Attock’s refineries posted 1HFY19 financial performance recently, which has been disappointing. Attock Refinery Limited (PSX: ATRL) saw its earnings go down from a profit of Rs1.29 billion in 1HFY18 to a loss or Rs2.97 billion. Similarly, National Refinery Limited (PSX: NRL) posted a loss of Rs3.86 billion in 1HFY19 versus a profit of Rs1.62 billion in 1HFY18.
While both the refineries depict a healthy increase in net revenues (see tables), a key factor for the decline in profitability for the refineries has been a more than proportionate increase in cost of sales. Higher cost of sales was primarily because of higher crude oil prices. This resulted in negative gross margins for the refineries.
Besides higher crude oil cost, the currency depreciation wreaked havoc on net margins. The refineries incurred significant exchange losses, which pulled down the bottom-line. This can be seen from the staggering increase in finance costs. For National Refinery Limited, it is likely that the fuel segment suffered a loss, which has been under pressure persistently. Moreover, the decline in non-refining segment of the Attock Refinery did little to contain the deteriorating profitability.
Given that the clampdown on furnace oil and the refinery up gradations are implemented in true spirit, things are only going to get difficult from here for the refining industry. They will have to find avenues to export furnace oil; they will have to upgrade production processes and install hydrocracking units with the money collected under deemed duty. Also, the government has taken a decision of reducing manganese content in locally refined motor gasoline, which would affect industry’s petrol production adversely. There’s a tough road ahead for refineries that are already facing deteriorating profits. And with UAE as well as Saudi refinery talks progressing rather quickly, the local refineries can expect some tough competition ahead.
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