Cnergyico Pakistan Limited (PSX: CNERGY) was incorporated in Pakistan as a public limited company in 1995. The company is engaged in oil refinery business and petroleum marketing business with the latter being launched in 2007. CNERGY was previously known as Byco Petroleum Pakistan Limited.
Pattern of Shareholding
As of June 30, 2023, CNERGY has a total of 5493.448 million shares outstanding which are held by 28,541 shareholders. Associated companies, undertakings and related parties have the majority stake of 73.44 percent in the company followed by local general public holding 20.67 percent shares. Around 1.2 percent of CNERGY’s shares are held by Modarabas & Mutual funds. The remaining ownership is distributed among other categories of shareholders.
Financial Performance (2019-23)
CNERGY’s topline slid twice during the period under consideration i.e. in 2020 and 2021. Conversely, its bottomline only posted net profit in 2021 and 2022. The company’s gross and operating margins which drastically fell in 2019 showed upturn in the subsequent years to reach their optimum level in 2022. However, CNERGY’s margins fell in the negative territory in 2023 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.
In 2019, CNERGY’s topline grew by 18.97 percent year-on-year which was merely the result of upward revision in oil prices as well as the effect of currency depreciation. During the year, the company’s production slid by 8.7 percent year-on-year to clock in at 18.39 million barrels. This resulted in 33 percent capacity utilization in 2019 as against 36 percent attained by CNERGY in 2018. In 2019, the company faced multiple challenges. Firstly, the demand of furnace oil (FO) drastically declined as FO was increasingly being replaced by LNG and coal for power generation. Secondly, there were abrupt changes in the international oil prices in 2019 with motor gasoline trading far below crude oil which further squeezed the industry’s margins. Pak Rupee depreciation added to ado. This resulted in 78.6 percent year-on-year slump in CNERGY’s gross profit with GP margin falling down from 5.51 percent in 2018 to 0.99 percent in 2019. Administrative expense surged by 9.17 percent year-on-year mainly on account of SAP maintenance charges, repair & maintenance, travelling & conveyance as well as utilities. Selling & distribution expense also escalated by 22.82 percent in 2019 due to higher payroll expense and depreciation charges. CNERGY was able to cut down its other expense by 44.45 percent year-on-year in 2019 primarily by keeping a check on its late payment surcharge & penalties and also by booking lesser provision for doubtful debts. Other income also shrank by 38.7 percent in 2019 due to high-base effect as the company wrote back some liabilities in the previous year. Operating profit registered a steep 89.91 percent decline in 2019 with OP margin falling down from 4.96 percent in 2018 to 0.42 percent in 2019. Finance cost inched up by 6.65 percent in 2019 on account of higher discount rate and an exorbitant increase in the company’s borrowings particularly finance against trust receipts for import and procurement of crude oil and petroleum products. Increased borrowing is also evident in the company’s gearing ratio (see the graph of gearing ratio & finance cost). CNERGY registered net loss of Rs.2237.75 million in 2019 as against net profit of Rs.5019.83 million in 2018. Loss per share stood at Rs.0.32 in 2019 versus EPS of Rs.0.94 in 2018.
In 2020, CNERGY’s topline slipped by 12.10 percent year-on-year. The company’s production further eroded by 5.2 percent year-on-year in 2020 to clock in at 17.43 million barrels with capacity utilization of 31 percent. While there was lower consumption of FO for power generation in Pakistan which had taken its toll on the refineries’ margins, in 2020, International Maritime organization (IMO) put restriction on the usage of FO as bunker fuel, resulting in the dive in prices from November 2019 to March 2020. As the prices started stabilizing, COVID-19 hit the world economies which took heavy toll on the demand of oil products resulting in a freefall on prices. For the first time in the history, oil prices were quoted in negative. Reduced prices of oil in the international market coupled with the company’s proactive strategy of rationalization of crude cargos and change in cargo pricing in anticipation of price movement resulted in 47.79 percent improved gross profit posted by CNERGY in 2020 with GP margin rising up to 1.67 percent. Administrative and selling expense posted an increase of 2.8 percent and 16.13 percent respectively in 2020 mainly on the back of higher payroll expense and depreciation. Higher provision for doubtful debt resulted in 65.83 percent inclination in other expense in 2020. However, it was offset by 34.78 percent rise in other income mainly as the company earned higher interest on balances due from customers as well as higher scrap sales made during the year. Operating profit rebounded by 83.89 percent in 2020 with OP margin mounting to 0.88 percent. Finance cost multiplied by 29.02 percent in 2020 due to higher discount rate for most part of the year as well as increased short-term borrowings. CNERGY’s net loss magnified by 44.37 percent in 2020 to clock in at Rs.2430.799 million with loss per share of Rs.0.46.
