Energy sector: BOSICOR PAKISTAN LIMITED - Analysis of Financial Statements - Financial Year 2004 1H Financial Year 2011
Bosicor Pakistan was incorporated on 9th January 1995 as a public limited company. It is listed on all the three stock exchanges of the country. At the time of inception, the company aimed to operate in the chemical, petroleum/petro-chemical and energy sectors.
Bosicor Pakistan started commercial operations in 2004. It completed its first turnaround on 15th August 2005 after starting trial operation in November 2003. The trial operations started with a capacity of 8,000 barrels per day. The capacity was subsequently increased to 18,000 barrels per day. BPL operates a refining facility at Mouza Kund Plant (MKP1), at Mouza Kund in Balochistan.
Bosicor Corporation Limited (BCL) and Abraaj Capital Limited (ACL), (a premier investment firm with specialized experience in private equity investments in the Middle East, North Africa and South Asia (MENASA) region and having executed some of the most compelling and successful transactions in the history of leveraged acquisitions across the region), have joined hands, in 2008, for further expanding Bosicor ventures in Refining and Petrochemicals by putting up concurrently our Country's largest refinery and petrochemicals complex. These projects are being developed in Bosicor Chemicals Pakistan Limited (BCPL), (an under construction Aromatic Complex of 17,100 bpd), and Bosicor Oil Pakistan Limited (BOPL), (an under construction refinery of 115,000 bpd), from the ownership platform of Byco Industries Inc (BII), a joint venture company owned 60% by BCL and 40% by ACL.
This venture has resulted in availability of additional foreign investment of US$ 135 million in Pakistan. Through the new venture, Abraaj will bring international reputation and foreign currency equity funds for timely completion of the ongoing projects. While Bosicor in addition to its share in equity will also contribute its expertise in oil refining, petrochemicals/marketing sector, making a combination to improving the pace of growth plan and polishing performance skills.
Industry overview (1H11)
The first half of fiscal year 2011 showed mixed results for both the refinery industry and the company. The international crude oil prices (WTI Benchmark) saw an upward trend during this period, going from US$ 71.86 in July 2010 to US$ 91.44 in December 2011, which was the highest crude oil price during this whole period. This upward was mainly due to the world economies bouncing back from the 2007 financial crisis. This period saw an increased demand from countries like USA, India and China. Also, the demand for petroleum and products saw a rise in the second half of 2010 due to the onset of heavy winter in parts of Europe and USA. Crude oil prices were seen rising in the Middle East due to the bullish activities there as well as due to the ongoing political tension between USA and Iran. On average, crude oil prices rose by over 20% during this period.
During this period, the Pak rupee to US dollar exchange rate saw a smooth trend. Exchange rate went up from Rs 85.59 one dollar in July to Rs 85.72 one dollar in December, showing an increase of .1%. This proved to be a huge advantage for the refinery sector in terms of exchange costs. As a result of the higher prices, within Pakistan the POL sales declined about two percent from July to December 2010 as compared to the corresponding period last year. Gross Refinery Margins (GRMs) saw a decline of about 2% during this period.
Increasing petroleum prices and good benefit of deemed duty on HSD helped stop the GRMs following any further. However December 2011 GRMs were 14% higher than the trailing 12-month average of 2010. Also the average GRMs during the first half of fiscal year 2011 were 8% higher than the same period last year. Once again, this gain was due to increase in local prices as well as due to the cutback on duties on oil products. However, the recent crisis in the North African region has pushed crude oil price beyond dollar 120 per barrel. This might result in negative GRMs for the whole industry. Ogra plans to increase local prices to reflect the change in international prices.
The Company has started getting limited quantity of local crude and has successfully blended it with imported crude oil while retaining product quality and yields. This has not only reduced the refinery's exposure on currency fluctuations but also reduced the demand for foreign exchange. The Company is seeking to increase its allocation of local crude oil and condensate. The company processed 1.82 million barrels of crude oil during this period compared to the 3.16 million barrels during the same period last year. This showed a 42% decline in activity. The daily activity stood at 14,124 barrels per day compared to 17,557 barrels during the same period last year. It operated for 134 streaming days during this period. The company's market share in terms of marketing and retailing of petroleum stood at 2.5% in December 2010.
