Refinery: National Refinery Limited - Analysis of Financial Statements February 2004-February 2007
National Refinery Limited (NRL) was incorporated as a public limited company at Karachi in 1963. Government of Pakistan took over the management of NRL under the Economic Reforms Order, 1972. Now the company is under the Ministry of Petroleum and Natural Resources, which is exercising control through its shareholding in State Petroleum Refining and Petrochemical Corporation (PERAC). The company was privatised in 2005.
The government decided to sell 51% equity and transfer management control to a strategic investor. After competitive bidding, the NRL was acquired by Attock Oil Group in July 2005.
In addition to a crude refining capacity of over 2.7 million tons per annum, National Refinery Limited has two lube refineries that have a combined capacity of 176,000 tons per annum of lube base oils (LBO) and a BTX unit that has a capacity of 25,000 tons per annum. Overall, the company enjoys a market share of 32% in terms of total capacity. The lube refining section distinguishes NRL with other refineries, which is the only one installation of its nature in the country.
The high margins in lubes business also protects the refinery from steep downside movements in fuel refining margins due to fluctuations in international crude prices, making the earnings of NRL less volatile. With a market share of 80% in lubes category, NRL enjoys a competitive advantage over other players. The company is in the process of increasing lubes production by 15k tons in order to enhance the lubes recovery from the less value added furnace oil. NRL has acquired certification under ISO 14001 for compliance with international standards on its environment management system.
The performance of the company is commendable considering the fact that the refinery sector is very unpredictable in terms of making profits because of its direct relation with the international oil market. Owing to liquidity crunch in the international financial markets, nothing can be predicted about the future. The prices of oil are tumbling down which may deteriorate the profits of the company. On the contrary, efforts by the central banks all over the world might help to end this sheer deadlock.
1Q'08 RESULTS:
NRL recorded PAT of Rs 535m (EPS: Rs 6.70) during 1Q'08 as compared to Rs 693m (EPS: Rs 8.66) in the same period last year, showing a decline of 22.7%. This was due to planned shutdown of Platformate unit for overhauling for approximately 20 to 30 days, removal of duty on certain products and volatile trend in oil prices.
The net sales revenue fell by 3.3% in 1Q'08. Rising price differential claims from the government and processing benefits that were to be recorded in 1Q'08 but due to delay will now be recorded in 2Q'08 are some of the reasons for fall in sales revenue. Approximately 81.0% of the total net sales revenue of the company is derived from the fuel segment while the remaining is earned from the lubes segment.
NRL, being the only lubes refinery derives major after tax revenue from this segment and serves as a revenue driver for the company. Segment wise break-up shows that lubes segment contributed 76.4% to the bottom-line in 1Q'08 as compared to 108.9% 1Q'07; this is because the cost of materials of lubes is fairly lower then that of fuels.
Fuel segment posted after tax revenue of Rs126m in the period under review as against loss after tax of Rs62m. The rising trend in international oil prices helped the segment in recording improved results on the back of rising GRMs. Gross Refining Margins (GRMs) of the company suffered and fell to 3.6% during the period under review as against 4.8% in the same period of last year, despite the fact that international oil prices has shown an increasing trend. The company has an almost debt free balance sheet with long-term liabilities relating to only retirement benefit obligations. The finance cost of the company therefore was 0.2m in 1Q'08 as against Rs4.3m in the parallel period of last year.
Large amount of cash and inventory fuelled liquidity for NRL. Besides lower debt burden put the liquidity trend on a higher side. The current ratio continues to increase beyond the industry trend with a consistent rise in current assets. However, an assessment of the quick ratio shows the true picture, revealing the large amount of non-liquid assets such as inventory and accounts receivables that NRL has on its balance sheet.
If the company is unable to get rid of the high inventory stocks, its liquidity position is going to deteriorate seriously in the near future. Thus, the current ratio trend for NRL over the past four years has been illusory. As mentioned earlier, the industry's profitability is directly related to the international oil prices since a major chunk of local demand is fulfilled through import of crude oil. Other major drivers for industry include demand and consumption pattern. During the past years demand and consumption pattern also witnessed a major change. While the demand of motor gasoline experienced a decline due to increase used of CNG and LPG, furnace oil demand depressed due to conversion to gas and coal based plants by sector like cement.
During FY06 NRL posted a sharp rise in the profitability ratios because of extremely high oil prices (up to $70-75 per barrel) in the international market. Thus the refinery's sales revenue increased both due to high sales volume and high prices that the company was able fetch. During the same year, NRL also exported LBO along with Naphtha amounting to $280.9 million. It was because of increased production, better sales combined with favourable price trend that lube segment registered an enormous profit. This enabled the company to keep itself in profit zone on overall basis.
All refineries posted big operating losses due to massive decline in oil prices in September 2006 except for NRL that showed a nominal decline of 14.9% in its earnings.
Gross profit margin and net profit margin posted an increase in FY07 in consequence of higher margin arising because of higher international oil prices. ROA and ROE remained historically high and above the industry averages owing to the same reason. However, it also posted a decline in FY07 owing to massive decline in the oil prices, which followed in September 06. It is important to mention that Attock Refinery posted lesser decline in earnings on the back its proportionate share of profit through its 25.0% stake in NRL that lifted its bottom line.
