[OPINION] Malampaya’s murky math 1

[OPINION] Malampaya’s murky math

Dean Dela Paz

Posted at Jan 06 2022 12:19 AM

In the fourth hearing of the Senate investigating the sell-outs of the service contracts of the Malampaya offshore gas fields, it was suddenly revealed that the state-owned Philippine National Oil Corporation – Exploration Company (PNOC-EC), which holds 10%, will not be giving consent to 45% then being sold to an entity whose affiliate had already purchased an initial 45%.

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The PNOC-EC declaration was welcomed by a public fearful of a complete sell-out of such a vital asset. It was presumably authorized by a board resolution and based on an assessment of the consequences of surrendering 90% to virtually a single entity albeit divided among affiliated recently incorporated corporations, both technically and financially questionable.

Because officials and sell-out proponents including representatives from the purchasing entity and curiously, some media owned by individuals at the center of the controversy, chorus that the transactions were mere share transfers between private corporations insulated from regulatory intervention, a good deal of undisclosed data requires serious scrutiny. It is those unknowns lurking in the shadows that compel the bright klieg lights of a full blown investigation.

The levels of distrust are high, necessitating taking the issue to court as more contradictions are revealed at the Senate while those accused of graft and corruption resort to muzzling media. 

One gnawing question is the possibility of a hidden beneficiary behind the purchase of the initial 45% given a start-up lacking relevant experience, inherent technical expertise, and financial capability. Might a hostile foreign power ultimately control our crown jewels? If the authorities insist that the sell-out is a private matter insulated from government vetting, then the barn doors are thrown wide open.

Another question is on losses. Since 90% was originally available to PNOC-EC under rights of first refusal (ROFR), the latter’s perspective and their computations matter and are raised as part of their defense. In fairness, allow us to present their arithmetic based on internally generated, verifiable and, for some, publicly available data.

These computations for losses are based on the initial 45% share of cashflows realized from June to December 2019 prior to the March 2020 sale, plus 2020 actual cash flows, and projected receipts up to February 2024. All were totaled before acquisition and financing costs were netted out.

It starts with six months of entitlements for a start-up still to be incorporated in September 2019 totaling $136.54 million. Actual 2020 inflows were $174.84 million inclusive of a remediation program. Without remediation the incremental prorated inflow for 45% approximates $3 million (or $6 for 90%).

Estimated inflows from thereon to February 2024 total $407.64 million. All total $719.05 million. They then subtracted the acquisition cost of $561.00 million plus 5% nominal interest financing charges of $56.00 million.

What’s wrong with this picture? The computations are purportedly an analyst’s study. These are not ours. For one, the quoted actual 2020 inflows translate to P8.74 billion. But the Commission on Audit (COA) reports show the PNOC-EC 2020 cash flow at P3.63 billion. At the COA-audited level for PNOC-EC’s 10% share, a 45% share should yield P16.33 billion, not P8.74 billion. Questions of mathematical operations, even account titles and differences in defining inflows are evident. Unfortunately, their impact may have been considered insubstantial minutiae.

In finance, computing for proper net present value (NPV) and discounted cash flows (DCF), future values must account for the 5-year time value of money using the weighted average cost of capital as a measure. Moreover, acquisition costs are discounted on year-zero, not on the final year. Interest on debt compounds thus increasing effective interest. Interest is paid periodically in arrears, not at the end of the total debt. Finally, net cash flows are different from net income.

These however total $102.05 million representing inflows accruing to the 45% purchaser, and on the flipside, losses to the state from the failure to exercise ROFR. Alternative projections of the loss are estimated at $1.4 billion. And that is just for one 45% sell-out.

Note the alarming disparity. A $1.4 billion loss is not minutiae.

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(Dean dela Paz is a former investment banker and a managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance and Mathematics professor.)

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.