Profitability
In terms of profitability, the company has performed well despite the tight Gross Refinery Margins (GRMs) as well as further deterioration in the pricing formula for the refineries. The company's sales revenue stood at Rs 20.3 billion compared to Rs 24.82 billion during the same period last year. This showed a decrease of about 18.3%. Second quarter sales revenue fell down by about 13.64% to Rs 11.12 billion. This fall was witnessed due to the decrease in demand owing to the increase in local prices as well as tightening GRMs. The company's cost of sales for the first half of FY11 were Rs 17.62 billion compared to Rs 21 billion last year. This shows a decline of 18.3%, similar to the gross sales revenue. This gives an indication that the company has been unable to improve it efficiency in terms of cutting on production costs. During the second quarter, the company exported 185,297 barrels of naphtha, which contributed an amount of Rs 14.8 million to its sales.
The company had a gross profit of Rs 283 million compared to a gross loss of Rs 216 million last year. Gross profit for the second quarter stood at Rs 271 million. This was due to the 30% decline in Sales tax and discounts. The expenses showed a completely different scenario compared to the revenue and profit. Administrative expenses went up by about 50% to Rs 402 million while the selling expenses increased by about 41% to Rs 323 million. The reason behind the increase in expenses was due to the company increasing its retail outlets all over the country. The number of retail outlets stood at 171 at the end of 2010. This was indeed a huge milestone on the retail and marketing side in just 4 years. Exchange losses fell down by 96% from Rs 294 million to Rs 11 million. This was due to the stable US dollar to Pak rupee exchange rate trend. The company also witnessed high financial charges due to the rising issue of circular debt in the country.
The company's loss after tax in the first half of FY11 stood at Rs 915 million compared to the Rs 1.955 billion last year. This shows a decline of about 53% in the loss after taxation. The second quarter contributed about Rs 234 million loss to the overall figure. The company's had a basic EPS of about Rs -2.34 compared to the Rs -5.00 last year, showing a decline of about 53%. The second quarter of FY11 had an EPS of Rs 0.60 compared to -2.14 last year.
Liquidity
The company's liquidity position deteriorated due to the falling sales and the worsening circular debt issue. The current ratio stood at 0.52. This was similar to the last year's ratio. On the current assets side, trade deposits and mark-up accrued went up by 122% and 477% respectively. However on the current liability side, this was reflect by the 100% decline in short-term borrowing and 14.6% rise in trade and other payables. This move from short-term to long-term borrowing has very much helped the company's liquidity position as it is saved from constant refinancing. As we can see, the loans from sponsors and associates increased by a nearly similar amount.
The quick ratio declined to 0.30 from 0.33 last year. This was due to the 30.5% increase in stock in trade. This represented nearly 41.5% of the total current assets.
Asset management
Day Sales Outstanding came went up to 138 days compared to 125 days in the same period last year. This was due to the 16% decline in sales. Inventory turnover also went up going from 90 days to 131 days. Thus the operating cycle came to 269 days compared to 215 days in the previous. These figures show some really poor performance in terms of asset management. The company has been keeping very high stockpiles compared to the rest of the industry. Such a high inventory could push up storage costs for the company.
Sales to equity ratio went up to from -2.00 from -2.60 in the first half of FY10. This was due to the 16% decline in sales. The total asset turnover fell down to 0.52 in the first half of FY11, compared to 0.65 during the same period last year. This was way below the industry's average of 0.92.
Debt management
The debt to equity ratio increased to -4.41 compared to -4.52 in FY10. This was due to the fact that the negative equity went up by 10.1% while the total liabilities went up by just 8%. Long-term debt to equity ratio went up to -1.07 compared to -1.24 in FY10. This was due to the 3.7% decline in long term assets. Debt to asset ratio went up from 1.13 in FY10 to 1.15 in the first half of FY11. This shows that the company has been piling up debt more than it has earned from it assets. This shows a very dangerous solvency position for the company. The management should immediately try to increase its assets and sell off assets, which are not in use. Times to interest ratio fell down to 0.28 compared to 0.54 during the FY10. This can prove to be harmful for the company's credit rating in the market. The company has to ensure its payments to lenders if it wants to improve its financial position through borrowing in the future.
The company has started making deals with local users which ensures it has a firm demand in the coming future. However the company has performed very poorly on the refining side. Its capacity fell down with its streaming days in this half also it has not been able to the reach the capacity level which it had promised the shareholders 2 years ago. Also the circular debt is a huge problem for the company and its liquidity.
The company has launched its own line of branded automotive lubricants Intelo and Cnergy for diesel and petroleum engines. The company is trying to find foreign markets for an export base in the coming future. The company has started refining niche market products such as Jet Fuels and Winterized and Ultra-Winterized diesel. The target audiences in these niche markets can give it a solid customer base in the coming future.
