PRL in difficult times

With 1HFY15 financial performance announced yesterday at KSE, it seems that Pakistan Refinery Limited's (KSE: PRL) profitability might just remain below par in FY15. A 50 percent year-on-year drop in 2QFY15 revenues and a 28 percent year-on-year drop in 1HFY15 revenues remained the key inhibitor in the refinery's financial performance.
As a result, gross margins slipped further into the negative zone and the operating and net margins followed suit. Even the effects of continued weakness in crude oil prices, and hence improving industry-wide gross refining margins cannot be seen in PRLs financial statements. A larger fall in crude oil prices than the petroleum products was expected to benefit the domestic refineries; According to a research note by Foundation Securities, PRL GRMs witnessed an improvement to $10 per barrel in 2QFY15 against $3 per barrel in 1QFY15.
The Board of Directors so announced along the financial performance a right issue of 280 million ordinary shares of Rs10 per share in proportion of eight right shares for every one ordinary share held. This right issue will generate Rs2.80 billion in equity. The refinery decided for a right issue to raise funds to increase the firm's equity and meet working capital requirements; the company had negative equity of Rs6.30 billion due to accumulated losses of Rs7.06 billion, and PRLs current liabilities exceed its current assets, which put a serious question mark on the firm's going-concern state.
The right issue will benefit the firm's growth projects eventually as it will reduce the company's reliance on bank borrowing, reduce finance cost and hence result in smoother operations, which will lead to quicker completion of its long awaited projects like the Isomerization plant, Hydro De-sulphurization Unit, and Refinery Upgrade Project. The management claims that the Isomerization project will increase petrol production by double along with the conversion of Naptha for export. The Diesel Hydro De-sulphurization unit will produce Euro-II complaint diesel.

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Pakistan Refinery Limited

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Rs (mn)                  1HFY15    1HFY14     YoY     2QFY15     2QFY14        YoY

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Net sales                50,569    70,250    -28%     17,434     35,928       -51%

Gross loss              (3,199)     (676)    373%    (2,110)      (634)       233%

Distribution cost           100       100      0%         44         51       -14%

Administrative exp          122       108     13%         66         64         2%

Operating loss          (3,330)     (748)    345%    (2,198)      (700)       214%

Finance income/(cost)     (247)     (425)    -42%         41      (239)

Loss after taxation     (3,577)   (1,251)    186%    (2,120)      (976)       117%

Loss per share (Rs)    (102.21)   (35.74)    186%    (60.58)    (27.90)       117%

Gross margin             -6.33%    -0.96%            -12.10%     -1.76%

Operating margin         -6.59%    -1.06%            -12.61%     -1.95%

Net margin               -7.07%    -1.78%            -12.16%     -2.72%

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