Refineries depict 71 percent growth

Three refineries listed at the Karachi Stock Exchange (KSE) showed tremendous performance during the last fiscal year, depicting a growth of 71 percent because of strong growth in refinery margins, consumption and higher oil prices. As expected, local refineries have announced exceptional earnings growth in FY05, due to strong recovery in refinery margins.
During FY05, cumulative profitability of the three refineries listed at KSE (Attock Refinery, Pakistan Refinery and National Refinery) has increased by 71 percent to Rs 5.1 billion as compared to Rs 3 billion in FY05. Higher profitability has ensued from increase in top line, which increased by 56 percent to Rs 147 billion.
However, for all the commodity manufacturers, this top line has only boiled down to the bottom line due to increase in higher refinery margins globally.
Cracking spreads in Singapore, for Dubai crude, averaged $7.2 per barrel in FY05 as against $4.7 per barrel in the previous year, and at the moment, they are at $8 per barrel, even higher than average for last year.
Therefore, the gross profits of the refinery sector have increased by 79 percent to Rs 9.3 billion in FY05. This growth has been transferred to the bottom line due to no major increase in the operating expenses, said Abdul Rasheed, research analyst at Jahangir Siddiqui Capital Markets Ltd.
NRL, the most profitable of the listed refineries, has announced highest net profits of Rs 2.1 billion (EPS Rs 31.82) with a growth of 15 percent from the last year. Besides it being the largest listed refinery, the company is able to earn better margins due to its lube refinery.
The profitability of Pakistan Refinery (PRL) improved by 135 percent to Rs 1.7 billion (EPS Rs 86.08) in FY05 whereas Attock Refinery (ARL) witnessed a growth of 219 percent to Rs 1.2 billion (EPS Rs 34.94) net profit in FY05 during the year.
While global oil consumption has consistently increased in the past, there has not been any significant investment in the refining sector. Therefore, the current global refinery capacity is insufficient to meet the rising global demand for refined products, even if crude oil supplies are available.
At the moment, due to severe environmental regulations, most of the global oil giants are not going for major refining expansions, whereas a few Indian companies have announced mega expansion plans to capitalise on the rising demand.
Reliance plans to set up largest refinery complex in the world, with a capacity of 64 million tons, in Gujrat. Some additional capacities are also likely to come online in the Middle Eastern region by Opec member countries. However, these expansions are likely to take 3-5 years to commence production, which is likely to keep refinery margins at higher levels in the near future.
Attractive valuations, dividends disappointing:
At the moment refinery sector is trading at trailing PE multiple of 6.6, which is at 39 percent discount to current market PE of 10.9 multiple. However, due to cap on cash dividend and volatile earnings, the refinery sector has historically traded at a discount to the market multiple.