Refinery: PAKISTAN REFINERY LIMITED - Analysis of Financial Statements - Financial Year 2009 - 1H - Financial Year 2011
Pakistan Refinery Limited (PRL) incorporated in 1960. It is situated in Karachi and engaged in the production and sale of petroleum energy products as well as MTT, its only non-energy product.
Its operations encompass extensive installations in refinery premises at Korangi, Karachi terminal, storage facilities at Keamari, Karachi and pipeline network: Korangi to Keamari. Its products include liquefied petroleum gas, motor gasoline, kerosene, jet fuel, high-speed diesel, and furnace oil. The company supplies its products to the domestic markets, Pakistan defence forces, and Railways. It is quoted on Karachi and Lahore stock exchanges.
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COMPANY SNAPSHOT
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Name of company Pakistan Refinery Limited
Nature of Business Oil Refinery & Distributors
Ticker PRL
Share price (avg.) Rs.88.47
Market Capitalization Rs.3,765,650,000
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There are currently five refineries operating in Pakistan:
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 40,000 barrels per day equivalent to 1.8 million tons
5. Byco; production 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 285,000 barrels per day or 12 million tons hence 220,000 barrels per day are imported. Pakistan produced 64,900 barrels of crude oil per day in fiscal year 2010, which was the lowest production level in the last six years.
Consumption and production of POL products in Pakistan:
Share of the petroleum products is about 40 percent of the current energy consumption in Pakistan. This consumption has grown sharply during 1980s at rate of almost 7 percent per annum but it has shown a decreasing trend during 1990s and later it gained the pace during 2004-2005 at about 10 percent per annum.
Oil consumption of different energy products is dominated by gasoline and fuel oil. Gasoline in Pakistan consists of high-speed diesel (HSD) and light speed diesel oil (LSDO), while fuel oil or furnace oil is used in thermal power generation projects.
Transport and agricultural sectors are the two major users of gasoline. Transport sector includes both private and commercial. In recent past, a substantial amount in the shape of subsidy was being provided by the government of Pakistan over gasoline due to which its consumption has increased. But in 2007, increase in oil prices in international market affected Pakistan's economy due to which government had gradually reduced the subsidy levels and as a result, gasoline prices were increased locally which affected its consumption. Secondly, the government is encouraging the use of compressed natural gas (CNG) in the transport sector. This indicates that in the coming years, Pakistan will see reduced consumption of gasoline products. But there is no alternative of gasoline in agriculture sector and as a result, this sector is facing extreme difficulties due to increase gasoline prices.
Furnace oil or fuel oil is normally used for production of electricity via thermal power plants. At the moment country is facing extreme energy crisis and government is planning for short-term power generation plants that are oil-based and also encouraging independent power producers to invest in the country. As all the new thermal power plants are oil-based besides country has now very limited natural gas resources, the consumption of furnace oil will also increase in the coming years.
Recent results (1H11):
The half-year ended December 2010 witnessed a growth in the profitability of the company. The company earned a profit after tax of Rs 881.1 million during the year as against a loss of Rs 1699.8 million in the same period last year. Cost of the sales showed an increase of 13.6% as compared to 1H10 whereas the other expenses registered an increase of 64.1% during the year. The finance cost for the company decreased drastically by 85.2%, and helped the company improve its position. The return on equity also improved in this period and was recorded as 27.3% as compared to the negative return due to loss incurred in 1H10 that worsened the associated profitability indicators.
Liquidity:
Liquidity improved slightly during 1H11 as compared to 1H10 because there was a significant decrease in accrued interest/markup; the amount of accrued interest declined by 94% during the period. Also, the other receivables that declined by 72.3%, indicate an inflow of cash. The current ratio for the period is calculated to be 0.902 as compared to 0.88 during 2H10. The acid-test ratio also increased by almost 2%, which is not a major change.
The sales tax payable to government increased tremendously by 190.7%. This shows that the company accrued its sales tax payable, which can be another reason for the improved liquidity. The short-term borrowings also increased slightly.
Asset management:
The operating cycle of the company decreased to 145 days in 1H11 as compared to 153 days in 2H10. DSO has decreased because of the decrease in trade debt from Rs 16.1 billion in 2H10 to 15.3 billion in 1H11. Inventory turnover however, remained almost the same at 50 days. The other receivables also showed a drastic decline of 72.3%.
Sales/equity ratio shows a drastic decrease from 81 times in 1H10 to 14.10 times in 1H11. This is mainly because of the increase in equity due to the surplus on revaluation of property plant and equipment. Total Assets turnover increased slightly to 1.6 times from 1.53 times in 1H10 and the total assets increased by 12.18%. There has been an increase of 132% in property, plant and equipment because of the revaluation and the additions.
