Refinery: ATTOCK REFINERY LIMITED - Analysis of Financial Statements - Financial Year 2005 - 1H Financial Year 2011

Attock Refinery Limited (ARL) is a pioneer crude oil refining company and a major supplier of refined petroleum products in Pakistan.
The company is a subsidiary of The Attock Oil Company Limited, UK and its ultimate parent company is Bay View International Group S.A.
It began its operations in 1922, in Morgah, near Rawalpindi and was the first refinery in the region. ARL became a private limited company in 1978, and in 1979 the company was converted into a public limited company. ARL is presently listed on all the three stock exchanges of Pakistan.

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COMPANY SNAPSHOT

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Name of company              Attock Refinery Limited

Nature of Business                      Oil Refinery

Ticker                                          ATRL

Share price(as on September 30th 2010)         Rs 80

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The company's primary activity is refining crude oil. It also produces certain petroleum products such as liquefied petroleum gas (LPG), unleaded petroleum solvent grade (PMG), naphtha, premium motor gasoline, mineral turpentine (MTT), JP-1 & JP-8, kerosene oil, high speed diesel (HSD), light diesel oil (LDO), furnace fuel oil (FFO), low sulfur fuel oil (LSFO), and polymer modified bitumen (PMB). ARL has an edge over other refineries because of its configuration which enables it to process the lightest to the heaviest indigenous crude and produce a complete range of both energy and non-energy products. The non-energy products include lubes and greases, asphalt, solvent oil, mineral turpentine (MTT), benzene toluene xylene (BTX), jute batching oil (JBO), processing oil, carbon oil, and wax.
Industry overview
Oil and gas sector has been a major contributor in the economic development of the country. It contributes more than Rs 230 billion to national exchequer annually. Oil and gas Sector can be divided into three categories:
* Upstream - exploration and production
Pakistan has so far discovered 1 billion barrels of oil and 54 trillion cubic feet of natural gas. Sedimentary area is Pakistan covers 827,000sqkm, 1/3 of which is under exploration. At present 17 foreign E&P companies including major multinational companies are operating in Pakistan. Pakistan Petroleum Limited, Pakistan Oilfield Limited, Deewan Petroleum and Mari Gas Limited are some of the local E&P companies.
* Mid Stream - Refining

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Refinery                  Location       Capacity (MT)

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Pak-Arab Refinery         Mehmodkot                4.5

Byco                      Hub                    2.187

National Refinery         Karachi                 2.07

Pakistan Refinery         Karachi                  2.1

Attock Refinery           Rawalpindi              1.82

Dhodak                    D.I.Khan                0.12

Enar Petrotech            Karachi                 0.13

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Total Refinery Capacity                         12.927

