August 31, 2016 [OPIS] - Chile's national oil company, Empresa Nacional del Petroleo (ENAP), finally has some results to report that may be of wider interest than to the bondholders that carry the firm's debt.
The company is now engaged in an effort to transform itself along the lines of the transformation in Mexico of Pemex divisions into “state productive enterprises” that seek to operate as profitable companies. At ENAP, the transformation is much less earth-shaking than at Pemex because the company is so much smaller, basically a refining company with a little E&P, and now some gas and power, tacked on.
Spearheading the transformation is the new division Gas y Energia (Gas and Power) created in April 2015 with the mandate to help move the nation away from hydropower, coal, heavy fuel oil and diesel for electric power generation to combined-cycle gas turbine (CCGT) power plants.
As related in OPIS alerts of Dec. 10 and Dec. 28, 2015, ENAP has advanced far down the path to becoming a key player both in the supply of gas (via LNG imports) for new power plants and as a project developer itself for new CCGT projects. For starters, ENAP is 20% owner of Chile’s main LNG import terminal at Quintero. They also market a substantial part of Quintero throughput to various generating companies.
As for project development, the main breakthrough came at yearend (OPIS, Dec. 28, 2015) when ENAP selected Mitsui & Co. as its partner to develop CCGT projects. The first project the two were working on was the 579-megawatt (MW) Nueva Era CCGT to be built at the Aconcagua refinery in Concon, Region 5 (R5-Valparaiso).
Unfortunately for Nueva Era, Chile announced the results two weeks ago of the country’s largest-ever electricity tender. The auction, held under the auspices of the Comision Nacional de Energia (CNE) sought to cover 12,450 annual gigawatt hours (GWh), about one-third of annual demand by 2021. Gas-fired plants were shut out by renewables as wind and solar power projects secured over half the demand on offer. The remainder went to Endesa Chile, the nation’s largest hydropower generator.
In spite of this downside development, OPIS concludes that ENAP is now a company worth watching as we try to discern the contours of long-term power and gas development in Latin America. The company reports financial results exclusively in U.S.dollars so interpretation is simple.
When oil prices were high, in 2012 and 2013, ENAP was a company that rang up over $11 billion in annual sales, but 95% of that came through the refining window. E&P revenue, mainly from natural gas production at the southern tip in Magallanes Region (R12), was $638 million in 2013, 5.7% share of total revenue.
As oil prices plunged, so did ENAP’s top-line revenue, to $9.84 billion in 2014 and $6.35 billion in 2015. As a refiner, high oil prices were no help to ENAP in 2012, when it lost $319 million. This turned into a net profit of $157 million in 2014, as its crude oil costs fell faster than its refined product prices. In 2015, net income climbed to $170 million even as the top line plunged.
That brings us to the latest results, just reported, for 1stHalf 2016 (1H16) compared to 1H15. They had a great 1stHalf in 2015, probably the best results in company history. From overall revenue of $3.39 billion, they got gross margin of $359 million and net income of $132 million. By then, E&P revenue had risen to $302 million, 8.9% of the total, and the brand-new Gas and Power division generated $176 million, 5.2% of the total.
With the big decline in oil between 1H15 and 1H16, overall revenues came down 27% to $2.46 billion in 1H16. But gross margin was down only 11%, to $320 million. The bottom line turned down 41%, from $132 to $78.6 million. But the highest annual income this company ever achieved was the $170 million net income for 2015. Against that standard, the $78.6 million in 1H16 could be a lead up to full year 2016 income at a very satisfactory level.
Our main interest is in this new Gas and Power division, and there results took a downturn. Revenue in 1H15 was $176 million, and that dropped 28% to $126 million YOY. The $26 million gross margin of a year ago turned negative, to an operating loss of $1.45 million YOY. Since this division is just getting off the ground in terms of project development, it will probably take some time for it to generate reliable returns.