Debt management
Debt/equity ratio has decreased drastically from 52 times in 1H10 to 7.84 in 1H11 because total liabilities increased by some 71.52% in FY08 on a YoY basis. Long-term debt to equity increased 1.4% but total equity increased by 572% because of the surplus on revaluation. Such high debt to equity ratio shows that most of the financing has been done using short-term debt. The debt/asset ratio declined from 98.1% in 1H10 to 88.7% in 1H11. The major decrease was in the short-term debt and accrued mark-up of the company. This is also a reason for the decrease in finance costs by 85.2%. The TIE (times interest earned) ratio also increased to 8 in 1H11 as compared to a negative figure in 1H10.
Market value:
The market outlook of PRL showed an improvement after it took a drastic turnaround when it registered a massive blow to its profitability on the back on fluctuating international oil prices, reduction of deemed duty, and depletion of Pak Rupee against USD. The average price of the share was recorded Rs. 75.62 in 1H11. The EPS for the period was recorded at Rs. 25.17 as compared to negative Rs 45.87 in the corresponding period of last year.
Financial overview:
FY10 has been a very challenging year for the entire oil sector and especially for refineries. The refineries were badly affected due to highly depressed refining margins, reduction in deemed duty on certain refined products and inventory losses. Additional burden was placed on PRL due to liquidity issues resulting from high receivables and depletion in the value of Pak rupee. Consequently, PRL incurred a post tax loss of Rs. 4,572 million during the year ended June 30, 2009 compared with a profit of Rs. 2.111 million last year. During the year, the company contributed an amount of Rs. 19.190 billion to the National Exchequer through direct and indirect taxes.
The year 2008-09 saw historical 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 US$35.35/bbl respectively.
This year witnessed an international financial meltdown and its impact trickled down on our national economy. The country recorded a decline in foreign exchange reserves and a steep raise in the interest rate. Petroleum products off-take in the country during the year almost remained at last year's level of approximately 187.7 million MT, including furnace oil and diesel at 8.1 million MT and 7.6 million MT respectively.
The company's local sales during the decrease by 4.64% whereas the exports showed an increase of 27.3%.
The company desires to comply with government directives of production of environmental friendly products by 2012. However, depleting financial reserves have seriously impaired the company's ability to achieve scheduled completion of Upgrade Project and Government support is imperative for timely completion of the project. The company management individually and collectively with other refineries has approached the Government for support in installation of Hydroesulphurising Facility to meet EURO II applications for diesel production.
During the FY09, PRL entered into a USD 50 million short-term loan agreement with ECO Trade and Development Bank (ETDB) of Turkey at a very economical cost for the purpose of financing company's crude oil imports from Iran. This facility helped minimize the liquidity problems faced by the company faced by the company due to inter corporate circular debt issue of the energy sector. The circular debt problem resulted in additional financial charge of Rs. 566 million to the company. But in FY10, the company repaid the USD 50 million short-term loans to ECO Trade & Development Bank (ETDB) of Turkey. However, a new USD 35 million short-term loan has been arranged from ETDB for the purpose of financing Company's crude oil imports from Iran.
During 2009-10 the company recorded huge losses as in FY09 but a little less mainly due to unsustainable refinery product pricing mechanism, a steep fall in international crude oil prices in FY09 which then improved in FY10, and adverse global refining margins. Rupee depreciation and the issue of circular debt all contributed to the huge loss.
The company had smooth operations during the year and key performance indicators were maintained within the targets. A planned shutdown of 13 days was carried out in October 2009, during which successful Platformer Catalyst regeneration and skimming of Hydrotreater Catalyst was completed, using company's own resources.
The actual throughput during the year was 1,596,637 metric tons (2009: 1,888,326 metric tons) as compared to the designed nominal annual capacity of 2,133,705 metric tons.
All efforts were made, including introduction of Distributed Control System (DCS) for Platformer unit, to maintain highest standards of safety, quality, engineering and environment while minimizing operating cost. The company has maintained improvement in reliability of plant to achieve the targeted four-year turnaround cycle length.
Considering the difficult economic scenarios in which the refinery operated during the year 2009-10, the management made concerted efforts towards controlling operating costs and a number of initiatives were taken in this regard. PRL hence managed to operate with the lowest operating cost as compared to other refineries of the country. Control systems were strengthened and improved to contain possible losses and promote good governance.
Profitability
The financial year 2009 witnessed a significant decline in the profitability of the company. The company had a loss after tax of Rs. 4,571,655,000 during the year ended June 30, 2009 as against a profit of Rs 2,110,744,000 in the last year. However, during the year ended June 2010, the company's loss after taxation decreased to -Rs 1,914,433,000. Cost of the sales incurred in this year exceeded the revenue generated by PRL. Other expenses registered a decline over the year, though it was not significant; however, the finance cost for the company decreased by 54.2%. The interest on foreign currency loan increased but the rest of the components of finance charges showed a decline. Profitability indicators and the return on common equity improved from their FY09 figures but were still negative. The overall scenario is that the company's profitability improved a little after declining sharply in FY09, but it is still not up to the mark.
Liquidity:
Liquidity deteriorated slightly during the FY10 as compared with FY09 because both the current assets and current liabilities decreased a little. The current assets in FY10 decreased by 13.7% whereas the current liabilities decreased by only 6%. The changes can be attributed to the increase loans and advances given to customers which increased by more than 63%, trade deposits and other prepayments that increased by 447.6%, the almost 100% decrease in cash and bank balances and the decrease in short-term borrowing by 22.75%. The company's current liabilities exceed its current assets by Rs 3.35 billion.