Compared to the FY09, FY10 was a huge relief for the refinery sector in terms of low volatility in the international crude prices and the USD/PKR exchange rate. This led to mixed results in the refinery sector. With the relative stability of the average processing cost of a barrel ($2.5 - $3), the Gross Refinery Margins for the sector are dependent on the international and local oil prices, which stayed below US$ 100 in FY10. Challenges in respect of depressed refining margins, unfavorable refinery product pricing mechanism, circular debt issues and liquidity crunch continued to haunt the sector. The decline in margins was also due to the poor spread on diesel and furnace oil which account for 70% in local refinery production. To avoid losses, the industry was cutting on it back on the production of low margin products. This meant lower production and lower capacity utilization which stands at 78% in FY10.
The Company has started getting limited quantity of local crude and has successfully blended it with imported crude oil while retaining product quality and yields. This has not only reduced the Refinery's exposure on currency fluctuations but also reduced the demand for foreign exchange. The Company is seeking to increase its allocation of local crude oil and condensate. Good Maintenance and Operations ensured 100% availability of the 30,000 Barrels per Day (BPD) crude oil processing capacity at the Oil Refining Business (ORB). Other improvements included lower fuel and water usage, increased LPG recovery and further enhancement in the recovery of HSD, while maintaining operations costs below budget. While the immediate outlook of the refining sector, both internationally and locally is not conducive to further investments, the Company is completing studies to increase the processing capacity above 35,000 BPD, to implement as the trading scenario changes for the better. During the year under review, your Company acquired 100% shares of a private limited company, Universal Terminal Limited (UTL). UTL was principally engaged in the provision of bulk liquid storage services at within Karachi Port Trust.
Performance overview
The year 2008-2009 has witnessed a consistent trend when it comes to crude oil prices. The price of Iranian Light Crude Oil-34 per barrel varied between US$ 62.88 to US$ 83.41 compared to US$ 39.81 to US$ 134.39 same time last year. Also the Arabian Light Crude Oil per barrel varied between US$ 59.69 to US$ 84.12 compared to US$ 39.51 to US$ 134.09 during the same time last year. The volatility was reduced as the after effects of the economic crisis started to wear off and economies started to bounce back. Also political tension between the US and Iran eased a little.
Also there was a huge relief for the local refinery sector as the Pak rupee to the US dollar exchange rate took a consistent trend this year. The exchange rate varied between Rs 81.12 to Rs 85.06 for each US dollar. The gradually falling rupee value was still a threat to the long-term profitability of the sector.
To avoid the repeat of last year's transportation mistakes, the company has branched out its retail locations and storage facilities to many far flung areas such as has been strengthened with availability of storages at Keamari, Machike, Ghatti, Chaklala, Shikarpur, Tarujabba and Mehmoodkot. Moreover with entry into the White Oil Pipeline the Company is supplying the refinery's product across every length and breadth of the country with more efficiency.
The crude throughput after revamp fell down in FY10 compared to that in FY09. The crude oil processed during the financial year came to 5.440 million barrels as compared to 7.037 million barrels processed during last financial year. The decline in activity was due to factors such as negative gross refinery margins (GRM) on some oil products due to falling prices. The company closed the activity of such loss making products which resulted in low overall processing activity.
Due to unprecedented losses incurred during the year, the Company faced severe constraints in meeting its financial obligations on due dates and reasonably managed over-dues through tight cash flow monitoring. At this crucial phase, the Company's Sponsoring Shareholders again showed commitment and endorsed the financial plan prepared by the Management of the Company and arranged financial support amounting to Rs 4.2 billion. This enabled the Company to partially meet the required funding gap from the losses. In addition, the Company has successfully executed long term financing arrangement with a consortium of nine leading banks for Syndicated Term Finance Facility of Rs 5.573 billion to streamline the remaining gap.
Production and consumption
Bosicor Pakistan's activities in Pakistan are primarily based on the production and sale of petroleum products The range of products include: light straight run naphtha, liquid petroleum gas (LPG), heavy naphtha, kerosene, motor spirits, high octane blending component, aviation fuels 1 & 4, high speed diesel and furnace oil. The company has a long-term sale and purchase agreement with Pakistan State Oil for marketing of its products.
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 is normally used in terms of furnace oil which is being used for thermal power generation projects.
