Bosicor Pakistan was incorporated on 9th January 1995 as a public limited company with an aim to operate in the chemical, petroleum/petrochemical and energy sectors.
Bosicor Pakistan is in the business of refining and marketing a large range of petroleum products. The company has a refining facility, the Mouza Kund Plant (MKP1), at Mouza Kund in Balochistan. The range of products include: light straight run naphtha, liquefied petroleum gas (LPG), heavy naphtha, kerosene, motor spirits, high octane blending component, aviation fuels 1 & 4, high speed diesel and furnace oil. The company has a long term sale and purchase agreement with Pakistan State Oil for marketing of its products.
The refinery has a designed capacity of 1.5 million tons per annum. The refinery has a total production capacity of 30,000 bpd, making it the fifth largest refinery in the sector. The share of BPL, out of total country's refining capacity of over 11 million tons per annum, will stand at 1.8 million tons which comes to 15 percent of the total production. The plant produces about 10,000 bbl/d of fuel oil, 6,000 bbl/d of diesel, and 5,500 bbl/d of naphtha, among other products. Its production capacity with respect to the other players in the industry is illustrated.
Bosicor Pakistan started commercial operations in 2004. It completed its first turnaround on 15th August 2005 after starting trial operation in November 2003 with a capacity of 8,000 barrels per day. Later it was gradually increased to 18,000 barrels per day.
The medium term objectives of the company are aimed at infrastructure development, which will promote it towards self-reliance in the supply chain. For this purpose, Bosicor Pakistan is pursuing additional storage capacity of 126,000 metric tons, besides investment in a single point mooring to improve freight economy.
In the longer term, ie 2009-2010, the company will add an isomerisation plant for converting and upgrading the light naphtha into environment friendly motor gasoline. The gasoline obtained from isomerization can be exported to neighbouring countries at higher prices than naphtha or consumed in the local market with environmental advantages. This will add to the profitability of BP.
Abraaj Capital, an investment firm specialising in private equity investment in Middle East, North Africa and South Asia (MENASA) region, has bought a stake in the holding company of Bosicor Group, (Bosicor). This stake will provide Abraaj a 40 percent shareholding in Bosicor's two group companies; Bosicor Oil Pakistan Limited and Bosicor Chemical Pakistan Limited. The investment in Bosicor was made through Abraaj Capital's US $2 billion Infrastructure and Growth Capital Fund (IGCF), which seeks to address the infrastructure requirements of the MENASA region in various sectors, including transportation, education, healthcare, water, manufacturing, petrochemicals, power and utilities. The investment will fund the establishment of a petrochemical plant and a refining unit that will provide the Bosicor group with an initial aggregate refining capacity of 145,000 bpd and create an integrated platform that operates across the full value chain in the oil sector. Further investments in related infrastructure are planned over the next few years with a view to creating Pakistan's first global scale refining, petrochemicals and energy conglomerate.
The demand from transportation, power and manufacturing sectors is expected to be increased, specially the power sector. The country's total demand for petroleum products is forecasted to rise at a five-year compound annual growth rate of 5 percent until at least 2010. Pakistan currently imports over 50 percent of its high speed diesel requirement and almost 100 percent of the petrochemical products.
Industry trend
The listed refineries booked handsome gross refining margins (GRMs) during 9mths'08 compared to the same period last year on back of the exponential growth in international crude oil prices. Average Arab Light crude during 9mths'08 stood at US $83.34 per barrel as against US $57.77 per barrel in the corresponding period of last year, depicting a rise of 44.3%.
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Refineries Sector's Profitability
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PAT (Rs m) EPS (Rs) Distribution
9mths' 08 9mths' 07 9mths' 08 9mths' 07 Chg.(%) 9mths' 08 9mths' 07
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1.ATRL 1,793 200 22.22 2.81 796.3% - -
2.BOSI 239 (864) 0.61 (2.20) 127.6% - -
3.NRL 3,302 2,399 41.29 30.00 37.6% - -
4.PRL 1,413 (407) 47.11 (13.58) 447.5% 16.6% B -
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Sub Total 6,747 1,328 - - 408.0% - -
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The whole oil sector benefited due to increase in international prices of both crude and refined products. The increase is reflected in the chart below. However, the escalation in the prices after H1FY'08 is even more pronounced with the price of crude hovering around $127/barrel currently. The impact of this increase will be reflected for the oil sector in the full fiscal year's results.
RESULTS OF 3QFY08: During the nine months period under review, the company generated a profit after tax of Rs 238.875 million from its sales of Rs 22,724.709 million compared to a loss after tax of Rs 864.040 million earned from its sale of Rs 16,601.115 million during the corresponding period last year. The company benefited from an increase in the oil prices during the period, as did the whole oil sector.
ANALYSIS OF FY04-FY07: The global refining industry witnessed a downturn in profit margins during FY06. In that period, the industry had to cope with rising crude oil prices against steady demand refined products. As a result, refinery margins came under significant strain and the average gross and net profit margins in the industry fell steeply. The figure compares the international crude oil prices with refined product prices over the last five years. The squeezing of margins in FY06 is evident from the shrink in the difference between crude oil prices and product prices during the period.
