Pakistan Refinery Limited

Pakistan Refinery Limited (PSX: PRL) was incorporated in Pakistan as a public limited company in 1960. It is a hydro skimming refinery designed to process imported and local crude oil, located on the coastal belt of Karachi, Pakistan. The refinery’s current capacity stands approximately at 50,000 barrels per day of crude oil into petroleum products, such as furnace oil, high speed diesel, kerosene oil, jet fuel and motor gasoline, among others. The refinery is operating at two locations; main processing facility is located at Korangi Creek with supporting crude berthing and storage facility at Keamari.

Shareholding at PRL

Shares of PRL are largely held by associated companies and related parties, and these include oil marketing companies. Pakistan State Oil (PSO) is the parent company of PRL and hold majority of the 63.5 percent held by the associated companies. General public that includes foreign and local shareholders hold over 24 percent of PRL’s share; the breakdown of the two is not given in the published accounts.

PRL Past Performance

Refineries have had a roller coaster ride in Pakistan. Last few years have been particularly difficult for the refining sector as it saw its earnings and margins dip. In FY14, earnings and, margins slipped when the refining margins for hydro-skimming refineries remained low due to sharp increase in crude oil prices and weak demand for products worldwide. And as margins dwindled due to high cost and working capital requirements, the local refining industry including PRL’s profits took a toll.

Though FY15 brought improvement in profit margins for PRL, it still wasn’t a good year for the refinery segment. Issues highlighted above continued to linger, which along with steep decline in crude oil and product prices resulted in heavy inventory losses. PRL saw a 36 percent year-on-year decrease in its topline along with increased finance cost that resulted in after-tax losses. This aggravated the negative equity situation of the firm.

This situation of negative equity had been an issue for PRL since 2010. In FY15 the board of directors announced a right issue at par to meet the capex and financial requirements of its projects. The highlight of FY15 was PRL finally commissioning its much awaited isomerization plant to convert low-value naphtha into gasoline (petrol), a premium product, which doubled its petrol production.

In FY16 - despite a fall in the topline due to lower oil prices - earnings became positive due to healthy gross refinery margins (GRMs) and the doubling of production of motor gasoline given the full year operation of the new isomerization unit. The right-issue in FY15 and the firm’s commissioning Isomerization plant played a key role in reducing the firm’s reliance on bank borrowing and increasing operational liquidity.

In FY17, PRL saw its profits improve by more than three times, which also brought some reduction to the negative equity. However, during the year, the refinery faced the deactivation of the catalyst of the isomerization plant, which reduced the firm’s petrol production.

The recovery that was seen in earnings in the last couple of years took a dip again in FY18 as PRL’s profit after tax halved despite a healthy growth of 32 percent in the company’s revenues. However, the company overcame the negative equity situation that it had been facing for long. Refining margins remained depressed during the year, which put pressure on gross profitability. Also, the catalyst of isomerization plant that was impaired in FY17 could not be operated at full capacity from July to November 2017, which resulted in squeeze in petrol production. Higher exchange losses due to currency depreciation and pressure on refinery operation due to decline in furnace oil demand amid its curtailment strategy by the government, and hence the buildup of stock pile also affected the refinery’s performance in FY18.

In FY19, the refinery posted staggering decline in earnings. The adverse factors that impacted the refining sector were the decline in the petrol prices, depressed refining margins and steep devaluation of currency locally. As a result the company incurred a loss of Rs5.82 billion in FY19 as compared to profit of Rs504 million in FY18. However, during the year, the Board of Directors of PRL approved the Refinery Upgrade Project through Refinery Upgrade Project to meet the regulatory requirement of EURO II compliant HSD. During FY19, Pakistan State Oil Company Limited (PSO) acquired 84 million shares from Shell Petroleum Company Limited, UK, which increased its shareholding in the company to 52.68 percent, making PSO the parent company of PRL.

FY20 was marked by the global COIVD pandemic, which affected the demand for petroleum products in the country and amid crashing prices resulted in huge inventory losses for the refineries and OMCs. PRL took measures to control losses during the lockdown and restrictions in the early part of the global pandemic like reduction in throughput, sustainable production of higher grade fuel etc. The company acquired additional Class B shares from Shell Petroleum Company Limited, UK (Shell) and Chevron Global Energy Inc. (Chevron), which increased the shareholding of the parent company (PSO). PRL incurred additional loss from the downward adjustment in HSD prices as the company could not install Diesel Hydrodesulphurisation Unit (DHDS) to produce EURO II compliant HSD in time.

PRL in FY21

FY21 was better for PRL. PRL’s earnings witnessed a recovery primarily due to the company strategy during the pandemic. According to the company, this entailed changing the crude recipe (composition of crude procurement from local and international sources) and operational strategy that got additional revenues as well as lifted existing sales. PRL was able to produce premium products like low sulphur fuel oil, HSD and petrol that helped it save on differential price adjustment as well as get additional revenue from premium products.

Growth in revenues for PRL in FY21 emanated from the last quarter’s topline, where revenues climbed by 80 percent year-on-years, taking overall topline growth to 2 percent for FY21. As for the improvement in profitability, it was due to better product mix that tilted towards diesel and petrol; also, the exchange gains and change in pricing policy to fortnightly from monthly helped the PRL turn losses into profits. Exchange gains stemmed from the change in pricing mechanism for petroleum products which enables the refineries to recover some of the exchange losses suffered on crude oil imports through pricing of petrol and diesel. Moderate growth in expenses and increase in other income further supported the operating margins, while decline in finance cost due to lower interest rates during the period lifted net margins in FY21.

In 1HFY22 and Beyond

The refinery sector has been under radar for not upgrading from its archaic technology, which resulted in the upliftment issue of furnace oil by the oil marketing companies amid falling furnace oil demand locally as well as globally. And the same factor has also affected the refinery sector’s profitability. PRL’s earning in 1HFY22 was seen going in the negative territory due to higher realized crude oil prices.

While the revenues were up, PRL’s volumetric sales were affected by the shutdown of refinery operations temporarily due to the falling demand for furnace oil and thus weak upliftment by the oil marketing sector. As per the company, the decline in earnings also came from exchange losses to the tune of Rs1.4 billion. Moderate growth in expenses and finance cost also impacted the operating margins.

However, the silver lining for PRL is that it is the only refinery that is coming up with expansion and up gradation plans. The company announcement highlights that in December 2021, the board of directors made public announcement for PRL’s expansion to undertake Refinery Expansion and Upgrade Project to produce EuroV compliant petrol and diesel, and expand the crude processing capacity to 100,000 barrels per day, and upgrade from hydro skimming to deep conversion refinery. This will help PRL ease its furnace oil upliftment challenge, for which recently the refinery has decided to find exports markets for its stored furnace oil at Port Qasim.