Transport and agricultural sectors are the two major users of gasoline. In the recent years a high amount of subsidy was being provided by the government over gasoline due to which its consumption has increased. But in the 2007, increase in oil prices in international market effected Pakistan economy due which government is no more in a position to provide same amount of relaxation on gasoline as before some years due to which government is gradually reducing the subsidy levels as result Gasoline prices are increasing locally also and effecting the consumption. Secondly government is promoting the compressed natural gas (CNG) sector in Pakistan and both encouraging and forcing the transport sector to convert on CNG. 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 rise of gasoline process.
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 and also country has now very limited natural gas resources the consumption of furnace oil will also increase in the coming years.
Capacity
In FY10, the company undertook a turnaround operation for it refinery. A turnaround in refining is required to make the refinery more efficient, more reliable, durable, and safer. In this recently concluded turnaround, 2nd phase of the debottlenecking study has been implemented and throughput of the refinery is increased from 30,000 barrels per day to 35,000 barrels per day. Detailed Engineering study is at hand to further debottleneck the constraints in the existing refinery and if economically justifiable, the throughput capacity will be further enhanced to 40,000 barrels per day.
Currently the company has a full capacity of processing 35,000 barrels daily, however it has an average throughput of just 16,233 barrels per day in FY10 compared to the average throughput of 22894 barrels per day in FY09. This means that the company is only utilized 46% of its potential capacity in FY10 compared to the 76% in FY09. This was way below the industrial capacity utilization of 78%. During the year actual production was for 335 stream days as against 308 stream days last year.
The medium term objectives of the company are aimed at infrastructure development, which will promote the company towards self-reliance in the supply chain. The company has made investment in a single point mooring to improve freight economy. In the longer term, ie 2010-2011, the company will add an isomerization plant for converting and upgrading light naphtha into environmentally friendly motor gasoline. The gasoline obtained from isomerization can be exported to neighbouring countries at higher rates than naphtha or consumed in the local market with environmental advantages. This will add to the profitability of the company.
Profitability
The company had a mixed profitability results. In FY10, the company achieved gross sales of Rs 48.5 billion compared to the gross sales of Rs 54.7 billion in FY09. Also it had net sales of Rs 41.1 billion compared to Rs 44.6 billion during the same period last year, with a decline of about 7.9% compared to the industrial sales growth of 1.63%. Sales went up in the first half of the FY10 due to the cross changes in prices of gasoline (down 1%) and CNG (up 6%).
However, overall the sales fell down due to decline in oil prices. During the year the company achieved a gross profit of Rs 667.3 million compared to the gross loss of Rs 3.91 billion last year with an increase of about 117% compared to the 22.5% growth in gross profit of the overall industry. Operating loss for FY10 was Rs 565 million compared to the operating loss of Rs 4.504 billion during the same period last year. Net loss after taxation was Rs 1.61 billion compared to Rs 10.33 billion last year. This shows an increase of 84.3% compared to the industrial net income growth of 36.4%.
The net loss decreased mainly due to the 84% decrease in exchange difference losses, which amounted to Rs 690 million compared to Rs 4.378 billion last year. The exchange difference amounted to Rs 690 million on account of consistent trend of USD/PKR exchange rate. At the end of the year the company had loss per share of Rs 4.12 compared to the loss per share in the previous year of RS 26.35. This was way better than the industry average loss per share of Rs 11.76. The company also had a PER of 2.77x compared to the industrial average of 21x. This shows low expectations from the investors due to the poor profitability performance of the company in the last few years.
The company had local sales worth Rs 39.73 billion in FY10 compared to the local sales of Rs 49.25 billion in FY09. This local fall in sales was mostly due to CNG overtaking the automobile and transport sector in the second half of FY10. Although CNG rose in the first half, customers still found them as a cost-effective alternative to petrol. The company also had exports of Rs 8.776 billion in FY10 compared to the exports of Rs 5.517 in FY09, showing a growth of 59%.
In FY10, the company had a gross profit margin of 1.62% compared to the gross loss of 8.76% in the previous year. This was a little higher than the industry gross profit margin of 1.42%. The company had a net loss margin of 3.93% compared to 23.16% in the previous year. This was below the industrial average net profit margin of 1.16%. The company had a return on common equity of -38.41% compared to the industry average of 36.8%. These profitability figures show that the results of the company were at par with those in the rest of the industry.
The company's petroleum marketing business has been growing very rapidly and reached volumes of 417,082 MT in the current financial year vs. 135,215 MT in the previous year. The year on year growth has been a very impressive 208%. Market share in liquid fuels now stands at 2.1% vs. 0.8% in the previous year. In the financial year commencing on July 2010, our marketing business has successfully climbed to no. 5th position in terms of market share. During the financial year ended June 30, 2010; the marketing business earned a gross turnover of over Rs 24 billion with a gross profit of Rs 944 million. This business is now reported as an independent business segment within our notes to the financial statements.
