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Hold it Right There Petrotrin!
Sunday 29, July 2018

Hold it Right There Petrotrin!

YaniqueF

Petroleum Company of Trinidad and Tobago Limited (affectionately known as Petrotrin) is the state-owned oil company in Trinidad and Tobago.  Its crude oilfields are located across the south-western peninsula of Trinidad, off the east coast of Trinidad, and in Point Fortin.  The country’s economy primarily emphasizes oil and petrochemicals, with oil contributing 40% of GDP.  This is what contributed to Trinidad’s enormous wealth as measured by their Net International Reserves which stand at 9.4 months of imports (Dec. 2017) vs. 19.8 weeks for Jamaica (June 2018).  This also led to them having “A” rated debt as compared to single “B” for Jamaica.  All this changed when oil prices started to decline and their debt was downgraded to BBB+ which is still investment grade, but after further deterioration of the economy, S&P moved its outlook to negative in April. 

Why do we care about Petrotrin?

Petrotrin issued a US$850 million bond that matures in August 2019.  While the company has issued other bonds, this was the most attractive to investors.  The bond is/was one of the most popular bonds in the market.  The reasons were simple: firstly, everyone in Jamaica was familiar with Trinidad, secondly, the bond has a very short maturity-it matures in 2019, and thirdly, the coupon rate is fixed at 9.75%.  In many ways it was a no-brainer, and given the importance of oil to Trinidad, it was assumed that it was implicitly guaranteed by the government.

Three Year Graph of Oil Prices (WTI)

 

So what went wrong?

Investors became jittery when the financials showed that the company recorded a massive loss of TT2.2 billion in 2017.  According to a Moody’s report, the cash flow (as at September 2017) was woefully inadequate for repaying the debt maturing in 2019.  The updated figure shown in the financials as at June 2018 shows approximately US$200m of cash against total debt of US$1.728bn and a current ratio that is much less than 1.  Furthermore, it was announced that Petrotrin was going to split operations and reorganize in February 2018.   This was against the backdrop of a deteriorating economy in Trinidad where real GDP growth contracted by 6.0% in 2016 and 2.6% in 2017. 

 

Real GDP growth (Annual percent change)

2014

2015

2016

2017

2018

Trinidad and Tobago

-0.3%

1.5%

-6.0%

-2.6%

0.2%

Source:IMF

 

 

Latest Developments

  • Petrotrin has recorded an after-tax profit of TT$85.6 million for the quarter ended June 30, 2018.  This compared to a loss of TT$517.5 million in the previous quarter.
  • Petrotrin was given the green light to terminate contract with A&V Oil amidst a scandal where the company paid $100 million to A&V Drilling, for oil which was not supplied.  In addition, findings showed that the reservoir was incapable of producing the volumes in question.
  • IMF stated that oil output is improving due to exploration and refinery upgrades by Petrotrin.  They added that Trinidad & Tobago’s growth may be flat or somewhat negative this year but the economy “may be starting to turn a corner as a result of a projected recovery” in the energy sector.
  • Local and global banks are already in talks with Petrotrin about restructuring the bonds and general liability management.

Conclusion

Investors are concerned about the refinancing options available to the Petrotrin, especially in light of a recent announcement that the government will not be guaranteeing any new debt and low cash flows. However, as listed under the latest developments, talks are underway regarding the restructuring of the bonds.   In addition, Petrotrin is a significant contributor to Trinidad and Tobago’s GDP and as such, it would be financial suicide to let it fail, but if you hold this bond, keep a track of the developments and act accordingly.

 

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

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