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-- There are 7 refineries currently operating in Pakistan.
-- Major players in the industry are as follows;
1. PARCO; production 100,000 barrels per day equivalent to 4.5 million tons
2. NRL; production 65,000 barrels per day equivalent to 2.8 million tons
3. PRL; production 50,000 barrels per day equivalent to 2.2 million tons
4. ARL; production 42,000 barrels per day equivalent to 1.8 million tons
5. Byco; production 30,000 barrels per day equivalent to 1.5 million tons.
Current crude production of Pakistan is 65,000 to 67,000 barrels per day and total capacity of the refineries is 287,000 barrels per day or 12 million tons hence 22,0000 barrels per day are imported.
National Refinery is the second largest refinery of the country in terms of refining capacity after Pak Arab Refinery (PARCO) and is presently selling its products both locally and internationally. On an average, it contributed 22.7% in the total production of the country during the last five years.
FY10 has been a very challenging year for the entire oil sector, especially the refineries. FY'09 saw severe fluctuations in international petroleum prices, with prices of Arab Light crude reaching all time high of USD 143.09/bbl and slumping to a low USD 35.35/bbl respectively. In comparison, prices varied between USD 70/bbl to USD 87/bbl during FY10, which is a considerable improvement. However, the stabilization in prices was not sufficient to maintain profitability, as the guaranteed return for the refineries was withdrawn, causing an erosion of the gross refiners margin (GRM). The average GRM for the year was insufficient to cover production costs, and the refineries could not as a result, post a profit in the fuel segment of their operations. Start of FY11 was not very good for refining sector when the worst floods hit Pakistan along with the unresolved issue of circular debt, which has been hampering the industry for the past two years, has added to the difficulties, posing severe risks to liquidity and disrupting daily operations of the refineries.
Petroleum products off-take for the year grew by 8.52%, with volumetric sales standing at 20,314,743 MT (FY09: 18,719,300 MT). Demand for Gasoline (HSD and LDO) dropped, while furnace oil sales expanded by 15%.
Currently, PARCO, the market leader, works under oil refinery formula with 25 percent guaranteed rate of return up to December 2008. The profit of NRL, PRL and ARL up to 2001-2002 is under 10 percent guaranteed rate. The IPP formula was modified in 2002 and minimum 10 percent guaranteed with upper limit of 40 percent was done away with.
Tariff protection was allowed to NRL, PRL and ARL giving incentive of custom/deemed duty of 10 percent on high speed diesel (HSD) and 6 percent on kerosene oil, light diesel oil (LDO) and jet propulsion (JP-4) in their ex-refinery prices to operate on self financing basis. The formula was further revised in 2007-08 by reducing deemed duty to 7.5 percent on HSD and removing 6 percent deemed duty on kerosene, LDO and JP-4/8 through budgets. This reduction in deemed duty, twined with fall in global oil prices and caused a considerable decline in the profitability of the oil refineries.
The companies have been actively involved in deliberations with the government over changes in the pricing policy; however no progress has been over the past year.
Share of the petroleum products is about 40% of the current energy consumption in Pakistan. This consumption has grown sharply during 1980s at rate of almost 7% per annum. However, it showed a decreasing trend during 1990s and during 2004-05, it gained pace at about 10% per annum.
Oil consumption of energy products is dominated by gasoline and fuel oil. Gasoline in Pakistan consists of High Speed Diesel (HSD) and Light Speed Diesel Oil (LDO), while fuel oil consists of furnace oil.
The transport sector and agricultural sector are the two major users of gasoline in Pakistan. In recent years, a high level of subsidy was provided by the government of Pakistan over gasoline due to which its consumption increased. In 2007 however, the increase of oil prices in the international market affected Pakistan's economy, and as a result the government is no longer in a position to provide the same amount of relaxation as before. The government has been gradually reducing the subsidy level, causing the local prices of gasoline to rise, and the consumption to drop. Secondly, the government is promoting the Compressed Natural Gas (CNG) sector in Pakistan and is encouraging as well as forcing certain sectors within transport to convert to CNG. This indicates that in the coming years Pakistan will see reduced consumption of gasoline products in the transport sector. There is however, no alternative for gasoline in the agriculture sector, which is facing extreme difficulties as a result of rising prices.
Furnace oil or fuel oil is normally used for production of electricity via thermal power plants. At the moment Pakistan is facing an extreme energy crisis due to which the government is planning construction of short-term power generation plants that are oil based, and is also encouraging independent power producers to invest in the country. As all the new thermal power plants are oil based and as the country has very limited natural gas resources, the consumption of furnace oil will also increase in the coming years.
Recent results (1H11)
Gross Refiner's Margin (GRM) had substantially improved in the 1st quarter. However, in the 2nd quarter GRM was once again adversely impacted by fluctuations in the international price of products and crude oil and also due to unilateral withdrawal of incidentals from the calculation of prices of regulated products effective December 1, 2010. As a result, the results from core refinery operations were negative in the second quarter October-December 2010 but overall GRM for the period Jul-December 2010 remained positive as compared to the corresponding period of last year where it was negative.
Sales increased to Rs 50.6 billion from Rs 39.4 billion in the same period last year. The financial results for the six months period also improved due to decrease in exchange loss to Rs 16 million (Jul-December 2009: Rs 194 million), increase in other income on account of delayed payment charges of Rs 320 million (Jul-December 2009: Rs Nil) recovered on fuel supplies, and increase in non-refinery income to Rs 766 million (Jul-December 2009: Rs 395 million). Consequently, the financial results for the six months period ended December 31, 2010, after inclusion of other income of Rs 753 million and non-refinery income of Rs 766 million, showed a net profit of Rs 1,502 million as against loss of Rs 210 million in the corresponding period of last year.
The refinery operated at 100% capacity, while in the same period last year, it had operated at 88%. The refining throughput increased to 7.332 million barrels as compared to 6.494 million barrels in the same period last year.
Sales and production
For ARL, sales for the quarter stood at 25 million as opposed to 19.25 million in the first quarter of last year showing an increase of 30%. The cost of sales showed an increase of 22% however, cost of sales as 5% of sales has decreased by 8%. This has resulted in gross profit for the quarter as opposed to gross loss in the 1st quarter last year. The expenses for the quarter decreased by almost 2% and other income increased by 68% resulting in an improvement in the bottom line profitability of the company. ARL showed a profit of 0.58 million as opposed to a loss of 0.4 million in the similar period last year. Gross profit margin remained at 3.5% this quarter, which is lower as compared to the industry average. The net profit margin was also very low as compared to the industry average and stood at 2% for the quarter.