Efficiency in capacity utilisation had an inflated effect on NRL's asset management ratios. With increasingly better utilisation of assets, the company has surpassed other players of the industry. Owing to change in consumption pattern and lower demand, inventory turnover ratio and thus the operating cycle has prolonged over the years. Easy credit policy by the company, delays in receiving accounts receivables are some of the reasons for the higher operating cycle as well as cash conversion cycle. The adjustment of inventories at net realisable value, however, deteriorated the asset management ability of the company, inflating the net value of the inventory on the books of the company. Sales-to-equity ratio showed an increasing trend until recently in FY07 due to drop in oil prices and consequent fall in sales revenue.
Long-term debt of NRL is near to the ground and constitutes deferred tax liability only. Zero long-term loans keep the company at a low risk position especially in times of high interest rates. Major financing comes through short-term debt. NRL therefore has a strong interest paying ability. On account of this, the Pakistan Credit Rating Agency (PACRA) has maintained both long-term and short-term entity ratings of Packages limited at "AA" (double A) and "A1+" respectively. These ratings denote a very low expectation of credit risk emanating from a very strong capacity for timely payments of financial commitments. The ratings reflect the company's demonstrated efficiency in the refinery industry of Pakistan. Also, the company has been consistent in maintaining its strong debt and interest-paying ability as compared to its competitors.
The net worth of the company has increased consistently over the years under discussion. Thus book value per share has also improved as compared to that of other players.
The EPS has increased substantially over the years and despite recent decline in oil prices, the company has ceaselessly paid dividends.
FUTURE OUTLOOK:
Increasing amount of price differential claims remains to be an area of concern not only for refineries but also for OMCs. NRL is the only lube refinery in the country which helps it gain an edge over other refineries and provides a solid source of revenue in the back drop of volatile international oil prices. Also, the company has the advantage of being vertically integrated since the company is the part of Attock Group. Development plans such as increasing storage capacities for crude and products, product metering system to enhance efficiency and desulphurization of HSD plant are all efforts towards improving throughput and profitability of the company in the upcoming quarters.
=========================================================================
NATIONAL REFINERY LIMITED-KEY FINANCIAL DATA
=========================================================================
Income Statement (Rs '000) Jun'04 Jun'05 Jun'06 Jun'07
=========================================================================
Total Revenue 40,399,860 60,740,849 80,894,039 91,326,538
Cost of Goods Sold 37,443,321 56,904,890 75,895,286 85,062,748
Administrative, Selling
& General Expenses 366,853 661,884 645,014 684,715
Operating Profit (EBIT) 2,589,686 3,174,075 4,353,739 5,579,075
Financial Charges 18,584 13,204 9,883 6,554
Net Income Before Taxes 2,764,521 3,294,662 5,262,093 6,094,700
Net Income After Taxes 1,849,505 2,120,506 3,409,821 4,202,654
-------------------------------------------------------------------------
Balance Sheet (Rs '000) Jun'04 Jun'05 Jun'06 Jun'07
-------------------------------------------------------------------------
Stores & Spares 703,998 719,385 716,709 802,794
Stock in Trade 3,639,869 3,205,874 6,475,195 7,687,420
Cash & Bank Balances 1,714,841 7,844,153 7,761,060 11,492,152
Total Current Assets 14,914,409 15,849,490 22,294,238 30,054,573
Total Non Current Assets 1,969,098 2,582,926 2,628,303 2,586,986
Total Assets 16,883,507 18,432,416 24,922,541 32,641,559
Total Current
Liabilities 11,121,614 11,732,490 15,545,821 19,658,230
Total Liabilities 11,304,505 11,732,490 15,545,821 19,895,170
Issued, subscribed and
paid-up capital 666,388 666,388 666,388 666,388
Total Equity 5,579,002 6,699,926 9,376,720 12,746,389
LIQUIDITY RATIO Jun'04 Jun'05 Jun'06 Jun'07
Current Ratio 1.34 1.35 1.43 1.53
-------------------------------------------------------------------------
ASSET MANAGEMENT Jun'04 Jun'05 Jun'06 Jun'07
-------------------------------------------------------------------------
Inventory Turnover(Days) 33.80 20.44 26.79 28.00
Day Sales Outstanding (Days) 18.72 8.61 19.90 20.22
Operating Cycle (Days) 52.52 29.05 46.70 48.22
Total Asset turnover 2.74 3.75 3.88 3.34
Sales/Equity 8.29 10.32 10.31 8.56
-------------------------------------------------------------------------
DEBT MANAGEMENT Jun'04 Jun'05 Jun'06 Jun'07
-------------------------------------------------------------------------
Debt to Asset(%) 66.96 63.65 62.38 60.95
Debt/Equity (Times) 2.03 1.75 1.66 1.56
Times Interest Earned (Times) 139.35 240.39 440.53 851.25
Long Term Debt to Equity(%) 3.28 0.00 0.00 1.86
-------------------------------------------------------------------------
PROFITABILITY (%) Jun'04 Jun'05 Jun'06 Jun'07
-------------------------------------------------------------------------
Gross Profit Margin 6.39 5.55 5.17 5.74
Net Profit Margin 4.00 3.07 3.53 3.85
Return on Asset 10.95 11.50 13.68 12.88
Return on Common Equity 33.15 31.65 36.36 32.97
-------------------------------------------------------------------------
PER SHARE Jun'04 Jun'05 Jun'06 Jun'07
-------------------------------------------------------------------------
Earning per share 27.75 31.82 51.17 63.07
Price earning ratio 6.67 9.94 5.00 3.81
Dividend per share 12.50 12.50 16.00 12.46
Book value 83.72 100.54 140.71 191.28
=========================================================================
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Comments
Comments are closed.