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Pilipinas Shell may have to recapitalize as liabilities reach 2.7X equity

As of the end of 2020, Pilipinas Shell (SHLPH) had a total liability of 62.9 Billion while its total equity amounted to just 23.6 Billion.

SHLPH’s equity dwindled as retained earnings of 11.9 Billion at the end of 2019 turns into an accumulated loss of 4.3 Billion at the end of 2020. SHLPH suffered a big operating loss in 2020 which has been exacerbated by the impairment of its Tabangao Refinery. In 2020, SHLPH decided to shut-down refinery operations and to transform the refinery into a world-class import facility. Loss before income tax of SHLPH for 2020 totaled 23 Billion Pesos.

SHLPH may have generated cash from operating activities of 5.9 Billion Pesos but it is a net borrower of short-term loan of 3.2 Billion Pesos. Its short-term loans are intended solely for working capital and corporate expenses requirements. Instead of being a net payor of that loan, SHLPH increased the short-term borrowings by 3.2 Billion to 13 Billion from 9.8 Billion in 2019.

Aside from that increasing revolving short-term loan, there is the 9 Billion Pesos that is due on 08 March 2023.

It is easy to point the finger on the pandemic for the lackluster cash flow generation from operations but if you look at the pre-pandemic 2019 results cash flow generation was already lackluster. Pre-pandemic 2019 cash flow from operation was a fall from the cliff of the 2018 cash flow from operation. 2019 cash generated from operations was just 48.9% from the 2018 cash from operations.

Unless cash generation from operations go back not to 2019 but to 2018 level, SHLPH may not be able to return capital to shareholders in the short run but instead may have to ask shareholders to chip in more capital.

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