Petron sees P1.5-billion loss in fourth quarter due to EO 839

First, let's check the technical side. Correct me if I'm mistaken, but that looks like a descending channel and it's nearing a break in support. That's kinda bearish. Eek.

The fundamental story for PCOR is that it lost money in 2008 due to the collapse in oil prices sometime July 2008. Comparing it with the year prior, gross profit rate declined from around 7% to just 1%. Not to mention that interest expense jumped from P1.8B to P4.1B. If I read the annual report notes right, the additional interest expense was brought about by short term loans used to finance oil inventory purchase. Looking at the cash flow statement, cash flow from operations is negative too. In story terms, because crude prices increased and dropped within the year, Petron was left with high priced inventory and had to sell at a lower price in the second half of the year. That led to losses and a cash shortage, forcing the company to borrow short term to continue its inventory buildup. That led to higher interest expenses, widening the net loss. Vicious.

So that's 2008. 2009 (based on 2Q) looks unusual. Revenues through June 2009 are almost half of last year. That is one major contraction! However, gross profit margin improved to over 9%. Is that a result of a pricing / marketing decision? I'm not sure. So let's add in the Gloria price ceiling. P1.8B net in 6mo09, assume P.9 in 3Q09 and the P1.5B loss in 4Q09. That's potentially P1.2B net income for 2009. If the P1.8B translates to a P0.19 EPS, the P1.2B should translate to P0.13. With a current price of P5.0, that would be 38.4X 2009E earnings. Expensive.

So storywise, where does this leave us. Well, income can easily double in 2010 provided the EO is repealed. For October, crude prices have increased by about $10 from 65 to 75. For about half that increase, PCOR has not been able to adjust (that's how I understand it). And since margins are thin to begin with, well...

The price control will make or break PCOR share prices in 2010. Then again, while reading the EO, I didn't see a provision on pricing if crude prices fall below the Oct 15 levels. Nope, PCOR will not be in my basket for a while even though there could be some potential trading gains once the stock hits the support of the downward channel.