Recent results, (3Q'08) The volatile petroleum prices and refining margins took a downturn in early January and continued at the end of February 2008. The price trend of crude and its products, globally took another upturn as crude prices touched all time high in March 2008 and breaching the psychological barrier of US $110/bbl. Refining margins also became healthier at the end of the third quarter.
The PRL earned a post tax profit of Rs 1,413 million during the nine months ended March 31, 2008 compared with a loss of Rs 407 million for the same period last year. There was a growth of approximately 10% in POL sales during the nine months period as compared to the corresponding period last year. The increasing demand of power, industrial consumption and transportation powered this growth.
The refinery operated at a capacity of 6,027 MT/day vs 5,728 MT/day from the corresponding period. During the nine months ended March 31, 2008, the overall sales volume increased by 19% from the same period last year.
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Refineries Sector 's Portability
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PAT (Rsm) FPS (Rs) Distribution
9 mths'06 9 mths'07 9 mths'06 9 mths'07 Chg. (%) 9 mths'06 9 mths'07
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1.ATRL 1793 200 25.22 2.81 796.3% - -
2.BCSI 239 -864 0.61 (2.20) 127.5% - -
3.NRI 3302 2399 41.29 30.00 37.6% - -
4.PR 1413 (407) 47.11 (13.56) 447.5% 16.6% B -
Sub Total 6717 1,328 108.0% - -
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The refinery sector as a whole, enjoyed increased profitability due to rising GRMs The increase in profitability has impressive because of the international price increases. Pakistan has five refineries with a total refining capacity of less than 270,000 bbl/d or 13.5 million tons per year.
The consumption of oil products is highly skewed, with nearly 85% in form of high-speed diesel (HSD) and fuel oil (FO). The refineries produce a full range of products, including lube base oils and asphalt. However, only 60% of their production is HSD and FO, resulting in a significant mismatch between refined product output and market profile.
Pakistan exports surplus gasoline and naphtha, and is self-sufficient in other petroleum products, such as kerosene and aviation fuels. Further, the refinery sector is one of the highly volatile sectors where small changes in international oil prices can cause large swings in the industry's profit margins.
Pakistan Refinery is engaged in production and sale of petroleum products. Its products include liquefied petroleum gas, motor gasoline, kerosene, jet fuels, high-speed diesel, and furnace oil. The company supplies its products to the domestic markets, Pakistan defence forces, and Railways.
Pakistan Refinery Limited (PRL) was incorporated in 1960. It is situated in Karachi and engaged in production and sales of petroleum energy products as well as MTT, its only non-energy product. Its operations encompass extensive installations in refinery premises at Korangi terminal, Karachi, storage facilities at Keamari and pipeline network from Korangi to Keamari.
PRL has been awarded ISO 14001 certification and OHSAS 18001 for maintaining its health, safety and environment (HSE) and quality control standards. Presently, it has a total capacity of 37,500 bbl/d, which makes PRL the 4th largest refinery in the industry in terms of total installed capacity.
FINANCIAL OVERVIEW FY07 The year 2007 witnessed a fluctuating trend in international petroleum prices, wherein the first half of the year depicted a consistent downward movement in prices and correspondingly refining margins. This trend in the first half of the year was triggered by various factors including the low demand of heating oil in the US due to mild weather, high product inventories and higher crude throughputs resulting in a drag on refining margins.
The second half of the year saw a trend reversal where international petroleum prices regained their upward momentum and remained consistently high, thereby favourably impacting the refining margins. This upsurge was mainly on account of increased demand for adequate supply of gasoline in the US ahead of peak driving season, growing geo-political tension in Middle East, buoyant naphtha demand, planned refinery shutdowns and continued supply restraint by Opec.
Arab light crude which constitutes bulk of refinery's crude recipe, reached an all-time high at $69.9 per barrel in August 2006 and then to a year low at $52.1 per barrel in January 2007. Petroleum products off-take in the country increased to 16.76 million metric tons compared to 14.48 million metric tons last year, registering an increase of 15.7%.
