Trans-Asia Oil and Energy Dev’t Corp. (TA)’s first half report shows the already promising future of the Company. The earnings for June 2012 surged by 70% or a jump from P129 million in June 2011 to P220 million this year. Earnings were mainly driven by TA’s trading gains of 313 million. Trading gains are the result of the company’s participation in Wholesale Electricity Spot Market (WESM). The Company’s purchased electricity from third party and excess electricity generated by the Company’s own power plants are sold to WESM. The Company usually enters into a contract with an independent power producer for a certain period of time. The fixed price in the contract allows TA to profit should electricity prices be higher than the cost in the contract. Electricity is a commodity that could not be stored; therefore, if electricity prices are lower than the contract cost, TA will be forced to sell at a loss.
Few electricity producers combined with high demand for electricity would mean high electricity prices traded in the WESM. Increase in profit due to high electricity prices is not a sustainable source of growth for the Company. However, with electricity demand to surpass the existing capacity and committed capacity in the coming years, electricity trading might be one of the major drivers of growth for the Company.
As depicted in the chart above, we can speculate that there will be an electricity crisis by 2016-2017 in Luzon should there be no substantial investments in the Philippine electricity industry from this year to 2014 (which appears to be the case).
TA has promising business developments on their power generation segment and oil exploration segments which I expect to contribute substantial revenue for the Company in the future.
TA has two major power plants under construction, 20 MW Maibarara geothermal power plant in Sto. Tomas, Batangas and 135 MW coal-fired power plant in Calaca, Batangas.
The Maibarara geothermal power plant is constructed by Maibarara Geothermal, Inc. a joint venture company of Petroenergy Resources, Inc through its subsidiary PetroGreen Energy Corp. (65%), PNOC Renewable Corporation (10%), and TA (15%). The construction is 35% completed as of June 2012 and is expected to be in commercial operation by third quarter of 2013.
The 135 MW coal fired power plant is constructed by South Luzon Thermal Corporation a joint venture company between Ayala Corporation (50%) and TA (50%). Construction has not commenced yet as of June 2012 but the power plant is expected to be in commercial operation by the fourth quarter of 2014.
TA’s oil exploration segment includes their minority participation in SC 55 which covers 900,000 ha. in offshore West Palawan. The SC 55 block includes the Cinco prospect with 500 million barrels mean resource potential. Drilling in the ultra deep prospect with BHP Billiton is expected to be on the first or second half of 2013.
A Note on TA’s Strategy to Maintain Their Share Price
The Company has a habit of declaring cash dividend and subsequently declaring share rights offering to replenish the cash they declared as dividend. At first glance, their P.04 cash dividend per year appears to be attractive but it eventually burdens shareholders with the SRO that effectively dilutes the earnings attributable for each share. Also, declaration of cash dividend would cost the Company 10% withholding taxes and declaration of SRO would require them to pay costs to the PSE relative to the amount they are willing to raise.
Despite the frictional costs, why is the Company doing what they are doing? In my opinion, cash dividends are declared to maintain TA’s stock price above P1. Management probably rationalized that the benefit of declaring cash dividends substantially outweighs the costs.
Maintaining the Company’s share price above its par value (P1) is necessary for the Company to issue shares to the public. Issuance of shares below par is illegal.
TA had consistently declared P.04 cash dividend since 2005 and I expect the company to maintain their strategy in the coming years.
Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.