The losses of listed refinery sector reduced significantly to Rs 2.7 billion in the first half of the current fiscal year (FY10) as compared to massive losses of Rs 13.4 billion recorded in the corresponding period of FY09. "Unlike last year, where inventory and huge exchange losses took a heavy toll on earnings, losses in the first half of FY10 mainly arrived due to negative refinery margins on fuel business", analysts said.
Diesel is considered to be a higher margins product for the refineries. Its spread (difference between international diesel price and crude oil price) reduced from average $26 per barrel in the first half of FY09 to approximately $8 per barrel (including deemed duty).
And, that was the major reason behind subdued margins in the first half of FY10, Farhan Mahmood, analyst at Topline Securities, said. Besides this, another factor, which diluted earnings, was reduction in other income. During the first half of FY10, other income suffered by 32 percent to Rs 1.5 billion mainly due to liquidity shortage amid circular debt situation, he said.
Only National Refinery posted profit in the first half of FY10, while the rest of the companies, ATRL, PRL and BYCO, remained in red, though they were able to reduce their losses. He said that there was bad news for the local refiners on all fronts so far this year. Margins and production showed negative trend for the refineries in the first half of FY10.
Beside these factors, liquidity crises continue to haunt local refined oil production. As a result, refinery capacity (only listed companies, excluding BYCO, previously Bosicor) estimated at 80-82 percent in the first half of FY10 compared to 88 percent in the same period of FY09.
He said that a positive thing that happened in this half was absence of any major inventory and exchange losses. During the first half of FY09, the refineries had posted inventory and exchange losses of Rs 7-8 billion (net of tax) and Rs 9.6 billion, respectively. This was mainly due to 70 percent reduction in oil prices and sharp devaluation in rupee versus dollar, he added.
BYCO relies mainly on furnace oil (FO). Its losses reduced to Rs 2 billion in the half year period in FY10 from Rs 7.9 billion. Huge losses last year were mainly due to inventory losses (estimated at Rs 4.3-4.5 billion-net of tax) and exchange losses of Rs 4.2 billion.
Since BYCO's production is skewed towards FO (negative margin product), any sharp decline in diesel margins (higher margin product) affects overall profitability of the company. Both negative earnings on FO along with decline in diesel margin on year-on-year basis led to losses in the first half of FY10.
Thanks to lube business of National Refinery, the company posted profit of Rs 1.1 billion compared to losses of Rs 793 million last year. Where fuel business dragged earnings during first half of FY10 (loss per share contribution of Rs 6.0), share of lube business in overall earnings stood at Rs 20.4 per share.
On the other hand, ATRL and PRL posted losses of Rs 210 million (loss per share of Rs 2.5) and Rs 1.7 billion (loss per share of Rs 48.6) during the first half of FY10. In the first half of FY09, their losses were Rs 689 million (loss per share of Rs 8.1) and Rs 4.0 billion (loss per share of Rs 113.6).
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