Petron Corporation

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Petron Corporation

Petron MegaPlaza
358 Senator Gil J. Puyat Avenue
Makati City, 1200
Philippines
Telephone: ( + 63) 2-886-3888
Fax: ( + 63) 2-886-3064
Web site: http://www.petron.com

Public Company
Incorporated: 1987
Employees: 1,198
Sales: P92.33 billion ($1.69 billion)(2002)
Stock Exchanges: Philippine
Ticker Symbol: PCOR
NAIC: 324110 Petroleum Refineries; 424720 Petroleum and Petroleum Products Merchant Wholesalers (Except Bulk Stations and Terminals)

Petron Corporation is the Philippines’ leading refiner, marketer, and distributor of petroleum-based products. The company’s Bataan refinery has a total output capacity of 180,000 barrels per day and produces a full range of petroleum products, including automotive fuels, diesel fuel, jet fuel, kerosene, lube and motor oils, and liquefied petroleum gas (LPG), many under the Petron and AutoGasul brands. The company also produces petroleum-based chemicals, such as naphtha and xylene. The company sells its products through two primary channels. Bulk sales go to large-scale customers, such as the power generation sector, and the industrial, construction, shipping, fishing, and airline industries. The company also operates its own chain of nearly 1,200 retail service stations—Petron controls more than one-third of that market in the Philippines, including nearly 30 Petron Express Center “super stations” along the North and South Luzon Expressways. In addition, Petron has rolled out its own convenience store format, Treats, located in its service stations, including the PEC super stations. In 2003, the company operated 26 Treats stores. Petron’s two principal shareholders, each of which hold 40 percent of the company, are the Philippine government’s Philippine National Oil Company and Saudi Aramco, based in Saudi Arabia. The remaining 20 percent of the company’s shares are listed on the Philippine Stock Exchange and are held by more than 200,000 shareholders. However, at mid-2003, the Philippine government was considering selling its 40 percent stake in the company in a move to drive down the country’s budget deficit. Petron is led by Chairman and CEO Nicasio Alcantara and President Motassim A. Al-Ma’Ashouq.

Origins

Petron’s history stretches back to the 1930s. The Standard Oil Company of New York merged with Socony Vacuum Oil Company in 1931. Two years later, after acquiring the Atlantic Union Oil Company, the Standard Oil Company of New Jersey (which would ultimately emerge first as Esso and then as Exxon) merged its operations in the eastern hemisphere with Socony-Vacuum. The newly enlarged company, with interests throughout the Asian-Pacific region, adopted the name of the Standard Vacuum Oil Company, or Stanvac, created in 1933.

Stanvac’s Philippines interests took off in the 1950s, when the company won a concession to build and operate a refinery in Bataan in 1957. While foreign interests remained in control of the Philippines’ petroleum industry for some time to come, efforts were already underway to introduce Philippine ownership into the industry. These efforts came to fruition in 1959, when Philippine Investment Management (later Trans-Asia Oil and Energy Development Corporation) backed the creation of the country’s first Philippine-owned refinery, Filoil Refinery Corporation.

Esso Standard Eastern took over Stanvac’s Philippines operations, including its Bataan refinery in 1962, then changed its name to Esso Philippines. Despite the presence of Filoil, the Philippines petroleum market, like most of its Asian counterparts, remained controlled by large foreign corporations throughout the 1960s. These companies were subjected to little in terms of government-imposed regulation.

Philippine Oil Industry: 1970s–80s

The collapse of the Philippines’ economy due to an oil crisis in 1971 forced the Filipino government to recognize the petroleum industry as vital to the country’s economic stability and to begin making plans to take control of the sector. At the same time, the government sought to replace the foreign dominance of the country’s fuel market with Philippine-owned and controlled operations.

In November 1973, the government, then led by Ferdinand Marcos, created a new body, the Philippines National Oil Corporation (PNOC) with the intention of developing a full-range of petroleum-related operations, including refining, marketing, shipping, transporting, and storage. One month later, PNOC launched its refining and marketing wing when it acquired Esso Philippines—marking the end of Esso’s involvement in the country—and the refining and marketing operations of Filoil. Esso Philippines was then renamed as Petrophil Corporation.

