.4 billion shortfall that
it expects from the decline in energy taxes,
that has followed the sharp decline in the
global prices of T&T's main exports.
But a strong argument can be made, I think,
that the option of NGC seeking to recover
exactly what it paid for 49 per cent of the
Phoenix Park shares it acquired from Cono-
coPhillips would not be in the interest of
T&T's institutional and individual investors
or in the larger national interest.
Government's preferred approach for the
Phoenix Park stake would not be in the inter-
est of local investors because they would be
buying a share in which there may be little
chance of either short or medium term profit
taking. And, unless I am terribly mistaken,
the basis of the philosophy of the Govern-
ment's divestment programme is an intention
to share the wealth of the nation with the
widest possible cross section of the T&T
Also, apart from the distribution of wealth,
the Phoenix Park IPO can be viewed as a
means of diverting money into shares that
would otherwise be used by individuals to
purchase expensive imported items.
The IPO, therefore, can be seen as a means
of reversing the capital flight that has been
evident recently. Also, while some individuals
may seek short-term profit from the Phoenix
Park IPO, some of the more financially savvy
individuals and the financial institutions of
the country will seek to hold this stock for
the medium to long term because of its
extraordinary dividend-producing ability.
There is another option for the NGC and
for the Government: the shares could be sold
to the investing public so that NGC takes a
small loss at the issue. If NGC, for example,
were to sell 75.2 million shares to the public
at $20 a share (which would raise $1.5 billion),
there is a good chance that even if Phoenix
Park's product prices are low at this point
that the IPO would be oversubscribed.
As was clear from the First Citizens exam-
ple, an oversubscribed IPO will lead to sharp
increases in the share price in the secondary
market. First Citizens closed last week at
$36.48, which means that the share price is
66 per cent higher than the IPO price of $22.
And, nearly 16 months after First Citizens
shares began trading on the local stock market,
a higher price in the secondary market means
that the value of the State's remaining stake
in First Citizens would be 66 per cent higher
than the IPO price.
All of this means that raising $1.88 billion
from the Phoenix Park IPO may suit the Gov-
ernment's short-term political need to raise
funds to replace revenue lost from lower taxes.
But such a move would not be in the interest
of local investors or of the Government/NGC.
JANUARY 25 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
COMMENTARY | SBG3
Is NGC approach in investors' interest?
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