Pakistan Refinery Limited

Pakistan Refinery Limited (PSX: PRL) is a hydro skimming refinery designed to process imported and local crude oil, located on the coastal belt of Karachi, Pakistan. It was incorporated in Pakistan as a public limited company in 1960. 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. Local general public hold around 28 percent of PRL’s share; the breakdown of the patter of shareholding is given in the illustration.

PRL historical performance

Refineries have had a tough time in Pakistan primarily because of the age-old technology but also the squeeze in refining margins and the credit crunch in the energy sector in the country. In FY15, the refinery segment continued to grapple with these issues sharp decline in crude oil and product prices. This resulted in heavy inventory losses; and 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. However, in FY15 the board of directors announced a right issue to meet the capex and financial requirements of its projects; and PRL commissioned the isomerization plant to convert low-value naphtha into gasoline (petrol), which doubled its petrol production.

In FY16, PRL’s earnings turned 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. This was despite the fact that despite that there was a fall in the topline due to lower oil prices. The right-issue in FY15 and the firm’s commissioning Isomeriza-tion 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.

FY18 was again a slow year for PRL as its profit after tax halved despite a healthy growth of 32 percent in the company’s revenues. However, the company overcame the negative equity situation. Refining margins remained depressed during the year, which put pressure on gross profitability. Higher exchange losses due to currency depreciation and pressure on refinery operation due to decline in furnace oil demand also affected the refinery’s performance in FY18. Also, the catalyst of isomerization plant could not be operated at full capacity, which resulted in squeeze in petrol production.

In FY19, the refinery posted shocking decline in earnings again due to 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 company approved the Refinery Upgrade Project to meet the regulatory requirement of EURO II compliant HSD. In the same year. 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 a year of pandemic where demand for petroleum products was along with crashing oil prices. This meant heavy inventory losses. And PRL’s earnings were adversely affected again. During the year, PRL 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.

FY21 was a recovery year. Growth in revenues for PRL in FY21 emanated from the FY21 last quarter’s topline, where revenues climbed by 80 percent year-on-year, 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. 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.

PRL witnessed a record profit owing to high GRMs, better inventory management, achieving optimal product mix and consequent improvement in yields in FY22. During the period of rising GRMs, PRL increased throughput and consequently the sale of MS and HSD. The production of HSD was the highest ever recorded in the history of the refinery. PRL’s revenue growth was double in FY22 on a year-on-year basis, on the back of higher volumes and prices. Growth in gross profit was over 6 times. The company’s bottomline grew by 35 percent year-on-year. FY22 was a memorable year for PRL as it recorded not only highest revenues for the company, but also highest ever gross profits and net profit for the company.

FY23 was a difficult year for the economy of Pakistan. The downstream oil and gas sector’s earnings were significantly impacted from the weak economy, rising inflation, fuelling petroleum prices, liquidity crunch, nose-diving currency and falling demand. Pakistan Refinery Limited’s expansion project also hit a roadblock early on during the year due to a shortage of dollars and delayed payments as a result. PRL has been working on Refinery Expansion and Upgrade Project to produce Euro-compliant petrol and diesel, and expand the crude processing capacity by double and upgrade from hydro skimming to deep conversion refinery. The refinery posted a significant decline in earnings for the year due to the abovementioned factors. Revenue and cost of crude were significantly high throughout the year due to increased international oil prices coupled with devaluation of Pak Rupee against USD. In addition to the forex devaluation and non-upliftment of furnace oil, the Company persistently faced the LC opening issues along with high cost of LC confirmation charges and steep surge in the interest rates, which dented the profitability.

PRL in 1QFY24 and beyond

Things changed for better in 1QFY24 as PRL announced a recovery in earnings with a jump from Rs1 billion in 1QFY23 to Rs4.5 billion net profit in 1QFY24. The growth in the company’s earnings emanated from the top where PRL posted a revenue growth of 23 percent year-on-year primarily due to higher prices of petroleum products. Gross profit grew by more than 6 times during the period with gross margins jumping from 2.2 percent in 1QFY23 to 9.6 percent in 1QFY24.

PRL’s bottomline was higher by 4 times despite the rise other expenses and finance cost. the company. The company’s net margins were up by 340 basis points. PRL has had a good start to FY24. The company has made key developments on the expansion and upgradation front. it has inked an agreement with the United Energy Group of China for refinery expansion and upgrade project where China will invest $1.5 billion in the company’s capacity. The upgrade to capacity will make PRL one of the largest refineries in the country in terms of refining capacities. The company has also struck a long-term supply contract for crude oil with Russia, with the first cargo expected to arrive this year only.