Shell launches long-awaited Philippine IPO

Royal Dutch Shell has been delaying the listing of its Philippine unit for almost two decades. But the deal has finally hit the market.

Royal Dutch Shell is close to listing its Philippine operations, finally pushing ahead with a stake sale to comply with a competition law passed by the Philippine government in 1998.

The oil and gas giant has been linked with a sale since the Philippine government tried to encourage competition in the downstream oil industry — that is, oil and gas refining and retailing — by passing the Oil Deregulation Law 18 years ago. The law compelled the biggest oil and gas companies to list part of their local businesses.

The company finally moved ahead with the IPO of Shell Philippines on Thursday, starting the ball rolling on a domestic IPO that could be worth as much as Ps19.25 billion ($400 million).

The irony is that there is less need for the deal now, at least from a competition point of view.

When the government first passed the competition law, the Philippines' oil industry was highly concentrated. Government officials believed that the listing of up to 10% each from Shell Philippines, Petron and Caltex Philippines would help encourage competition.

Petron responded to the government mandate and listed itself on the local stock market in 2004, while Caltex Philippines shut down its refineries. But since then, the government has also approved licences for new oil refineries and retail companies including PTT, Sea Oil and Phoenix Petroleum — turning the highly concentrated business into a fragmented industry.

Shell, for its part, has repeatedly requested postponement of the stock market listing since the law came into effect in 1998, citing unfavourable market conditions and the need to upgrade its refineries.

Bankers did say, however, that Shell Philippines was ready to float earlier this year after it completed its crude refinery in Tabangao in December last year. The listing was delayed partly due to disruption from the country’s presidential election in May.

Secondary sellers

Shell Philippines’ 275 million-share deal is predominantly secondary, with 90% being existing shares. The company’s post-listing free float will be around 17% of its share capital, excluding the 5.8% greenshoe. The freefloat will rise to 18% if the option is exercised in full.

The sellers are Shell Overseas Investments, a Royal Dutch Shell subsidiary; The Insular Life Assurance; and Philippine financial company Spathodea Campanulata. They are the three biggest existing shareholders and own nearly 93% of the company before the IPO.

Based on the indicative price range of Ps64 to Ps70 per share, Shell Philippines will command a market capitalisation of $2.14 billion to $2.35 billion post-greenshoe, which translates to 9 times to 9.7 times forward enterprise value-to-Ebitda, according to consensus syndicate estimates.

This means the deal is being pitched at a premium to Petron, which trades at 7.5 times EV-to-Ebitda on a rolling twelve-month basis. On a regional basis, it is also richer than oil refining companies like PTT, Esso Thailand and Star Petroleum, which are all trading at below 7 times EV/Ebitda.

Shell Philippines believes its premium could be justified by its brand reputation, as well as its access to Shell’s technological research and development edge, according to a company presentation.

In its IPO offering circular, Shell Philippines said it has low gearing and a well-capitalised balance sheet that positions itself for future growth opportunities. As of the end of June, its debt-to-equity ratio was 36% compared to Petron’s 184%.

In addition, it has an edge over smaller oil retailers by offering premium fuel products because of its access to premium fuel technology, as well as global research and development programs. Premium fuel typically commands higher retail margins of about $0.03 per litre over regular fuel products, according to the offering circular.

Potential risks

Still, Shell Philippines may face headwinds over a contracting market for bigger players as the government continues to deregulate the industry to encourage participation from smaller oil and gas companies.

The big three — Shell Philippines, Petron and Caltex — had 32%, 29% and 15% of the Philippine retail market as of the end of last year, while smaller players had 24%. Some industry experts estimate that these smaller firms could command half of the market in the future.

Against such a threat, Shell is planning to expand its retail network to 1,220 fuel stations by 2020 from 966 as of the end of June. It also wants to increase sales from its commercial fuel business — which includes diesel, jet fuel and liquefied petroleum gas sales — by a compound annual growth rate of 10% by the end of 2018.

However, Shell is restricted under the law and cannot acquire shares of any public-listed crude oil refining company, limiting its capability to expand through mergers and acquisitions.

The Philippines' new government recently announced that it will increase excise tax on gasoline by 1.3 times to Ps10 per litre, compensating for an expected reduction of personal and corporate income tax rates. It remains to be seen whether retail oil companies can fully transfer the incremental cost to consumers, or whether their profit margins will suffer.

Ready to hit the road

Under the current timetable, the Reg S-only offering will be opened for institutional subscription under October 13, after which the offer price will be set.

It will be followed by a retail roadshow in Manlia on October 18 and Cebu on October 19. The retail offer period will run between October 19 and 25 October, and the shares will list on November 3.

The IPO of Shell Phlippines will be the second largest this year after Cemex Philippines’ $470 million offering in June.

It is worth noting that under the government’s oil industry deregulation law, Shell Philippines is forbidden to sell more than 5% of the IPO to a single institution. That implies institutional orders will be capped at $20 million based on the maximum deal size of $400 million.

JP Morgan is the sole international bookrunner while BPI is the domestic bookrunner.


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