Esso share price plunges 18.6%

KUALA LUMPUR: Esso Malaysia Bhd shares plunged by 92 sen or 18.59% to close at RM4.03 yesterday after its parent ExxonMobil International Holdings Inc agreed to sell off its stake in the company to the Philippines’ San Miguel at a significant discount to its last traded price.

Under the deal announced Wednesday, ExxonMobil agreed to dispose of its 65% or 175.5 million shares in Esso Malaysia to San Miguel for RM614.25 million (US$206.02 million) or RM3.50 per share.

The RM3.50 price tag translates into a small premium of 7% or 1.06 times Esso Malaysia’s book value (RM3.28) and almost a 30% discount to its Tuesday’s closing price of RM4.95.

It also translates to less than two times earnings before interest and tax, which is lower than the average 20 times for other international deals involving oil refiners and retailers in the past one year, according to external data.

Based on the valuations alone, it appears that San Miguel has landed itself a good deal for its first acquisition of overseas oil and gas (O&G) assets.

It is also noteworthy that Esso Malaysia, which has a market capitalisation of over RM1.1 billion, has a higher return on equity (ROE) compared with its larger peers.

Esso Malaysia’ ROE stood over 42% while its bigger peers such as Shell Refining Co (Federation of Malaya) Bhd offers only 5%, Petronas Dagangan Bhd 19% and Petronas Gas Bhd 18%.

Therefore, it is not surprising that Esso Malaysia, which has been profitable over the last two financial years, has been a takeover target of many players over the past years.

However, an O&G observer familiar with the deal said San Miguel’s price is only a fair one. He pointed out that the average price of Esso Malaysia’s stock in 4Q10 was about RM2.80, and the offer price represents a 70 sen or 25% premium over this.

“In all fairness, an acquirer can only offer the right price based on fundamentals of the business and not artificial evaluations driven by speculation… Esso (Malaysia)’s share price has never moved beyond RM3 in the past, but has been subjected to severe movements this year, presumably on news flow relating to potential corporate activities,” he added.

San Miguel plans to upgrade Esso Malaysia’s Port Dickson refinery to make use of a wider variety of crudes and produce higher valued-added products.

The observer pointed out that San Miguel is likely to rope in its unit Petron Corp to upgrade the facilities at Esso Malaysia. Petron had earlier this year announced a massive US1.8 billion refinery upgrade plan in the Philippines.

“Such an upgrade could reduce imports of refined petroleum products for Malaysia but more importantly, the refinery economics will be improved,” the observer added.

While the refinery has a rated capacity of 88,000 barrels per day, production last year was at only 45,000 barrels per day.

In April, The Edge reported that Boustead Holdings Bhd and parent company Lembaga Tabung Angkatan Tentera are believed to be eyeing a 65% stake in Esso Malaysia.

The company’s 580 Esso and Mobil service stations across the country would have complemented Boustead’s own BH Petrol 300 service stations.