Refineries show healthy growth

Profitability of three refineries listed at Karachi Stock Exchange (KSE) during the first quarter of the current fiscal year recorded healthy growth where earnings amounted Rs 1.150 billion because of higher oil prices. The refineries' profitability, globally, has remained robust on account of strong growth in benchmark product prices and low surplus refining capacity. Local refineries are also benefiting from this scenario as their selling prices are linked with international product prices.
Crude prices have also remained robust due to over 40 percent growth in oil consumption in China, supply constraints and speculation. The high earnings growth over last year was also due to the fact that oil prices were falling in the 1QFY04 on expectations that end of military campaign in Iraq would bring in additional supplies from that country.
The three local refineries hence showed depressed performance in the 1QFY04, though National Refinery (NRL) was relatively better off due to its lube operations. Although government has removed all caps and floors on refinery earnings, they are, however, barred from paying out large dividends on their fuel refinery earnings.
Earnings growth picked up on account of increase in gross refining margins as refining capacity is getting stretched due to over 40 percent growth in Chinese oil consumption. US and India are also showing strong growth in their consumption. Globally, refineries are running at peak capacity levels to meet the demand and even a minor supply shock results in considerable jump in prices.
Growing demand of base oils and asphalt and strong international prices are benefiting National Refinery. NRL's lube earnings showed 86 percent growth in FY04 to Rs 1.2 billion and the trend continued in the first quarter.
"We expect lube profitability to grow further in FY05. This will be good news for investors because NRL can pay out large dividends from its lube earnings as there is no cap on its payout," said a report of Global Securities prepared by head of research Mohsin Ahsan.
Pakistan Refinery and Attock Refinery also showed robust performance during 1QFY05 due to strong gross refining margins and improvement in consumption of both white and black products.
During 1QFY04 profitability was depressed on account of declining oil prices and surplus furnace oil locally. Refineries were forced to operate at low capacity utilisation level, which further put pressure on their profitability.