CNERGY’s net sales continued to decline in 2021 to the tune of 18.26 percent. The actual throughput for the year was 14.2 percent lesser than last year with capacity utilization standing at 26 percent. As business activity began to resume, the demand began to gain momentum. CNERGY had already setup fluid catalytic cracking unit (FCC) to convert FO into Motor Spirit (MS) and High Speed Diesel (HSD). This bore fruit and the demand of MS and HSD significantly improved in 2021. 179.94 percent higher gross profit recorded by the company in 2021 was the result of better inventory management. GP margin rose up to 5.7 percent in 2021 as GoP revised the pricing formula for MS and HSD and started computing their prices on bi-monthly basis. OMC’s margin on MS and HSD also increased from Rs.2.81 per liter to Rs.2.97 per liter. Administrative expense rose by 7.57 percent in 2021 as number of employees increased from 867 in 2020 to 911 in 2021 which increased the payroll expense. Conversely, distribution expense tumbled by 0.32 percent in 2021 which was the effect of lower rent, rates and taxes incurred. Higher provisioning for doubtful debts resulted in other expense escalating by 22 percent in 2021. Other income eroded by 8.38 percent in 2021 due to lower interest income on account of monetary easing. Operating profit mounted by 310.98 percent in 2021 with OP margin reaching 4.42 percent. Finance cost dropped by 38.99 percent in 2021 on account of low discount rate and lesser short-term borrowings obtained during the year. CNERGY was able to record net profit of Rs.3,595.84 million in 2021 with EPS of Rs.0.65. NP margin stood at 2.53 percent in 2021.
After two successive years of topline slide, CNERGY’s topline recorded 19.6 percent rebound in 2022. Production volume drastically fell by 37.8 percent in 2022 with capacity utilization clocking in at 16 percent. During the 2HFY22, the refining industry made immense profits due to Russia-Ukraine crisis which drove up the crack spreads to an unparalleled level. International oil prices surged beyond $100 per barrel. However, due to steep depreciation of Pak Rupee and current account woes, oil industry was facing difficulty in getting Letter of Credit which restricted its performance. Gross profit grew by 35.32 percent in 2022 with GP margin touching its optimum level of 6.45 percent. Administrative and selling expense surged by 10.15 percent and 2.86 percent respectively in 2022 which was mainly on account of higher payroll expense. This was despite the fact that CNERGY trimmed its workforce to 895 employees in 2022. No late payment surcharge and penalties incurred during the year and lesser allowance for doubtful debt allowed the company to cut back its other expense by 5.88 percent in 2022. Other income shrank by 18.75 percent in 2022 due to lower scrap sales and no reversal of WWF unlike last year. Operating profit revived by 41.32 percent in 2022 with OP margin reaching 5.23 percent. Finance cost spiraled by 22.61 percent in 2022 due to higher discount rate. Net profit enlarged by 33.15 percent in 2022 to clock in at Rs.4787.876 million with EPS of Rs.0.87 and NP margin of 2.82 percent.
In 2023, CNERGY’s topline grew by 14.06 percent year-on-year. The company’s throughput diminished by 26.7 percent in 2023 with capacity utilization clocking in at the lowest level of 12 percent. This was due to sluggish economic activity in the country due to which oil consumption fell by 26 percent in 2023. Furthermore, on account of dwindling foreign exchange reserves, oil companies were not allowed to obtain forward cover for their payments. Obtaining Letters of Credit even at exorbitant rates was not allowed to oil companies, resulting in under utilization of their available plant capacity. Oil prices in the international market crossed $110 per barrel during the year but dropped thereafter. However, Pak Rupee depreciation didn’t allowed the local companies to take optimum advantage of plunge in oil prices. The devastating floods in the 1HFY23 destroyed the country’s infrastructure and affected the transportation of the company’s products during the year. All these factors culminated into gross loss of Rs.9749.26 million recorded by CNERGY in 2023. Administrative expense soared by 12.55 percent in 2023 due to significant rise in payroll expense despite the fact that the number of employees were reduced to 725 in 2023 from 895 in 2022. Lower depreciation on right-of-use assets resulted in 18.84 percent reduction in selling & distribution expense in 2023. Other expense mounted by 51.97 percent in 2023 on the back of higher provisioning for ECL. CNERGY wrote back liabilities worth Rs.6081.235 million in 2023. This greatly reduced the magnitude of operating loss incurred by the company in 2023. CNERGY registered operating loss worth Rs.5635.29 million in 2023. The company’s performance was further exacerbated by 122.06 percent hike in the company’s finance cost in 2023 which was the effect of high discount rate. CNERGY recorded net loss of Rs.12,663.279 million in 2023 with loss per share of Rs.2.34.
Recent Performance (1QFY24)
FY24 didn’t bring along any hopes for the company as its topline slid by 36 percent year-on-year in 1QFY24. Oil prices in the international market increased by 25 percent during the quarter. Pak Rupee declined to the level of Rs.306/$ which then settled at Rs.288/$. Both these factors drastically blew up the working capital requirements of CNERGY resulting in extraordinarily low refinery throughput in 1QFY24. On a positive note, the company was able to record gross profit of Rs.390.12 million in 1QFY24 as against gross loss of Rs.4642.06 million during the same period last year as the company incurred huge inventory losses in 1QFY23 on account of severe flash flooding in the area surrounding its refinery. Administrative expense swelled by 25 percent year-on-year in 1QFY24 on account of high inflation which amplified payroll expense. Selling & distribution expense inched down by 10 percent during the quarter due to lower sales volume. Operating loss considerably fell to the tune of 96 percent in 1QFY24 to clock in at Rs.200.83 million. Finance cost surged by 91 percent in 1QFY24 on account of high discount rate and increased short-term financing obtained during the year. CNERGY was able to cut down its net loss by 61 percent in 1QFY24 to bring it down to Rs.2543.071 million with loss per share of Rs.0.46.
Future Outlook
The recently announced brown field oil refining policy for the upgradation of existing refineries will bode well for the local refineries including CNERGY as it will attract foreign investment in the sector and improve the overall product quality. This coupled with the company’s strategy of processing crude oil on open credit are the steps in the right direction and will boost the company’s throughput.
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