Trans-Asia Energy and Development Corporation (PSE: TA, the “Company”) presented favorable first half report with a 70% jump in net income year on year. Earnings were mainly driven by TA’s electricity trading gains of 313 million. High electricity demand coupled with few electricity producers makes electricity trading profitable for TA. With electricity demand expected 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’s attractiveness is not only on its capability to generate gains in electricity trading but in TA’s promising business developments which in my opinion is substantially undervalued by the market.
Valuing TA’s Power Generation Business
Majority of TA’s power generation revenue is currently from their Bunker C-Fired Power Plant under Trans-Asia Power Generation Corporation (TA Power) which is a 50/50 joint venture with Holcim Philippines, Inc. (HLCM) On January 2013, the Company will have CIP II Power Corporation (CIPP), another Bunker C-Fired power plant, to be operational in La union. Unlike TA power which is committed to supply HLCM power for their cement operations, CIPP will operate as a merchant power plant and will only supply HLCM power in case of emergency. I expect CIPP to generate profit through electricity trading but for conservatism, let’s assume CIPP to operate at break-even.
Maibarara Geothermal, Inc.
The Maibarara geothermal power plant is constructed by Maibarara Geothermal, Inc. (MGI) a joint venture company of Petroenergy Resources, Inc through its subsidiary PetroGreen Energy Corp. (65%), PNOC Renewable Corporation (10%), and TA (25%). The construction is 35% completed as of June 2012 and is expected to be in commercial operation by third quarter of 2013.
Estimated profit that the MGI joint venture will contribute to TA is computed as follows:
South Luzon Thermal Corporation
The 135 MW coal fired power plant is constructed by South Luzon Thermal Corporation (SLTEC) 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.
Estimated profit that the SLTEC joint venture will contribute to TA is computed as follows:
In full year commercial operations in 2015, SLTEC and MGI will contribute a total of 256 million. Assuming that the earnings of TA will not be less than P220 million until 2015, TA’s net income will jump to 476 million or an EPS of .114 (483 million / 4.2 billion shares*). At TA’s current price of 1.28, TA is trading at 11x earnings. The market properly valued the power generation business of TA considering that it would take 3 years before full commercial operations. What the market failed to value is TA’s gas resource, the Cinco prospect in SC 55.
*4.2 billion shares is already adjusted for the 1:2 share rights offering with an ex-date of Oct. 31, 2012
Service Contract 55 – Cinco Prospect
SC 55 has an area of 9,880 km2 in offshore West Palawan which includes the Cinco prospect with a mean resource estimate of 3.2 trillion cubic feet (Tcf)  which is comparable to PXP’s Sampaguita gas discovery which has a mean resource of 3.4 Tcf. The largest operating gas field, Malampaya, has only 2.7 Tcf. The only disadvantage of SC 55 prospects is the high capital requirement in exploiting the ultra-deep resources. Cinco is situated 1,400m deep while Malampaya gas field is only 846m deep.
On May 11, 2011, BHP Billiton exercised their option to farm-in and earned a 60% participating interest and assumed the operatorship of SC 55.
On a press release, the Company disclosed that drilling of deepwater well on SC 55 is now scheduled to be on the first or second quarter of 2013.
Estimated profit that the Cinco prospect may contribute to TA:
Disadvantages in investing in TA:
- BHP Billiton drilling of the Cinco prospect this 1Q or 2Q of 2013 may not be successful.
- Delays on the schedule of drilling may occur.
- Projected earnings will only be realized three years from now.
Other Oil and Development interests of TA:
TA’s interest in SC 51 is also note worthy. SC 51 has the following participants:
*On October 23, 2012, Frontier Oil Corporation (Frontier) entered into a Farm-in Option Agreement where Frontier can acquire 80% interest in the southern area of SC 51 through shouldering all the costs of drilling an exploratory well in the area.
SC 51 is divided into northern (on-shore) and southern areas (off-shore Cebu). The on-shore prospect, Duhat, is situated on the northern tip of Leyte.
Northern Leyte has been described by geologists as containing the most natural oil seeps in the Philippine archipelago. Duhat was drilled in 2011 but the well reached only 321 m, far from the programmed 1,000 m depth, when it had to be abandoned due to adverse pressures. Despite the shortfall, oil and gas indications were observed and a working seal and structure conductive of hydrocarbon entrapment were proven, indicating the presence of an active petroleum system. New seismic data is scheduled to be acquired in July or August of 2012 to locate a new well on the same prospect.
The Company is bound to have huge increase in earnings in the future with its power generation business and high possibility of generating revenues from their gas resource interest. I expect TA to reach the price of P2.31 before 2015 should BHP Billiton’s drilling in the Cinco prospect turns out to be successful.
Since 2005, the Company has consistently declared dividends of at least P.04 annually exhibiting a dividend yield of 3.15%, 3.54%, and 3.82% for the years 2012, 2011, and 2010.
The Company declared a Share Right Offering (SRO) of 1 share for every 2 shares held for P1 each. The ex-date will be on October 31. For those who wish to enjoy TA’s dividend yield while waiting for its business developments to mature, it would be wise to participate in the SRO.
- Otto Energy Annual Report, p. 14, http://www.ottoenergy.com/IRM/Company/ShowPage.aspx/PDFs/1848-75207268/AnnualReport2011
- Exercise of option by BHP Billiton to farm-in to Service Contract No. 55., http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-3529_TA.pdf
- Press Release: “First Half 2012 Results,” http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6546_TA.pdf
Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.