Home' Trinidad and Tobago Guardian : September 3rd 2015 Contents SEPTEMBER 3 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
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Today s share price is derived from taking the
today s total company value and dividing that
by the number of shares that are issued.
For the unsophisticated investor that expla-
nation for share valuation can be very difficult
to understand. In the case of TTNGL the share
price is determined based on forecast of profits
of the company for the next 20 years. Forecasting
things one year into the futures is sometimes
quite difficult far less for forecasting 20 years
into the future and there must be certain atten-
The key variables in determining the profits
and future profits of TTNGL are the same as
those for PPGPL given that TTNGL sole asset
is 39 per cent of the shares of PPGPL. The fol-
lowing are the key variables that impact on the
profits of PPGPL.
Key variables used in the TTNGL share
a. Estimated economic life of the PPGPL facil-
ity.b. Product prices: prices of propane, butane
and natural gasoline
c. Production volume: annual production of
propane, butane and natural gasoline
d. Profits as a percentage of revenue which
is available to pay dividends to shareholders.
Which is impacted by:
d.i. Cost of raw materials. Determined by
long-term PPGPL contractual agreements with
NGC and Atlantic T1, T2/3 and T4.
d.ii. Operating and overhead costs
d.iii. Taxation rate
d.iv. Exchange rate $TT to $US
Assumptions for each key variable
a. Economic life: The TTNGL estimated
economic life of PPGPL asset of 20 years used
for the share valuation would have been based
on information provided by the NGC.
Likely factors considered would be natural gas
reserves (current and forecasted through explo-
ration activity) and current production rate of
raw natural gas. A good source of information
on this would be the 2013 Ryder Scott Report
which is published on the Ministry of Energy
and Energy Affairs Web site and the recently
completed Gas Master Plan done by consultants
Poten and Partners.
b. Product price forecast: TTNGL has used
an international consultant to provide a 20-year
forecast on product prices. Typically propane,
butane and natural gasoline selling prices which
are based on the US Mont Belvieu daily listed
spot prices are highly correlated with the WTI
spot crude oil prices and a forecast of crude oil
prices is used to forecast the prices of propane,
butane and natural gasoline. Adjustments are
typically made for expected seasonal variations
and any abnormal supply/demand situations.
Premiums and discounts that customers would
be willing to pay for these products would be
based on product quality and alternative sources
c. Production forecast: TTNGL would have
relied on the management of PPGPL to provide
a production forecast for the next 20 years. To
do that PPGPL s management would have relied
on an NGC forecast for the both the quantity
of raw natural gas that would be delivered to its
facility and the natural gas liquid content of that
gas and an Atlantic forecast of delivered NGLs.
The production of NGLs at PPGPL( combi-
nation of what is extracted from the NGC sup-
plied raw gas and Atlantic) has fallen by over 36
percent between 2010 and 2015 in a non- linear
manner and PPGPL s Management would have
made an assumption on a decline rate over the
next 20 years. There is no mention in the IPO
about a forward looking view on the production
d. Profit available for shareholder divi-
dends: TTNGL would have relied on PPGPL s
management to provide the 20-year forecast of
the profit after tax available to pay dividends
which would have been impacted by the fol-
I. Cost of raw materials: The purchase price
that PPGPL would pay for extracted NGLs would
be based on its long term contractual agreements
with NGC and Atlantic T1, T2/3 and T4. Some
of these agreements come to an end over the
next 20 years. PPGPL s Management would have
made assumptions on the likely future change
in terms of these agreements.
II. Operating and overhead costs: Likely PPGPL
has made a provision for escalation of these
costs associated with inflation factors for services
and materials and for an ageing facility. Some
of PPGPL s facilities will be 25 years old in 2015
and in the next 20 years will be 45 years old.
III. Exchange rate: PPGPL earns it profits from
the sale of its products in US$ and its profits are
in US$. In the IPO prospectus TTNGL states
that the exchange rate is TT$6.3399 per US$.
Given the current T&T economic realities there
is likely to be continuing pressure for currency
TTNGL share price
The essence of what TTNGL is offering to the
public are shares at a unit price of $TT20 and,
in return, TTNGL is offering the purchaser:
1. A non-guaranteed benefit (on average) of a
TT$2.40 dividend ( ~12 per cent of the share
selling price) per share per financial year for a
duration which TTNGL believes could be 20
years but which is not guaranteed.
2. A non-guaranteed selling price for the share
after purchase from TTNGL. There is no obligation
from TTNGL to repurchase the shares and pur-
chaser can sell their shares on the stock market
at market prices.
Is this a good deal?
To answer that question one has to compare
the future expected TTNGL share return and its
uncertainty (possible variability) against other
investments options that are available to the
Other investment options can include company
shares, investments in government bond or private
sector bonds, investment in mutual funds etc.
Another useful benchmark would be the interest
rate at which a bank will be willing to lend PPGPL
~TT$1. 5 billion, the expected value of IPO
(75,852,000 Class B shares at $TT20/share).
Future expected returns from TTNGL
To estimate the future expected return from
TTNGL shares an economic model was developed
using information on PPGPL from the CariCRIS
credit rating reports which provide financial per-
formance data from 2005-2015 and PPGPL NGL
production date from the Ministry of Energy and
Energy Affairs Web site.
A crude oil price from the EIA s Web site for
the period 2015-2040 was used to forecast PPGPL
product prices. Table 1 below shows the results
for a base case, low case and high case for TTNGL
share price return over the economic life of
Table 1: Economic modelling of share price return
on the TTNGL shares at IPO price of $TT20 per
From Table 1, the average dividend yield over
the economic life on the TTNGL shares at the
IPO price of TT$20 per share can vary for the
low and high case scenarios between 5.9 per
cent and 22 per cent, with the base case being
13.7 per cent.
The internal rate of return (IRR) can range for
the low case from 1.9 per cent to 18.3 per cent
for the high case.
Looking at the key variables for each scenario
there is a higher likelihood of the low case than
the high case. Gas volume and liquid content
in the gas is more likely to decline than to increase;
the 20-year product prices forecast provided by
IHS for the share valuation in July is more likely
to be lower given recent market developments
at the end of August 2015.
Profit as a percentage of revenue is more likely
to decrease as operating and overhead costs
increase with aging plant facilities and; economic
life is very contingent on the success rate in
finding gas reserves that can be economically
developed. A bank lending $1.5 billion to PPGPL
would for 20 years would likely expect a return
of between 2.0 to 3.0 per cent above the Libor
10-year rate or the US treasury 10-year rate
which is currently around 2.2 per cent.
The cost of the loan would be between 4.2
to 5.2 per cent which would rise and fall with
the indexed rates. An equity investor (shareholder)
who takes on a higher risk than a debt holder
(lender) should therefore should have the benefit
of earning a higher return.
In the case of the TTNGL shares the share-
holder from the modelling could have a range
of outcomes of returns from a low of 5.9 per
cent to 22 per cent.
Other alternatives for an investor would be
the investments in the shares in the TT stock
exchange, mutual funds, certified deposits and
other money market funds.
Typical dividend yields on the TT stock
exchange have varied between 2.0 per cent and
4.0 per cent for the first half of 2015. Mutual
funds have also provided yields between 2.0 and
4.0 per cent.
Eugene Tiah was
president of PPGPL for 13 years
Continued in the September 6,
Sunday Business Guardian
Is this a good deal?
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