Furthermore, the refinery product prices in Pakistan are linked with the prices in the Gulf region, which remained depressed during the 2nd and 3rd quarters of FY06. The domestic market, therefore, also suffered its share of the lower margins. However, in the last quarter, the profit margins redeemed themselves in the backdrop of strong oil demand from China and other emerging market economies.
The deplorable profitability position of the refinery sector improved during FY07. During the second half of FY07, even though crude oil price hike continued, but the damage to profits was cushioned by a larger increase in product prices.
During the first half of FY07, crude oil prices continued its hike due to supply constraints, so that the gross margins were squeezed further. The product prices also remained volatile, putting further pressure on refinery margins. The second half, however, witnessed a favourable turn of events as product prices increased more than crude oil prices. As a result, the refinery margins improved greatly in the second half and enabled the Bosicor to partially recover losses made in the first half of the year. Consequently, the company posted an after tax loss for the year of Rs 681.27 million. Nonetheless, the severely wounded gross margins during the first half had a significant impact on company's earnings, depicting a massive decline of 445%, one of the worst in the sector during the period.
FY07 saw a 7.8% increase in net sales of BP, corresponding to an increase in production from 15218 bpd to 15,355 bpd. This equates to a 5.7% higher crude consumption during the year compared to FY06.
The profit margins have historically remained below the industry average but, FY06 brought about a positive change in this trend as the company managed to outdo the average industry, in terms of the gross profit margin, in the face of the changing industry dynamics. The improvement in the trend notwithstanding, the pricing dynamics in the global market took its toll on the company in FY06 and FY07, manifesting itself most glaringly in FY07. In FY07, the company was unable to stand the in pricing pressures and as a result incurred losses, hence the gross and net profit margins cascaded for the period, turning negative and dropping well below the average industry level.
This decline in the profit margins for FY06 and FY07 occurred despite higher sales revenue than the corresponding periods in prior years. In FY07, the cost of sales continued to increase sharply, and despite the greatly improved pricing situation in the second half, the company was unable to fully recover its losses. As a result, BP posted an after tax loss of Rs 681.3 million.
Financial charges increased by 66% during FY06, further pulling down the profits. Likewise, a 42% increase in financial and other charges was registered in FY07. This rise in finance cost may be attributed to the higher level of long term loans and other debt instruments.
The other income for the company jumped up by 35.2 times in FY06, and this somewhat eased the pressure on profits exerted by the higher costs of sales. However the settlement of the insurance claim, on account of loss of profit arising from breakdown in production in the year 2003-04, formed a large portion of this income. Hence this growth is not sustainable in the long run. Consequently, in the absence of insurance claims and other one time gains, other income registered a decline in FY07. The profits from bank deposits also increased by 3.6 times in FY06, further augmenting the other income.
The ROE and ROA of the company have also remained below the average for the entire period. ROE suffered most in FY07 as an increase in equity, resulting from the revaluation of assets, compounded with the loss for the period, leading to high negative figures.
Bosicor Pakistan has not fared well compared to its peers in terms of inventory management. Throughout its four years of commercial production, the inventory turnover (days) of the company has been longer than the industry average. The company's stance continued deteriorating in FY06 and FY07. The increase in FY06 was seen despite a 79% increase in sales for the year, since the inventory levels shot up, offsetting the effect of the increase in sales. This trend may be attributed partially to an increase in crude oil prices, which have increased the value of inventory.
Bosicor Pakistan is also relatively less efficient in recovering cash from its sales but the trend seems encouraging. The high DSO and inventory turnover gave rise to prolonged operating cycles for the company compared to the industry. Hence Bosicor Pakistan trails behind the industry in turning its crude oil inventory into cash. The asset management capacity as measured by the total asset turnover and sales to equity also tarried below average for all periods. The sales to equity and total asset turnover have been showing a positive trend up to FY06 but declined in FY07.
Hence BP is relatively inefficient in managing its assets. An improvement in this area may enable the company to lower its per unit costs and increase efficiency in operations, leveraging its financial performance.
During FY07, BP finalised an agreement to obtain a syndicated term loan of Rs 2.6 billion to finance the debt portion for implementing its ongoing projects, which include the construction of additional storage tanks with a combined capacity of 126,000 tons, laying of sub-sea pipeline for the SBM project and the addition of isomerisation Penex-Molex Unit.
The equity portion of financing was arranged through the issue of 60% right shares, amounting to Rs 1,470.4 million during the year. The result of these developments was a nominal increase in the company's debt ratios; however the effect was subdued because of the substantial increase in equity accompanying the increase in debt.
During FY06, the debt ratios escalated as a result of an increase in both, current and non-current liabilities. During the year, the company was able to acquire more loans and assets on finance lease, causing the jump in the debt to equity and long term debt to equity ratios. The inflated current liabilities figures, arising from creditors and higher accrued mark up, further boosted the debt to equity and debt to assets figures in FY06.