This was mainly due to the increased demand of furnace oil, which grew by 47.3% from the power sector due to high electricity demand and frequent interruptions in the gas supplies. This, in turn, led to an increase in import of furnace oil during the year. Despite sustained GDP growth of 7.0% on average for the past four years, its impact could not be translated into robust demand for other petroleum products.
Motor spirit sales volume remained depressed, registering a decline of 26.9% from the previous period due to a shift in consumer preference towards the cheaper CNG alternative.
During FY07, the PRL operated at a capacity of 5,871 metric tons per day. It was able to increase its naphtha exports by 20% in comparison to last year as local demand of motor gasoline registered a marked decline. Sales of jet fuel to defence forces also saw a healthy rise of 24.3% compared to last year.
Liquidity position is fairly strong as evident from its current ratio trend. Throughout the years under review, the current ratio has remained consistently above 1. Decline in liquidity in FY06 and 07 owes much to the very steep rise in the current liabilities.
This is indicative of the fact that the company has not been able to pay off its liabilities as net income has declined consistently on account of lower demand and higher international oil prices. However, this decline is not very pronounced compared to the industry trends. All in all, the PRL retained its superior position in terms of current ratio trend. As current liabilities are expected to rise further in future, the downward trend in liquidity is expected to continue.
Profitability of the company, in fact of whole industry, is directly associated with the international oil prices. Fickle prices also give rise to erratic demand trend as businesses and consumers switch to cheaper alternatives. FY06 witnessed rising trend of petroleum prices internationally. As a result, the prices of all the products went up significantly. Though the profit margins plunged, yet the company was still able to post a robust after tax profit.
In the first half of FY07, the international prices of oil plunged while in the second half; it rose thereby impacting the margins of the industry as a whole. The cost of operations rose considerably depressing the bottom-line of the company. ROA and ROE depicted an increasing trend in FY05 but decreased in FY07 owing to the reasons mentioned above. Depressed demand of petroleum products like motor gasoline, due to availability of cheaper substitute like CNG was also a contributing factor, which affected the profits of PRL.
The six-month period from July'06-Dec'06 also posted a consistent downward trend of oil prices. Low demand of heating oil in US due to mild weather, high product inventories and higher crude oil output pulled down the refining margins. Although the demand for motor spirit decreased owing to cheap substitutes available, higher furnace oil consumption due to growth in electricity requirement spurred the overall demand for the refinery.
Even though, the PRL completed the 28 days turnaround successfully, the suspension of the refinery operations during the period affected its sales revenue. The top line as well as the bottom line of the company was negatively affected as evident from the negative profit ratios figures.
Apart from the above-mentioned trends and the underlying reasons, the PRL posted higher than average figures for all the ratios under review and thus speak volume of its better profits, better management and sound policies.
High product inventories owing to high price of oil in the international market prolonged the operating cycle of the company thereby affecting the asset management ability of the company. However, the operating cycle of PRL does not depict as glum a picture as that of industry trend where operating cycle is much longer.
While the demand of petroleum products remained depressed, the inventory level increased and the sales revenue decreased. As a result, total asset turnover started decreasing. Sales/equity posted an erratic trend and mainly fluctuated with the change in reserves of the company. The declining trend though is in line with the industry, yet the PRL posted much healthier figures than the other players.
As for FY07 operating cycle has shortened which indicates better inventory management and cash management on company's part. Yet sales/equity and asset turnover ratios have been against the company's asset management ability so far since this shows depressed sales and under-utilisation of assets in terms of revenue generation.
The major chunk of financing for PRL comes through debt and more specifically short-term debt as indicated by elevated figures of debt to asset and debt to equity ratios and extremely low long-term debt to equity ratio. This has been consistently reflected over the years under consideration from FY04-07. As a result, the company's long term debt obligations are at a very lower side.
Moreover, the interest paying ability of PRL has been mitigated by the temporary loss that the company is going through in the wake of rising oil prices and depressed demand. Too much of debt financing gave rise to higher financial charges, which has eroded away the debt paying ability of the company by a large extent. Otherwise the company is relatively in a strong position than its competitors in terms of debt management and enjoys a high level of leverage.