Management has taken an aggressive step against costs by using waste products for other uses. The company has completed building the isomerization plant, which will convert the loss making naphtha into an environment friendly motor gasoline.
Asset management
The company's asset management performance was way below the industry averages. Inventory Turnover (Days) went up from 36 days in FY09 to 43 days in FY10. This was due to the fall in sales in the current fiscal year. It was above the industry average of 31.8 days. However the company did show improvement in its Day Sales Outstanding (Days) numbers, which went down to 60 days in FY10 compared to 73 days in FY09. However it was still way above the industrial average of 45.5 days. Summing up these two, one gets the operating cycle of the company, which is the average number of days between buying inventory and getting its payment after sales. The company had an operating cycle of 103 days compared to 110 days in the previous. The industry had an average operating cycle of 87 days. These numbers indicate that the company was less efficient in recovering cash from its customers. This can be accounted to the circular debt crisis, which showed no signs of declining in FY10.
The company's fixed asset turnover and total asset turnover fell down in FY10 on account of falling sales. Fixed asset turnover fell down by 3% to 2.93, while the total asset turnover fell down 9.4% to 1.28. These numbers show poor utilization of the assets in production activity. Also the company's capacity utilization was at 46%, showing inefficient use of production assets.
Debt management
The company's debt management performance has been somewhat poor compared to the overall industry results. Debt to asset ratio was 113% compared to 108.2% last year, which indicates an increase of about 4.5%. This was mostly due to the huge rises in the current liabilities with the trade and other payables going up by 8.7%, accrued markup by went up by 32% and the current portion of long term liabilities also went up by 37%. However on the positive note, the company had started to pay back some of its unsecured long-term debt, which went down by 36.22%. The debt to equity ratio fell down to 4.51 from 5.12 in the last year. This was due to the rise in the accumulated losses of 13.14%.
The company's return on asset ratio fell down by 84.6% to -5.03%, compared to -32.68% last year. This fall was due to the drastic fall in net losses, which decreased by 84.3% this year and the rise in total assets of 1.68%. The return on common equity also fell down by about 90.37% to -38.41% compared to 398.9% an year earlier. Company's ROCE was at par with the industrial average of -36.8%.
Liquidity
The company did not show any commendable performance when it comes to liquidity. Its current ratio fell down by 29% to 0.52 compared to last year's 0.72. This was mostly due to the changes in current assets, which fell by 18.8% and the current liabilities, which went up by 13.85% due to the rise in trade and other payables. Company's current ratio was below the industry average of 0.70, showing poor management performance of cash and other liquid assets compared to its peers. Quick ratio also showed similar performance, going down by 38% to 0.33 compared to the industry averages of 0.68. These numbers show that the company had a very poor liquidity performance in FY10 and it result in bankruptcy for the company. To solve this issue, the company should let go of some non-performing assets as well as borrow long term finances instead of relying on the short term ones which can prove to be costly in terms of high interest costs and early maturity refinancing.
Future outlook
Future outlook for the company is good on account of the excellent performance by the Petroleum Marketing Business, which has been successful in setting up 160 retail outlets. Its staggering growth rate of 208% and 390% in retail sales, makes it a promising business. The business has built on its customer base by acquiring major customers in the bunkering and marine business, industrial consumers, captive power projects, cement industry and consumer good companies. Also the company has carved a niche in the oil market by providing specialized fuels such as Ultra Winterized Diesel and RMG 380.
Starting from next year, the company is expected to provide a one of its kind LPG auto gas facility at its retail stations, apart from marketing it through cylinders and in bulk, providing greener energy options to our customers and creating a cleaner environment in the country. The company also plans on launching an auto lubricant product, which is expected to be exported to UAE in the coming years. The company will soon be the biggest oil refinery in the country. The company is expected to increase its potential processing capacity to 40,000 barrels next year. Also the company's management has been aggressive cost-cutting measures which have helped in lowering its wastage costs and will further decrease such costs in the future as well.
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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 planed refineries (Indus & Bosicor) are operational
** = Assumes planed Coastal 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 interlinked with the international petroleum products and crude oil prices which is subject to much fluctuations. Petroleum prices are expected to rise in the coming few years due to bounce back from the economic crisis. Also the auto sector and the thermal energy production have shown significant growth in last 1 year and this growth is expected to carry on in the coming future.
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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