PNOC also bought up a controlling stake in Bataan Refining Corporation, completing that acquisition in 1983. By then, PNOC had already established the Petron name. The government continued to regroup its petroleum industry operations, merging Bataan Refining Corporation into Petrophil in 1985. Two years later, Petrophil adopted the name of Petron Corporation.

By then, Petron had taken a major share of the Philippines’ petroleum market, particularly after both Mobil and Getty exited the country in the early 1980s, leaving only Shell and Caltex, both of which had been among the pioneers of the country’s petroleum market. The company was particularly strong on the retail market, with 900 service stations and one-third of the total retail market. Petron’s refinery operations, with a total capacity of 155,000 barrels per day at the time, were running at just 33 percent of that total, however. Nonetheless, the company remained highly profitable.

The fall of the Marcos regime and the creation of a new government under Corazn Aquino led to calls to privatize many of the industries that had been taken over by the Marcos government. Petron appeared to be first up to bat, to the point where the government hired Citicorp to act as a consultant. The initial proposed called for the government to retain a 35 percent share of the company, selling the remainder in a public offering, with a limit of 40 percent of shares permitted to be placed with foreign investors.

Privatization and Regulation in the 1990s and Beyond

Petron’s privatization was put on hold until the early 1990s. The government, under President Fidel Ramos, had by then developed a new privatization strategy based on the need to include a major foreign shareholder in the Petron ownership pool. The privatization was to come as part of a larger effort to deregulate the Philippine petroleum market, introducing new competition while allowing fuel prices to be set by market forces. By linking Petron up with a major oil company, the government sought to protect Petron’s supply of crude oil. Negotiations were underway by mid-1993, with Malaysia’s Pe-tronas initially tipped to purchase a 40 percent stake of Petron.

Yet Saudi Aramco, 100 percent owned by the Saudi government, topped Petronas’ bid of $421 million with a bid of its own worth $502 million in December 1993. The purchase, completed in February of the following year, gave Saudi Aramco a 40 percent share in Petron, while Petron gained access to one of the world’s largest crude oil supplies. The Philippine government, through PNOC, then began plans to take Petron public.

Petron’s initial public offering (IPO) was accomplished in July 1994 when the company placed 20 percent of its shares in what was one of the largest IPOs in the country’s history. At the end, Petron found itself with two major shareholders—Aramco and PNOC, each with 40 percent—and more than 200,000 shareholders splitting the 20 percent involved in the IPO.

Petron now began preparations to meet the coming deregulation of the Philippines’ petroleum market, slated for 1997. As part of that effort, the company began a $320 million investment program in order to upgrade its Bataan refinery, raising production capacity to 165,000 barrels per day by mid-decade. The company also began a new expansion drive for its distribution wing, which by then already enjoyed more than 46 percent of the Philippine market.

In 1995, Petron announced plans to spend up to $1.5 billion expanding its Bataan site and building a second, larger refinery with a capacity of 200,000 barrels per day. At the same time, Petron opened new desulfurization facilities in order to produce cleaner diesel fuels. In another expansion drive, the company stepped up its production of liquefied petroleum gas (LPG).

Petron began a bit of a diversification drive at mid-decade, adding several subsidiaries, including the Overseas Insurance Corporation and Petron General Insurance Company in 1995 and 1996, respectively. While insurance seemed a bit far from the company’s core operations, it also set up New Ventures Realty Corporation in 1995 to handle the real estate requirements of its retail and wholesale distribution networks.

In 1996, the company launched a $200 million, five-year effort to open as many as 400 new service stations by the turn of the century. The company was also able to boast about the completion of its desulfurization facility in January 1997. Yet by the end of that year, Petron had stumbled.

Company Perspectives

We are a petroleum-based business enterprise in pursuit of growth and opportunities that are in the best interest of our shareholders. We are committed to excellence in meeting customer’s expectations and in caring for our community and environment. We shall conduct ourselves with professionalism, integrity, and fairness.