The company's profitability continues to be governed under an Import Parity Pricing Formula as modified with effect from July 1, 2002 whereby the minimum rate of return of 10% on paid-up capital was dispensed with and net profit after tax (if any) above 50% of paid-up capital as at July 1, 2002 is required to be diverted to a special reserve fund to
offset any future losses and/or make investment for expansion or upgradation of the refinery. However, the
government has, from time to time made unilateral modifications in the Refineries Pricing Formula adversely affecting refineries profitability with the last revision made in the formula for HSD and motor gasoline in August 2008.
As reported in the Annual Report for 2010, the Ministry of Petroleum & Natural Resources (MOP&NR) had been submitting various proposals on revision of pricing formula for the consideration and approval by the Economic Coordination Committee. However, the refineries have not yet been communicated of any revision in the pricing formula and the matter is still pending.
Liquidity
In terms of liquidity, the company's position remained relatively stable, with only a slight improvement. The current ratio rose from 0.87 in FY09 to 0.91 in FY10. The ratio for the quarter remained at 0.93 which, shows slight improvement but it is still below the industry average of 1.1. Similarly, the quick ratio rose from 0.75 to 0.77. These changes can be attributed to a greater proportionate rise in current assets as compared to current liabilities.
During the quarter, we can observe that the cash position of the company has improved substantially, however, trade debts have increased by almost 17%, which must be a concern for the company. This increase can be attributed to the unresolved issue of circular debt, which is still haunting all major industries in Pakistan.
Among current liabilities, trade payables are the only major component reflecting an increase of 16% as compared to the same period last year.
Asset management
The issue of circular debt further aggravated during the period under review as the overdue receivables of
Rs 24 billion at the end of June 30, 2010 accumulated to over Rs 29 billion at the end of September 30, 2010. Consequently, the company is handicapped in meeting its regular obligations related to crude oil supplies. While the government is being continuously reminded to resolve the issue of circular debt plaguing the entire oil industry, there has been no improvement in the situation, which is progressively worsening.
However, due to favourable refiner's margin and in the best national interest to ensure continued supply of petroleum products, the company managed to operate at 101% capacity (September 30, 2009: 88%) despite severe liquidity crises. The refining throughput during the quarter ended September 30, 2010 was 3.508 million barrels (September 30, 2009: 3.261 million barrels) while the sales volume was 3.553 million barrels (September 30, 2009: 3.143 million barrels). Further, all the processing units of refinery operated smoothly.
Debt management
Like asset management, debt management of ARL has been on a decline this year. The debt to asset ratio increased from 0.73 in FY09 to 0.79 in FY10, showing an increase of the company's debt. The company is however in line with the industry, which has an average debt to asset ratio of 0.78. Total liabilities for ARL stood at Rs 46.4 billion, a 43% rise YoY. Total assets on the other hand stood at Rs 58.6 billion, a smaller rise of 32% YoY. The increases in both the total assets and total liabilities were due to increases in the current portions of the two accounts. This is visible in the long-term debt to equity ratio which is only 0.01; showing that the company has almost no long-term debt. Non-current liabilities stood at Rs 140 million (FY09: Rs 120 million), while equity stood at Rs 12.2 billion (FY09: 12.1 billion). This amount has remained relatively stable over the past few years, due to stability in both amounts. The total debt to equity ratio on the other hand is very high, showing considerable risk of the company. The debt to equity ratio stood at 3.8 in FY10, from 2.7 in FY09. This is due to the large increase in current liabilities, as mentioned earlier. The company's debt to equity ratio is considerably higher than the remaining refineries, further proof that ARL is more severely affected by trade debts than the industry.
Market value
The market price of the stock has been on a decline, with the price dropping from Rs 155 per share at the end of FY09 to Rs 80 per share at the end of FY10. At the end of the 1st quarter of the year, it remained at 80, which shows the concern of the investors. This is an expected decline, and is the direct result of the collapse and then stabilization of the stock market. It does not indicate poor performance of the company itself. The beta for the stock is 0.87, which means it provides less return than the average stock in the market, but is also less risky.
Earnings per share for the quarter stood at Rs 6.48 per share as opposed to negative earnings in the same period of last year. Due to the difficulties faced by the company over the year, they were unable to announce any dividend to shareholders.
Future outlook
The revision of the pricing formula as notified in August 2008 has had an adverse effect on the revenues of the refineries with prices of the main products HSD and PMG having being adversely impacted. These measures were taken by the GoP under extreme public pressure in addition to the earlier modifications it made to the pricing formula from time to time in the form of withdrawal of deemed duties on Jet Fuel, kerosene oil, and LDO. The year under review witnessed relative stabilization of international prices of crude oil and petroleum products, but a heavy erosion of the GRM. Unless this margin improves, refineries run the risk of running heavy losses. Furthermore, with the impending issue of circular debt, the liquidity of the refineries have been severely affected, and urgent steps are required by the government to resolve the problem.
ARL, in order to sustain economical operations, made strong representations to the Government jointly with other refineries for a review of the Pricing Formula and held several meetings and negotiations during the year. The Government though acknowledging the refineries' difficulties remains under public and other pressure, and has not taken a concrete decision as yet. The Refineries have emphasized on the Government that a revision in the pricing formula is extremely essential in order that the refineries are able to maintain their normal operations to continue supplying petroleum products to the domestic market.
To improve product quality with changing environmental standards and value addition, ARL is seriously considering installation of an Isomerization Complex to upgrade its Light Strain Run Naptha, to produce PMG with low benzene and aromatics. A Diesel Hydro Desulfurization Unit to reduce sulfur content in HSD has also been planned. Further investment in the industry however depends on the awaited decision of the government regarding the pricing policy, as the refinery will only be able to afford investment if profitability improves.
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].
Copyright Business Recorder, 2011