Adapting and thriving in new realities based on new strategies
It has been more than a year since the first local transmission of COVID-19 was reported in the Philippines, prompting the government to implement a lockdown in Luzon that quickly got replicated by local governments in the Visayas and Mindanao, as more cases of transmission were reported nationwide.
Like other companies, Pilipinas Shell’s immediate concern was to ensure the safety of our employees, customers, contractors and suppliers, as we sustain operations to fulfill the energy needs of the country, while managing the adverse impact on our balance sheet caused by the slowdown in economic activity as businesses closed and people stayed home.
We had to rethink our business and the way we do things. The result is a refocused and reenergized Pilipinas Shell, a marketing-led energy company supported by a world-class supply chain with 107 years of experience in the Philippines.
We are aware that the economic climate remains uncertain, but we are optimistic about the future given our country’s strong macroeconomic and market fundamentals, its young, growing population driving high domestic consumption, and the government’s aggressive infrastructure program.
Assumptions
We expect demand to go back to pre-COVID levels by 2022 for fuel, and by 2024 for aviation fuels in tune with government projections for economic recovery and pandemic response. We also assume that we will see a gross domestic product growth rate of anywhere between 6 and 6.5 percent a year until 2025.
We anticipate that the market will continue to be deregulated and when our health figures show a positive response to pandemic measures and restrictions are relaxed further and eventually lifted, energy demand will continue to rise due to strong vehicle growth and increased household spending.
By 2022, we expect to see more ratable and predictable financial results given that in transforming our refinery into an import facility, we are removing our exposure to the significant volatility that we historically saw in inventory costs and from refining margins. We experienced as much as P6.8 billion in inventory losses and P5.7 billion in negative refining margins when we were still operating a refinery.
We stand to benefit from some provisions of the Corporate Recovery and Tax Incentives for Enterprises Act, most notably the lowering of the corporate income taxes from 30 percent to 25 percent. With improving economic conditions, we hope to generate sufficient cash flow from operations to fully fund all of our capex and dividends. We also expect to bring back our debt levels to pre-COVID levels sometime in 2022.
Finally, we look forward to achieving positive retained earnings soonest so that we maintain our attractive dividend policy of distributing a minimum of 75 percent of prior year’s net income as payout to shareholders.
Strategic intent
We intend to continue maximizing cash generation at competitive returns. We will also maintain our disciplined approach to capex and cost management, as well as our commitment to good governance, talent management and low carbon operations.
Our strategies have started paying off, allowing us to post a core net income of P400 million at the end of 2020, a strong rebound from YTD 3Q’s P700-million core net loss.
We also reduced our gearing from 47 percent in Q3 to 41 percent by yearend, supported by P5.9 billion positive cash flow from operations. We have also exceeded our cash conservation targets, recording P3.9 billion in capital and operating expenditure savings, almost double our target of P2 billion for 2020.
Pilipinas Shell has already started the shift from manufacturing to full importation, and the transformation of our business from retail to mobility.
In line with the accelerated pace toward energy transition and in support of Royal Dutch Shell’s target of net zero emissions by 2050 or sooner, we are also focusing on lower carbon operations and the introduction of lower carbon products and services.
World-class supply chain. The decision to shift away from a part-refining and a part-importing supply chain, to a full import supply chain is a start toward achieving our goal of a worldclass supply chain: customer-centric, flexible and cost-efficient.
We intend to spend some P1 billion in capital expenditures per year to complete the transformation of the Tabangao site into an import facility and increase our number of strategically situated Medium Range-capable terminals from three to five over the next few years.
Mobility sites. Our gas stations will now become more than just a place to fill your tanks. Instead, they will become mobility sites with more customer-centric, location-specific offerings for those driving cars, trucks, bus and standard vehicles; mobility offers for bikers, cyclists and pedestrians. Delivery of food and other essentials to those at home will also be undertaken.
The mobility site is a destination where customers can find products and services that will enable them to care for their vehicles and reenergize as well. They can fuel their cars, avail of full vehicle servicing like car wash and oil change, and when mobility restrictions are lifted, buy food, and shop for goods offered by international and local brands that will be colocated at the mobility site.
We plan to build 60 to 80 new mobility sites per year to reach about 1,500 by 2025, with the target of increasing fuel volumes by about four percent per year and sustaining premium fuel penetration at 30 percent year on year. We also aim to open 550 Select stores and come up with close to 900 vehicle servicing offers by 2025, growing our convenience retail profits by some 15 percent per year.
On top of this, we will also offer digital offers and payment toward new offers and delivery platforms for our nonfuels business.
Reduced carbon footprint. We aim to reduce energy consumption in our mobility stations by more than 30 percent by 2025. Initiatives include the installation of LED lights, solar panels and green walls, the use of nonharmful paint and using “ecobricks,” or upcycled plastics as building materials. As in the case of our Shell Helix OilChange+ Center in Bulacan, the building was constructed using 13,250 Shell Helix lubes bottles upcycled into ecobricks. A first for the Philippines and for Shell globally, we prevented 1.2 metric tons of plastic from ending up in our landfills and reduced carbon dioxide emission by over 6,000 kilograms.
We will continue to offer innovative low carbon oils like Shell Helix OW, and ready-to-use bitumen that can effectively reduce specific gases and particulate matter from asphalt mixtures like Shell Bitumen FreshAir.
We will partner with progressive companies that will sign up for Shell Fleet Solution’s voluntary carbon offset offer, which we pioneered in the Philippines with our customer Knowles Electronics Philippines Corp. on Jan. 21.
By tracking every liter of fuel they consumed with their fleet card, we enabled Knowles to offset 4.63 tons of carbon dioxide from vehicle emissions through Shell’s many nature-based projects around the world.
Shell’s global portfolio includes afforestation and reforestation projects that revitalize over 10 million hectares of forest cover in Canada, China, Indonesia and Australia. These projects help recapture carbon dioxide emissions lingering in the air, which plants and vegetation use as fuel for growth.
Currently available to customers of Shell’s Fleet solutions and Lubricants business, the carbon offset program will soon be made available to all our marketing businesses. Shell’s carbon capture projects create carbon credits that are independently verified by a world leader in voluntary greenhouse gas reduction programs.
Processes geared to lower carbon output across businesses will also be sustained. These include the installation of vapor recovery units at Tabangao loading stations to reduce the escape of gases into the atmosphere and to strengthen safety in operations, and the use of onboard “telematics” to aid fleet fuel efficiency, among others.
The times may be fluid, uncertain and perhaps, disruptive. But we are refocused and reenergized, and we intend to pursue the aspirations we have set from 2021 to 2025, and beyond. Pilipinas Shell remains committed to providing the country’s energy and mobility requirements through worldclass and innovative offerings.
As we look forward to a brighter future, we lean on our 107 years of nation-building, working hand in hand with the government in our commitment to continue moving forward to power progress for the Filipinos.
The times may be fluid, uncertain and perhaps, disruptive. But we are refocused and reenergized, and we intend to pursue the aspirations we have set from 2021 to 2025, and beyond
Cesar Romero President and CEO, Pilipinas Shell Petroleum Corp.