A number of factors—including the Philippine Supreme Court’s rejection of the deregulation law scheduled to go into effect that year, coupled with the court’s refusal to allow Petron and other oil companies to raise their prices—combined to force Petron into the red for the first time since the mid-1970s. At the same time, the company was hit hard by the Philippines’ currency crisis, as the peso slumped amid the tumbling Asian region economies. As a result, the company was forced to put on hold its plans to build a second refinery by the beginning of 1998.

Petron worked at controlling its costs, an effort that paid off by the end of the year, as the company returned to profitability despite a drop back in its sales volume. Petron then began a “re-imaging” program designed to spruce up its service stations, with the first 100 stations undergoing a revamp in 1999. At the same time, the company rolled out a new convenience store format, dubbed Treats, which it began placing in a number of its stations. On the industrial side, the company opened a new Lube Oil Blending Plant, adding an annual capacity of some 90 million liters, as well as a Continuous Catalytic Regeneration Reformer Unit. Also in 1999, Petron moved into its new headquarters, called the Petron Megaplaza.

As it faced the countdown to deregulation, Petron started to seek out new markets. In January 2000, the company entered the petrochemicals market with the inauguration of a $35 million facility to produce xylene, a raw material used to produce paraxylene, which in turn played a role in the production of polyester. With a capacity of 165,000 metric tons per year, the new plant gave Petron access to markets beyond its core fuels range. Despite these growth initiatives, Petron was forced to report a loss for 2000.

At the beginning of 2001, the company, faced with a tough economic climate as the Philippines’ oil market at last underwent deregulation, suggested it might pursue further expansion beyond its core fuels market. The company had already taken a new step in that direction when it acquired a major stake in a consortium, led by PNOC, that planned to build the Philippines’ first naphtha cracking plant.

Petron was boosted in 2001 when it gained the bulk of a one-year fuel supply concession for government-owned National Power Corp. The company, which had previously sold its surplus fuel overseas, now began directly marketing to the international market, boosting the share of foreign sales in its overall revenues past 17 percent. These efforts helped the company return to profitability again by the end of the year.

In 2002, Petron began an upgrade program at its Bataan facility designed to enable it to reduce still further the sulfur content of its diesel products in order to meet stiff new government requirements. At the same time, the company readied the launch of its LPG brand, AutoGasul, which became the first commercially available LPG brand in the Philippines at the end of the year.

With sales topping P92 billion ($1.7 billion) in 2002, Petron appeared to be approaching a crossroads. The Philippine government’s growing budget deficit had prompted many to call for the completion of Petron’s privatization. Given the depressed value of Petron’s shares, however, the sale of PNOC’s 40 percent share would be expected to yield just P6 billion, a far cry from the P200 billion need to plug up the deficit. Instead, a number of lawmakers passed a resolution seeking to block any further privatization of Petron. Considered a “jewel in the crown” of the Philippines’ industrial sector, Petron enabled the government to maintain some control over prices within the crucial oil sector.

Principal Subsidiaries

Overseas Insurance Corporation (OVINCOR); Petron General Insurance Company (PETROGEN); Petron Foundation, Inc. (PFI); New Ventures Realty Corporation (NVRC).

Principal Competitors

PNOC Exploration Corporation; Caltex Philippines Inc.; Mobil Philippines Inc.; Pilipinas Shell Petroleum Corporation.

Key Dates

1933:: Standard Oil Company of New Jersey merges its operations in the eastern hemisphere with Socony-Vacuum, which is renamed Standard Vacuum Oil Company, or Stanvac.
1957:: Stanvac begins construction of a Bataan refinery, later grouped under Bataan Refining Corporation.
1959:: Filoil, first Filipino-owned oil refinery, is created.
1962:: Esso Standard Eastern takes over Stanvac and Bataan refinery.
1966:: Esso Standard Eastern changes its name to Esso Philippines.
1973:: Philippines’ government creates Philippines National Oil Company (PNOC), which buys up Esso Philippines, renaming it Petrophil, and Filoil.
1987:: Petrophil is renamed Petron Corporation.
1994:: Petron goes public, listing 20 percent of its shares.
2000:: The company moves into the petrochemicals market with the opening of a xylene processing facility.
2003:: The Philippine government blocks calls to complete Petron’s privatization.