Energy Technology Expert

THE CASE AGAINST OIL DEREGULATION – Marcial Ocampo’s comment #5

[Editor’s Note: Finally, Marcial Ocampo proposed this action plan to top government officials in the executive and legislative branch of the Philippine Government thru email.  Marcial is hoping that positive action will be accorded to this proposal in order to bring closure to this nagging issue.  Let’s pray to that.  Marcial]

From: Ocampo Marcial <mars_ocampo@yahoo.com>

Subject: Fw: IT DEPENDS ON WHOSE VIEWPOINT… Re: LET US USE BOTH PROFITABLITY MEASUREMENTS… Re: PER LITER MARGIN is Gateway to PERCENT RETURN on CAPITAL… Re: DEREGULATION AFFECTS MARGIN ONLY… Re: THE TEST OF DEREGULATION IS ON PER LITER MARGIN… Fw: Re: For CEBU C… THE CASE AGAINST OIL DEREGULATION/Let’s oil ourselves

Dear Readers and Fellow Citizens,

Just sharing with you our continuing discussion on oil deregulation with Mar Tecson.

I believe that oil company margin based on % of duty paid landed cost (DPLC = FOB + FRT + INS + OCEAN LOSS + BOE FEE + CUSTOMS DUTY+ SPECIFIC TAX + DEMURRAGE + VAT1) is the most equitable way of providing reasonable returns that could be readily agreed upon by the regulator and oil industry participants.  VAT1 refers to the 12% VAT applied on the imported oil value adding activities. FOB is the MOPS for products and DUBAI for crudes.

The DPLC is then converted to Pesos per liter given the exchange rate (PhP/US$) and conversion factor from barrels to liters (42 gal/bbl x 3.7854 liters/gal) = 159 liter/bbl approximately.

DPLC, PhP/liter = (DPLC, $/bbl) x (48 PhP/$) / (42 x 3.7854 liters/bbl)

Then the pump price becomes a transparent and predictable commodity and may be calculated by anyone as follows:

PUMP PRICE = (DPLC + % oil company margin x DPLC) + (biofuels + depot cost + transshipment + hauling + dealer’s margin + VAT2)

where VAT2 refers to the local value adding activities:

OIL COMPANY MARGIN = (% oil company margin) x (DPLC, PhP/liter)

VAT2 = (OIL COMPANY MARGIN + biofuels + depot cost + transshipment + hauling + dealer’s margin) x 12%

Then we could perform a financial analysis on the oil company/oil product as follows:

1) gross revenue = (sales volume, liters) x (OIL COMPANY MARGIN, PhP/liter)

2) Less expenses = operating costs + supplies & materials + utilities + salaries & wages + admin + marketing + royalties + regulatory costs (permits, fees, licenses, fines) + real property taxes + rent/lease + property insurance + business interruption insurance

3) Equals gross margin (EBITDA)

4) Less depreciation, amortization and interest on loans

5) Equals income before tax (IBT)

6) Less corporate income tax = 30% x IBT

7) Equals income after tax (IAT)

8) Add back non-cash items such as depreciation and amortization

9) Less principal repayment on loans

10) Add other incomes with final tax (e.g. interest income on bank deposits)

11) Less other expenses not tax deductible

12) Equal net cash flow

13) Compare project cost with the net cash flow to arrive at discounted cash flow return on investment (DCF-ROI) and project payback period – use the IRR function of Excel

14) Compare equity portion of project cost with the net cash flow to arrive at the discounted cash flow return on equity (DCF-ROE) and equity payback period – use IRR function of Excel

15) You may also compute debt service coverage ratios (DSCR) to see if there is sufficient cash flow to payoff the debt service (interest + principal repayment)

If the DCF-ROE is approximately 15% p.a. which is the usual hurdle rate for making corporate investments (debt interest may vary from 10-12% p.a.  while minimum equity returns for making investments is around 15-18% p.a. depending on the risks of the business), then the assumed % oil company margin is just right and equitable to the oil company investor and the buying public. The DCF-ROE is commonly known as the discounted cash flow internal rate of return (DCF-IRR).

If the DCF-ROE is less than 15% p.a., then the oil company investor is not recovering his cost of equity.

If the DCF-ROE is much greater than 15% p.a., then the oil company investor is over-recovering and may be profiteering at the expense of the buying public.

I therefore recommend that a committee of experts be constituted immediately to analyze the oil industry profitability using the above financial tools that I discussed above.

Regards,

Marcial T. Ocampo

Energy Technology and Energy Pricing Expert

Business Development Consultant