Asset management:
The operating cycle increased during FY10 because of the decrease in inventory turnover and increased day sales outstanding. DSO has increased because of the rise in trade debt by 11.71% as compared to FY09. Secondly Inventory turnover decreased in FY10 because stock in trade decreased by 18.6% to Rs 16120 million. The sales/equity ratio showed a decline but the total asset turnover improved a little during the FY10 because of the decrease in the loss as compared to the loss incurred in FY09.
The operating cycle further went up in FY10, corresponding to increase in DSO. Decline in sales revenue and rise in trade debts contributed to this deteriorating trend.
Total Assets turnover increased slightly in FY10 because of the loss incurred and 5.24% decrease in the assets. There has been an increase of almost 140% in the value of property, plant and equipment. The company has initiated projects to produce more profit generating products and it is expected that such an investment will turn around the poor profitability of the company and generate positive returns in the future.
Debt management:
Debt/equity ratio has decreased from 13.94 in FY09 to 12.14 in FY10 because total liabilities decreased by 6.17% and the total equity showed an increase of 7.77%. Long-term debt to equity decreased to 0.05 in FY10. Such a low long-term to equity figure represents a fact that most of the financing of assets in done through short-term debt. The debt/asset ratio also declined from 93.31% in FY09 to 92.39% in FY10. The major increase in the short-term debt of the company in FY09 also decreased by 22.7% in FY10. Because of this decrease, the finance costs for the year also decreased by more than 55%. In FY10, debt/equity ratio decreased to 12.14 due to the fall in short-term borrowings as well as the increase in equity due the surplus on revaluation of property plant and equipment.
The company also successfully repaid the US $50 million short-term loan to ECO Trade & Development Bank (ETDB) of Turkey. However, a new US $35 million short-term loan has been arranged from ETDB for the purpose of financing Company's crude oil imports from Iran. Long-term debt to equity decline to 0.05 (FY09: 0.20) as the company did away with its balance of retirement benefit obligations. Debt to assets stood at 92.4% at the year-end (FY09: 93%). This change is not that significant because the decrease is very small. Due to negative earnings recorded in this year, times earned ratio couldn't be calculated. This ratio is significant to the creditors of the company.
Market value:
The market outlook of PRL took a drastic turnaround since the company registered a massive blow to its profitability on the back on fluctuating international oil prices, reduction of deemed duty, and depletion of Pak rupee against the USD. Security and political concerns reduced the investment numbers causing a sharp decline in the stock market during many periods of the year. The average price of the share was recorded as Rs 88.47 against Rs 90 in FY09. The earnings per share rose to negative Rs 85.1 from negative Rs 130.62 in FY09. Owing to the losses in the FY10, no dividends were announced for the shareholders.
Future outlook
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CRUDE Million Tons per Annum 2007 2010 2015
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Processing Capacity 12.61 22.45 * 33.63 **
Indigenous Supply of crude 3.86 4.8 4.8
Import Requirement 8.75 17.65 28.83
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* = Assumes planned refineries (Indus & Bosicor are operational
** = Assumes planned Cosstal Refinery is operational
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The future energy consumption poses a challenge for the country, mainly because of the projected increase reliance on foreign sources of supplies for crude. Such dependence means that the profitability of the refinery is closely inter-linked with the international petroleum products and crude oil prices which are subject to many fluctuations. The graph shows fluctuation in the average monthly price of crude oil in 2009 where as the table on the right shows the average monthly prices of crude oil in 2010. According to the table, the average price in 2010 was $71.21, an increase from 2009's average of $53.56.
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January $69.85 July $67.91
February $68.04 August $68.34
March $72.90 September $67.18
April $76.31 October $73.63
May $66.25 November $76.00
June $67.12 December $81.01
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2010 Average $71.21
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The revision of the Pricing Formula by the Government is not in the interest of the Refinery. The reduction in the deemed duty has been a blow to the profitability, the situation being further augmented by the depreciation of Pak rupee against the US dollar.
Declining capacity utilisation is expected on the back of the following reasons:
iv) Subdued POL product spreads
v) Reduction of deemed duty by 250bps to 7.5% on HSD and
vi) Inflated working capital financing on account of circular debt
The refinery has undertaken an upgrade project, primarily to meet the government's regulations for introducing Euro II fuel specifications for the year 2012. The effort will specifically address reducing sulfur content in High Speed Diesel (HSD) from 10,000 ppm to 500 ppm. Subsequently, project objective is to improve refinery profitability by partially converting High Sulfur Fuel Oil (HSFO) into HSD and therefore shifting slate to a more profitable product mix, ensuring sustainable profits for the company.
Several options for future funding of the project are being explored by the company to execute the project. However, depleting reserves may hamper the pace of work in progress on the upgradation project and Government support is imperative for timely completion of the project.
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].
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