KARACHI: It is expected that fuel earnings of local refineries to improve in the third quarter of FY24 on a sequential basis mainly due to stable gross refining margins (GRMs) and absence of inventory loss as witnessed during the previous quarter, experts said.
Average industry GRM is expected to remain around $9.0 per barrel during the third quarter of FY24 compared to $8.0/bbl during the second quarter of FY24, up 13 percent, Farhan Mahmood, senior analyst at Sherman Securities said.
However, company wise GRM may vary depending on product mix and crude grade, he said.
“Assuming Arab light crude oil remains at current levels of $84/bbl for the rest of the month (up 3.0 percent QoQ), we may see slight inventory gains during ongoing quarter”, Farhan Mahmood said.
Just to recall, earnings of local refineries during previous quarter impacted mainly due to huge inventory losses as crude oil prices fell by 15 percent QoQ during the second quarter of FY24.
“According to our estimates, listed refineries posted inventory loss of Rs 9.0 billion during the second quarter of FY24”, he said.
He said refiners’ profits are tied directly to the spread/crack or difference between the price of refined products and crude oil. The spread on MS (Motor Spirit or Petrol) - which represents the profit generated by turning a barrel of crude into MS reached average $6/bbl during third quarter of FY24 compared to average of $4/bbl during second quarter of FY24.
“This is primarily due to the fact that demand for MS seems to recover relative to other products as transportation activities to pick up once global weather warms up.”
All eyes will be on Russia as it has already banned export of MS for next 6 months which may keep its spread on the higher side, he said.
Currently spread on MS is hovering around $8/bbl which is highest in last 6 months. Increase in MS spread is beneficial for Attock Refinery (ATRL) as petrol contributes 39 percent of the company’s production slate which is highest amongst listed refineries.
“Assuming an average GRM of $15/bbl, we expect ATRL to post EPS of Rs 75 (9MFY24 EPS Rs 229) during third quarter of FY24, up 63 percent QoQ”, Farhan Mahmood said.
While average GRM on fuel products is expected to remain higher by 44 percent QoQ, absence of inventory loss during third quarter of FY24 will significantly improve earnings on QoQ basis. Having said that, any abrupt change in crude oil prices during the rest of the month may affect our earnings estimates, we believe. However, the refinery is expected to operate at lower capacity utilization of 60 percent due to annual turnaround to carry out essential maintenance of the plants.
“Going forward, beside robust GRM, huge surplus cash of Rs 65 billion (Rs 610/share) is enough to absorb any adverse movement in GRM and to finance the plant up-gradation project under new Brownfield Refinery Policy 2023”, he said.
Copyright Business Recorder, 2024
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