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Investing Lessons - Petroplus Holdings (PPHN.SW)
Posted by: Chandan Dubey (IP Logged)
Date: February 1, 2012 09:49AM
To become a better investor, one has to keep learning from the ideas that went wrong. Sometimes, an investor may put off his better judgement and invest in a stock for some quick bucks because he “knows” the way the stock price behaves. He might think that the company is not going bankrupt and will recover from the slump that the general market is in. I will describe one such company which has made me grapple with myself quite a bit. I am happy to report that even though some serious profits could have been made by investing in this particular stock for the short term, I did not invest in it because of some reservations I had about the business and its liquidity. Last December, I even removed this company from my watch list because I would look at the price and think, “Oh! If only I had bought some at $6 I would have doubled my money in a month!”
If my memory serves me right, I first saw Petroplus Holding (yahoo quote PPHN.SW) in February 2010, when it had dropped from CHF23 in Jan 2010 to CHF16 in Feb 2010. A 30% drop and in comparison, the Swiss Leader Index had only dropped 7%. I did a quick check of the company, what it does and how its balance sheet looks.
Petroplus Holding is Europe’s largest independent oil refiner by capacity. It has refineries in UK, Belgium, France, Germany and Switzerland, with sales of nearly $21 billion. In 2006, it had made earnings of $9.71 per share and traded in the CHF 67-80 range. The operating profit in 2010 was $155.4 million. The key numbers from the annual report are given below.
If you look at the numbers, it does not seem like Petroplus will go bankrupt. The current ratio is above 1, and the debt-to-equity ratio is less than 1 and is improving. Furthermore, at CHF24 a share it was greater than $2 billion company and hence a safer bet than small caps. With its improving EPS it seemed like the company is turning around a corner and could be a very good turnaround play. The refining margins were better and the oil demand was recovering.
Let us quickly run through the investment thesis here.
The company’s debt and the maturity profile is not out of order either. As you see, until 2013 the company does not need to make major payments to its creditors and hence is quite safe till then.
The chairman of the board, Thomas D. O’Malley, owns 3.97% of the shares outstanding as of 2010.
This is a group of 14 people and they were compensated $18.6 million in the fiscal year 2010. The management was not treating the company like their wallets.
I decided not to invest in the company. There were three reasons for this. One, I did not understand the refining business. I mean, I know what the business is but I don’t have a good idea about how the margins work. I tried to educate myself but it seemed like a bad business with very low gross margins. Two, I did not like the business. There was no defensible moat. No one cares where the oil comes from, the cheaper the better. Three, the total equity was $2 billion and the total liability was $4.7 billion. I had randomly decided that I would not invest in a stock with total liability/equity was greater than 2, however attractive it may look (I have broken this rule a few times in “expert” recommendations and it has turned out well so far).
Let's look at the share price graph during February-April 2010.
And in April I thought that I missed a good opportunity to capitalize on the “value” of this investment. In any case, then came the sovereign debt crisis in Greece and then the Macondo Well oil leak. Down the market went and Petroplus with it. I was again considering pulling the trigger.
At around CHF10 I was asking myself if the stock had gone too far down and at some point the risk of balance sheet will be worth taking from a pure value point of view. I mean, how low can it go ? The price/sales ratio at this point was 0.07 which means that even with a paper thing 0.7% net margin the company will have a P/E of 10! In February 2011 the company quickly doubled from a low of CHF9. And then it went down slowly as the 2010 results were also a loss, but better then the results of 2009.
The company improved the balance sheet (not by much, as you can see from the details in the key figures). And then came the debt ceiling debate with the usual Greek problems and at CHF4.12, I fought with the idea that I should buy some. This decision was also due to the fact that in October 2011 several of the insider buy transactions were reported. You can see in the table below that the insiders bought almost CHF700,000 worth of shares at an average price of more than CHF5.5. This was a good buy signal that the insiders thought that the company had gone too far down and was quite cheap.
At this point though, I had several less risky investment options because the market was down and several good quality companies were trading at discount. In particular, I bought Swiss Re (up 25%), Zurich Financials (up 25%), Transocean (up 8%) and ABB (up 10%). Also, at this point I had decided not to buy bad companies (bad businesses I mean) and so I stayed away from Petroplus and even removed it from my watch list. This was the end of my actively following the company.
I have a RSS feed for BBC business news and I saw the article on Jan. 24, 2012' about Petroplus' insolvency filing. And I was happy that I stayed away from this company. The stock at the moment trades at CHF0.4 and had traded as low as CHF0.18.
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