Home' Trinidad and Tobago Guardian : March 16th 2017 Contents MARCH 16 • 2017 guardian.co.tt BUSINESS GUARDIAN
NEWS | BG7
Petrotrin's deep financial hole
Few companies affect the na-
tion's psyche like Petrotrin. In
fact, in many ways, the evolu-
tion of Petrotrin's fortune can
be seen as a mirror image of the
fortunes of T&T as a whole.
What is clear is that with the country being
so largely dependent on energy revenues for
the foreseeable future---and Petrotrin's sig-
nificant footprint in that area---the role of the
Pointe-a-Pierre-based oil company in con-
tributing to, or taking away from, the national
coffers is likely to remain quite pronounced.
Since the start of 2017, Petrotrin has dom-
inated the headlines.
Firstly, by averting the greatest strike that
never happened and, secondly, by having its
accounting methods called into question by
the Minister of Finance Colm Imbert.
As recent as Monday, a special committee
was appointed by Prime Minister Keith Rowley
to look into the operations of this integrated
tell the story
Anyone looking at the financial perfor-
mance of Petrotrin over the last five years
gets a reasonably clear picture of a company
caught in the throes of the global decline in
oil and gas prices.
Like all other integrated petroleum com-
panies (meaning the company engages in
the exploration, production, refining and
distribution of oil and gas) Petrotrin has had
to battle its way in a low commodity price
environment. The result has been mounting
losses and declining revenues.
Additionally, the effect of an agitated union
has done little to help the company's financial
According to the company's audited fi-
nancial statements, in 2012 Petrotrin earned
revenues of $37.6 billion and made a profit
before tax of just over $2 billion.
In the same year, the company also remitted
income tax to the government of just over $1
billion (Petrotrin is taxed at a rate of 55 per cent
based on the Petroleum Profits Tax).
Also, according the company's 2012 balance
sheet, the company had roughly $1.88 billion
in cash and cash equivalents.
Additionally, according to Note 29 of the
2012 annual report, the company's wages
and salaries bill (exclusive of allowances and
overtime) stood at $1.26 billion.
Fast forward to 2016, and Petrotrin's man-
agement accounts paint a contrasting pic-
ture. It should be noted that the manage-
ment accounts---as published by Petrotrin
for 2016---have not been audited, but one
can discern quite clearly the state of play at
the oil company.
According to the management accounts,
Petrotrin's revenue, as at its September 30
2016 year end, stood at $16.6 billion---55 per
cent lower than in 2012.
The company's cash position was also down
by more than 58 per cent for the same peri-
od, moving from $1.88 billion in 2012, to $780
million in 2016.
Petrotrin's management accounts does not
clearly state what its wage bill for 2016 is, but
two line items listed in its income statement
can be used as proxies for estimating these
figures: operating expenses for exploration
and production (which was listed as $1.8 bil-
lion), and operating expenses for refining and
marketing (which stood at $1.79 billion).
Taken together---and, if assumed, indicative
of the labour cost structure at the company---
Petrotrin's employee expenses cost the com-
pany in excess of $3 billion annually.
Again, this figure involves a margin of er-
ror that can only be made certain when the
company's audited financial statements are
released, and employees' wages and salaries
are fully broken out.
According to the company's financial state-
ments, the last time the company realised a
before-tax profit was in 2012. Since then,
Petrotrin has incurred losses on an annual
basis. According to its management accounts,
Petrotrin's before-tax losses for 2016 stood
at $1.95 billion.
The foregoing information is illustrative of
the broad scope of challenges facing Petrotrin.
A declining cash position, loss of profitability
and increased labour expenses may be symp-
toms of the underlying problems rather than
the causes themselves. There are, however,
specific arrears that warrant immediate at-
tention. The newly formed review committee
would do well to come up with solutions to
rectify these concerns.
The proverbial "800 pound elephant in the
room" is ostensibly Petrotrin's significant
US-dollar denominated debt obligation. The
company has two bonds due in 2019 and 2022
respectively. The first---and quite possibly
more pernicious of the two---is the US$850
million bond due in 2019.
The proceeds of the US$850 million bond,
floated in August 2009 with a term of 10 years
and fixed interest rate of 9.75 per cent, were
to be used to finance the company's gas op-
timisation project (GOP) which involved a
refinery upgrade, allowing the company to
produce increased volumes of higher quality,
environmentally safer gasoline.
According to Petrotrin, the GOP refinery
upgrades were completed in 2013, when all
plants involved achieved commercial status.
The real challenge with this debt obligation
is that the entire principal, that is, the full
US$850 million must be repaid in the form
of a one-time "bullet" payment in 2019.
It seems fairly obvious that given its cur-
rent position---and the medium-term outlook
for energy commodity prices---that Petrotrin
would be hard-pressed to come up with that
principal sum to make the payment when it
comes due in August 2019.
Even the company's president, Fitzroy
Harewood, by his own admission, underscores
the magnitude of the difficultly involved in
meeting its debt obligation.
In his president's message in the January
issue of the company's magazine PetroCon-
nect, Harewood says:
"For fiscal 2016/2017, the company's ability
to repay its debt obligations---including the
US$850 million bond due in August 2019---
remains a huge challenge."
The second bond, a US$750 million 15-year
note, was raised in 2007 for the purpose of
constructing an ultra-low sulphur diesel
(ULSD) plant. The plant, intended to produce
improved quality diesel and allow Petrotrin
to process a broader range of crude oils, is yet
to be completed.
Most major integrated oil companies protect
themselves against various risk factors (in-
terest, currency, credit) by engaging in some
form of hedging arrangements that allow them
to insulate themselves as far as is reasonably
possible from such risks.
These arrangements (properly termed de-
rivative contracts) are designed to "lock in"
certain pricing structures thus mitigating
any fallout associated with the volatility of
the energy commodities market.
In this regard, a note in Petrotrin's 2015
financial statements stands out. Note 4.1 (a)
"As a result of these market price fluctu-
ations the group may, in the future, use es-
tablished over-the-counter swaps for crude
oil, refined products and natural gas, or other
appropriate instruments, to hedge exposures
in order to protect budgeted revenues and mar-
gins. The company does not currently have
any such hedging instruments in place."
Questions can be raised as to whether the
lack of such hedging arrangements has done
any damage to Petrotrin's finances and why
would a company operating in such a volatile
environment for so many years, not protect
itself in this way; an area for examination by
the new committee.
Petrotrin's wage bill remains among the
highest in the energy sector. The rate of esca-
lation of the company's wages has outstripped
any productivity gains the company would
have experienced over the past five years.
The company's president stated in his Janu-
ary message: "We are presently experiencing
lower productivity and an operating expense
that outpaces our revenue intake."
Today, Petrotrin has on its staff roster ap-
proximately 3,800 permanent employees, with
a number of contract, temporary and casual
employees based on work volumes.
Even in the midst of sustained losses, the
company has had to settle outstanding collec-
tive bargaining arrangements with estimates
suggesting that an additional $80 million
annually will be added to its expenses as a
result. This, again, is another area worthy of
careful consideration as the company must
rationalise its labour spend while ensuring
value for money.
According to the Harewood: "I urge each
and every employee to come to terms with the
full reality of our situation and---in every area
of our operation---seek to be more productive
and cost effective."
There are, of course, a number of other areas
that the stewards at Petrotrin would do well
to consider (its restructuring initiatives, its
lease out/farm-out operations and even the
matter of its deferred tax position). All areas
require a judicious mix of analysis and insight
into what would be the best course of action
in taking the company forward.
In the words of its president, "change is once
again coming to Petrotrin."
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