The thesis of buying TA was mainly the likelihood of TA’s petroleum subsidiary to be distributed as Property Dividend and with the recent statements of Phinma President and vice-chairman Ramon R. del Rosario, that likelihood becomes highly probable. The first question that will come in mind is how much is Palawan 55 Exploration & Production Corp. (PEPC) worth?
The comparable company to PEPC is Philex Petroleum (PXP). That said, we go in detail what are the assets that underlie the mentioned companies.
The most notable advantage of PXP over PEPC is its ownership of 36% in SC 72. However, PXP has no financial capacity to initiate the drilling of the service contract alone thus the 36% interest in SC 72 is actually misleading since this interest will eventually be diluted if a new partner with the financial capacity to perform the drilling of the well will buy-in to the service contract. In the case of PEPC, the partner with the financial capacity is BHP Billiton.
Another disadvantage of PXP’s assets is of course the encumbrance that SC 72 is a disputed area with China.
Despite all that is mentioned about PXP, the market still valued the company at P50 billion. That said, it is then safe to assume to have the following valuation model:
Historically TA declares share right offerings (SRO), assuming that TA will continue the trend, we can conservatively assume that the SRO will dilute TA shares by 50%:
Should the property dividend push through, a shareholder of TA may receive a property dividend which has a value of 0.82, 5.15, and 10.29. In the case of 50% dilution of TA shares, a TA shareholder may receive a property dividend with a value of 0.55, 3.43, and 6.86.
One may argue that it depends on the number of PEPC shares that will be available for property dividend, however, that fact is irrelevant. To illustrate my point:
Based on the illustration above, as long as the assumed value of PEPC remains constants, the value of PEPC for each TA shareholder remains the same regardless of the number of PEPC shares distributed.
At current TA price of P2.55~P2.60 the stock is still undervalued considering that at this price, the value of the property dividends may surpass TA’s current market price.
- Non-occurrence of PEPC property dividend
- Relative valuation may not be realized by the market.
- Clarification of news article: “TA Oil finalizes PEPC listing”, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3284_TA.pdf
- Forum Energy Plc Annual Report 2011, p. 3, http://www.forumenergyplc.com/DocumentLibrary/FOR-16846-AR11-web.pdf
- Otto Energy Annual Report 2012, p. 10-12, http://www.ottoenergy.com/irm/content/annualreport/AR2012.pdf
Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.