What is Petrojam's real value?

BY DENNIS CHUNG

Friday, February 22, 2019

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In Parliament this week, newly appointed Minister Fayval Williams caused a stir when she revealed that Petrojam has lost almost US$100 million in value between 2006 and 2018. Williams reported that the same firm that had valued Petrojam in 2006 for US$126 to US$128 million, using the income approach, applied the same valuation methodology in 2018 and arrived at a value of US$34 million.

This amounts to a 71 per cent decline in value in a matter of 12 years. This is worse than any financial crisis or stock market crash, and makes the two debt exchanges after the 2008 financial crisis look like a joke. Just imagine earning $126,000 per month when you were 20 years old, and 12 years later when you are 32 years old with more responsibility and having gone through 12 years of even low inflation, you are now earning $34,000 per month. That is like being a victim of the “lottery scam” and warrants calling a state of emergency.

That is exactly how those who reacted with disbelief to the minister's revelation must have felt. No doubt some people were saying 'from whence does this newbie minister come with these fictitious numbers, coming like Nicodemus and the bearer of all things bad.

If one were to take a practical look at the issue, however, the truth is that the initial emotion of disbelief and shock, coming on the heels of the recent allegations of mismanagement and breaches, should give way to a realistic analysis of what the minister revealed.

I for one, when I heard the statement made, was not in any disbelief as it seems very realistic to me (without reading the report) that the valuation could easily have fallen by 70 per cent or more. Why do I say this?

First of all, the important point made by the minister was that the same valuation company, using the same valuation methodology, arrived at the revised valuations. What this means is that any one who says that the minister is not to be believed is saying at a minimum that the company is at minimum incompetent and at worst dishonest. This would imply also, that if either were true then they could have easily have fallen prey to their incompetence or dishonesty in 2006 and provided a value in excess of what the assets valued in order to get a better price for the Government at the time. So if we say that the valuation is wrong, we are really speaking to the competence or dishonesty of the valuation company.

Secondly, if you assume that the company is competent and professional, and believe the report, then it seems very realistic to me that the value could truly have fallen by 71 per cent over the 12 years. The reasons for me saying this are the following.

In 2006 when the Venezuelans bought into Petrojam, I recall the reason given for bringing them in, by the then minister, was that the refinery was in urgent need of a US$1 billion upgrade if it was to remain viable, and the Venezuelans had the cash to assist us in doing so. For this reason they were brought in as partners. Therefore, it follows logically that if in 2006 before the move toward renewable energy and other forms of energy in the economy, we recognised that the refinery upgrade was necessary for the viability of Petrojam — then what of 12 years later.

In 2018 there has been no investment made in the upgrade of Petrojam, and at the same time the largest customer (JPS) has indicated that they are going to be using LNG, and will not be requiring the supply of HFO from Petrojam anymore.

So in one move Petrojam has lost their single largest customer.If they were barely profitable when they had JPS, what is the logical financial outcome when JPS switches to LNG? I think this means Petrojam will be like Air Jamaica or the sugar factories. In other words, it will be another cost on the budget, which ultimately means it has to be paid for by Jamaicans in the form of taxes or economic costs.

As an example, if I have an asset worth $1 million, and I am using it to produce revenue (sales) of $10 million annually, and one customer who accounts for $6 million leaves and I now only have sales of $4 million, will the asset still be worth $1 million?

Add to that the following two factors (i) the operating cost is $7 million annually; and (ii) there is no one in Jamaica that wants to buy that asset. So I am stuck with an asset that the only thing it can be used for is to make products that have a market for $4 million sales annually but the cost to make that $4 million sales is $7 million annually, implying a loss of $3 million.

So this shows an asset that has much less revenue (income) potential than it had before — an asset that cannot make any money in the changed environment.

In addition, the fact is that in 2006 Venezuela entered the arrangement knowing that they would have to spend US$500 million on the refinery but didn't. Therefore the cost to the Venezuelans to grow the value in Petrojam, in 2006, is the purchase price plus US$500 million, which they never contributed.

So one could say that in taking over Petrojam, the Government will not only pay the purchase price (based on the valuation), but will need to put an additional US$500 million to make it viable.

Couldn't an argument be then that the Venezuelans got value of an additional US$500 million plus the purchase price, and the cost to the Government is actually the purchase price but US$500 million.

Additionally, the value to the Government is also said to be the value to be gained from energy security. So one way to look at it is what would we all do if we didn't have energy for one week? How much production would be lost and what would be the inconvenience of Jamaicans? This is a consideration the Government must make which no private person has to. So one could say that the value to the Government, and country, is actually much more than the purchase price plus the upgrade, as it may cost us more in GDP losses if energy is compromised.

So when we talk about the value of Petrojam, it shouldn't be looked at politically, but by asking (1) if I had US$100 million would I be buying Petrojam now, and (2) would I be willing to be without electricity for a week.

So in my view, it is very realistic that Petrojam today is worth 71 per cent less than it did 12 years ago, and the longer we take to do the upgrade then the greater the risk of further valuation loss and the possibility of losing our energy security.

Dennis Chung is the author of Charting Jamaica's Economic and Social Development and Achieving Life's Equilibrium. His blog is dcjottings.blogspot.com.

Email: drachung@gmail.com


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