The marketability of PRL is fairly strong compared to other players of the industry. Earning per share witnessed a sharp down turn from FY05 onwards owing to extremely low oil prices in the international market. Dividend per share, on the other hand, has remained constant throughout the years under consideration. Book value reached its peak in FY06 when the company's reserves rose by extraordinarily high amount. After that BV also posted a declining trend as the outstanding shares increased along with a decrease in the reserves.
FUTURE OUTLOOK The oil sector, as a whole, is an important driver for the entire economy, therefore any upward or downward change in its prices would impact the entire economy of the country. For an oil import dependent country, the worldwide supply demand of oil is important. We need to exploit other alternate sources of the energy like coal and nuclear and increase our refining and storage capacities to become self-sufficient in this area.
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PAKISTAN REFINERY LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs'000) Jun'04 Jun'05 Jun'06 Jun'07
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Total Revenue 28,670,445 44,442,052 60,963,200 24,195,370
Cost of Goods Sold -27,300,427 -41,505,290 -58,561,787 -25,219,052
General & Administrative Expenses -102,765 -70,122 -84,752 -39,513
Selling and Distribution Expenses -106,432 -105,380 -121,203 -69,170
Operating Profit (EBIT) 1,149,239 2,626,019 2,084,814 -1,103,758
Financial Charges -18,337 -29,957 -40,999 -43,942
Net Income Before Taxes 1,130,902 2,605,341 2,063,383 -1,140,873
Net Income After Taxes 733,528 1,724,896 1,344,942 -813,260
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Balance Sheet (Rs'000) Jun'04 Jun'05 Jun'06 Jun'07
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Stores & Spares 205,618 209,954 282,797 220,333
Stock in Trade 2,441,440 2,040,949 3,843,622 3,688,168
Cash & Bank Balances 4,283 248,724 2,363,107 829,496
Total Current Assets 5,511,383 6,923,070 11,086,850 11,293,354
Total Non Current Assets 2,187,656 775,969 917,549 1,465,651
Total Assets 7,699,039 7,699,039 12,004,399 12,759,005
Total Current Liabilities 4,581,453 4,427,340 7,447,223 9,018,768
Long Term Liabilities 4,831 7,870 5,628 2,395
Total Liabilities 4,586,284 4,435,210 7,452,851 9,021,163
Share Capital 200,000 200,000 250,000 300,000
Total Equity 1,610,068 3,263,829 4,551,548 3,737,842
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LIQUIDITY RATIO Jun'04 Jun'05 Jun'06 Jun'07
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Current Ratio 1.20 1.56 1.49 1.38
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ASSET MANAGEMENT Jun'04 Jun'05 Jun'06 Jun'07
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Inventory Turnover(Days) 33.24 18.23 24.37 16.74
Day Sales Outstanding (Days) 30.75 31.79 21.70 14.99
Operating Cycle (Days) 63.98 50.02 46.07 31.72
Total Asset turnover 3.72 5.77 5.08 4.50
Sales/Equity 17.81 13.62 13.39 11.95
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DEBT MANAGEMENT Jun'04 Jun'05 Jun'06 Jun'07
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Debt to Asset(%) 59.57 57.61 62.08 77.45
Debt/Equity (Times) 2.85 1.36 1.64 2.06
Times Interest Earned (Times) 62.67 87.66 50.85 7.09
Long Term Debt to Equity(%) 0.30 0.24 0.12 0.09
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PROFITABILITY (%) Jun'04 Jun'05 Jun'06 Jun'07
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Gross Profit Margin 4.78 6.61 3.94 1.35
Net Profit Margin 2.56 3.88 2.21 0.44
Return on Asset 9.53 22.40 11.20 1.97
Return on Common Equity 45.56 52.85 29.55 5.22
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PER SHARE Jun'04 Jun'05 Jun'06 Jun'07
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Earning per share 69.00 69.00 53.80 8.36
Price earning ratio 3.00 3.00 4.00 25.89
Dividend per share 5.00 5.00 5.00 5.00
Book value 80.50 163.19 182.06 160.17
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