Despite this, the figures remained on the higher side, reflecting a high level of financial leverage for the company. The Times Interest Earned (TIE) dropped slightly in FY06, compared to FY05, largely as a result of the mark up on the mounting loans. In FY07, Bosicor Pakistan incurred losses even at the gross profit level, hence the finance charges led to further deteriorating the situation.
This does not bode well for the company and raises doubts about the company's debt financing abilities. The current ratio has lingered slightly above 1 for the whole period, the greatest change being the temporary increase to 1.07 in FY06. The ratio has hovered slightly below the industry for the period, indicating the company's weaker standing in this area.
Inventory constitutes the largest portion of current assets, followed by cash and trade debts. The inventory figures have been increasing sharply during the last few years as a result of the mounting crude oil prices.
The EPS of Bosicor Pakistan has always been lower than that of the average industry and the trend persisted in FY06 and FY07. The EPS turned negative in the FY07 the losses for the year translated into an EPS of Rs (1.74). Although this trend was experienced by the entire sector, but the average industry figures remained positive, compared to the negative EPS for Bosicor Pakistan. The book value of the company's shares has been increasing throughout the period of commercial operations starting 2004. However compared to the industry, Bosicor Pakistan has not done well in this field.
Consequently, the company did not pay dividends for FY07.
Future outlook
The company has undertaken various capacity expansion projects. As the additional capacity from these facilities comes online, it will augment sales for the company in addition to reducing per ton operating costs. Besides this, various projects are in progress, which once completed will enhance the profitability of BP. These include the project to increase storage capacity of the company and the SBM Sub-sea Pipeline Project. The latter will improve the financial performance of the company by improving freight economics and reducing transit costs.
Moreover, the incremental demand growth of various POL products worldwide is expected to be 23 million barrels per day over a 15-year period. During FY07, the total POL consumption in the country registered a growth of 12.4% to 17.2m tons, over 15.3m tons in FY06, as against refining capacity of 13.0m tons. The total energy demand of the country is expected to increase at an annual rate of 10%-12%. Hence the company will be able to benefit from the capacity expansion even in the unlikely event of stunted growth in the country by exploring their export prospects.
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BOSICOR PAKISTAN LIMITED
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BALANCE SHEET (Rs '000) FY'04 FY'05 FY'06 FY'07
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Non-Current Assets 3,162,216 3,369,867 3,741,835 6,718,930
Current Assets 2,001,207 3,506,272 7,375,766 8,523,699
Total Assets 5,163,423 6,876,139 11,117,601 15,242,629
Current Liabilities 1,995,467 3,472,308 6,869,637 8,469,890
Long Term Liabilities 1,417,490 842,270 1,489,373 3,157,970
Total Liabilities 3,412,957 4,314,578 8,359,010 11,627,860
Total Equity 1,750,466 2,561,561 2,758,591 3,614,769
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INCOME STATEMENT FY'04 FY'05 FY'06 FY'07
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Net Sales 2,112,506 9,998,865 17,929,007 19,328,906
Cost Of Sales 2,182,300 9,607,392 17,304,378 19,401,391
Gross Profit -69,794 391,473 624,629 -72,485
Admin Expenses 29,386 67,179 99,410 159,936
Selling And Dist Expenses 28,836 23,236 36,206
Operating Profit -99,180 295,458 501,983 -268,627
Other Income 2,786 100,876 46,070
Financial Charges 20,936 106,253 285,566 405,647
Profit Before Taxation -120,116 182,391 301,361 -628,204
Taxation 10,787 71,482 104,331 53,062
Profit After Taxation -130,903 110,909 197,030 -681,266
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LIDUIDITY FY'04 FY'05 FY'06 FY'07
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Current Ratio 1.00 1.01 1.07 1.01
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY'07
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Inventory Turnover(Days) 179.22 68.30 80.39 99.01
Day Sales Outstanding (Days) 130.05 45.37 22.23 20.10
Operating Cycle (Days) 309.27 113.67 102.61 119.11
Total Asset Turnover 0.41 1.45 1.61 1.27
Sales/Equity 1.21 3.90 6.50 5.35
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07
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Debt To Asset(%) 66.10% 62.75% 75.19% 76.29%
Long Term Debt To Equity(%) 80.98% 32.88% 53.99% 87.36%
Times Interest Earned (Times) -4.74 2.81 2.11 -0.55
Debt/Equity (Times) 1.95 1.68 3.03 3.22
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PROFITABILITY FY'04 FY'05 FY'06 FY'07
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Gross Profit Margin -3.30% 3.92% 3.48% -0.38%
Net Profit Margin -6.20% 1.11% 1.10% -3.52%
Return On Asset -2.54% 1.61% 1.77% -4.47%
Return On Common Equity -7.48% 4.33% 7.14% -18.85%
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MARKET VALUE FY'04 FY'05 FY'06 FY'07
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Book Value 10.00 10.45 11.26 14.75
Price Earning Ratio -30.69 28.61 26.74 -5.54
Earning Per Share -0.75 0.45 0.80 -2.78
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