National Refinery Limited

National Refinery Limited (PSX: NRL) was incorporated on August 19, 1963 as a public limited company. The government took over the management of NRL under the Economic Reforms Order, 1972 exercising control through its shareholding in State Petroleum Refining and Petrochemical Corporation (PERAC).

In June 2003 the government decided to include NRL in its privatisation programme. After competitive bidding NRL was acquired by Attock Oil Group in July 2005. The Company has been privatised and the management handed over to the new owner on July 7, 2005. NRL is engaged in the manufacturing, production and sale of a variety of petroleum products. The refinery complex of the company comprises of three refineries, consisting of two lube refineries and one fuel refinery. The first lube refinery was commissioned in 1966 with designed capacity of 539,700 tons per annum of crude processing and 76,200 tonnes per annum of lube base oils. The second lube refinery was commissioned in 1985 with designed capacity of 100,000 tons per annum of lube base oils.

The fuel refinery was commissioned in 1977 with designed capacity of 1,500,800 tonnes per annum of crude processing with subsequent revamping increasing the capacity to 2,170,800 tonnes per annum of crude processing. The BTX unit was commissioned in 1985 with design capacity of 25,000 tons per annum of BTX. NRL enjoys a competitive edge, as it is the only refinery producing LBO in Pakistan.

Historical financial and operational performance

Sales revenue increased at an impressive rate from FY10 to FY14 with an increase of almost 88 percent. Although sales revenue for FY15 registered an increase of 34 percent when compared to 2010, it fell 28 percent when compared to FY14. Sales revenue eroded due to falling prices of fuel products due to supply glut as well as geo-political situation.

PRL earned profit after tax of Rs3,709 million in FY15, an increase of over 3.5 times in year-on-year earnings. Profitability margins were highest in FY15 as compared to the previous three years with a gross profit margin of 4.61 percent and a net profit margin of 2.50 percent.

The improved performance could be attributed to improvement in margins of refined fuel products versus crude oil. During the financial year crude oil prices in the international market dropped sharply from $109 to $44, settling near $60 in the last quarter. Lower prices of crude oil enabled the company to invest unutilised funds to increase its interest income while stable exchange rates during the second half of the year also helped improve profitability.

FY14 proved challenging for the oil refining industry as a whole with volatile oil production in the Middle East and Africa due to internal conflicts. Core refining operations were negatively affected due to expensive oil. The depreciation of the PKR since July, 2013 was considerable resulting in a blow to the overall economy. Of the two segments, it is the lube segment that has proved to be more reliable in profit contribution as NRL is the only player in the lube industry of Pakistan. The fuel segment suffered losses while the lube segment reduced pressure on the bottom line to a certain extent. The lube segment's share in total profit increased from 55 percent in 1QFY13 to almost 500 percent in 1QFY14 once again reaffirming the profitability potential of the segment.

Snapshot of 9MFY16 and Q3FY16

PRL earned a net profit after tax of Rs5.24 billion with an EPS of Rs65.50, compared to a net profit of Rs1.16 billion and EPS of Rs14.53 in the same period last year. Although international crude oil prices continued to weaken during 9MFY16, the decline in product prices had a laxer dip generating healthier refining margins. Profitability from the fuel segment improved to Rs1.18 billion as compared to loss after tax of Rs1.38 billion during the same period last year.

The company attributed the increase in fuel segment profitability to higher margins, improved production, higher sales and lower exchange loss due to stability of rupee dollar parity. The rate of production witnessed an increase to 90.36 percent compared with 81.28 percent during the same period last year.

The lube segment registered a net profit of Rs4.06 billion compared to Rs2.54 billion during the same period last year. The increase in profitability was directly attributable to better production and sale of lube base oils. Another factor was the significant increase in bitumen sales due to strong demand in the country which also contributed towards the profitability of the segment.

Stock performance

NRL outperformed the KSE-100 benchmark index throughout the last year with investors being optimistic about the company's growth prospects. The stock price of NRL increased from Rs234.10 on 1 January to 371.49 on 30 May, 2016 showing an increase of almost a whopping sixty percent.

Expansion plans and future outlook

PRL has ambitious expansion and up-gradation plans for the future with the work being divided in two phases. Under the Phase-I the company is undergoing up-gradation of its plant to comply with government directives to produce environmental friendly HSD and meet Pakistan's rising demand of motor gasoline. According to company reports work on diesel desulphurization (DHDS) and Isomerization (ISOM) projects is progressing rapidly with Chinese contractors' already starting work on the projects.

Recent updates in the company's report reveal that the supply of material and equipment is under way while the civil work is expected to be completed in the near term. The company expects its plant up-gradation to be completed by May, 2017.

The company estimates that contract value plus other cost of the project would be $349 million. The financing for these projects is being provided by a consortium of banks for an amount of Rs24.2 billion at 1.7 percent above six months KIBOR.

Under Phase-II further up-gradation projects are expected to be undertaken after completion of the Desulphurization and Isomerization projects. A two stage unit at Lube-1 refinery has been planned to augment the installed crude oil processing capacity from 12,050 barrel per stream day (bpsd) to 17,000 bpsd and vacuum fractionation capacity from 5,200 bpsd to 6,600 bpsd.

Another planned expansion is the installation of a crude distillation unit at the fuel refinery to boost the installed crude oil processing capacity from 50,000 bpsd to 53,000 bpsd. The design package and invitation to bid documentation is complete and the project is expected to be awarded during this or the coming year.

The company also plans to install nitrogen gas generator increased efficiency by using nitrogen gas as inert media for MEK units and for tank blanketing. The generator will utilise Pressure Swing Absorption technology having a capacity of 400 normal cubic meter/hour. Lastly the company also plans to set up a reverse osmosis plant with a capacity of 250,000 gallons per day to counteract the dearth of water availability for refinery operations.

Considering these expansions plans coupled with the dominant position the company enjoys in the lube industry and its impressive stock performance for the past year, the future of PRL looks promising.