Attock Refinery Limited (ARL), was established in 1978 as a private limited company, to take over the business from the Attock Oil Company for the refining of crude and supplying of refined oil products. In 1979, the company was converted into a public limited company and has subsequently been listed on all the three stock exchanges of Pakistan.
The strategic plans of ARL include enhancement of its refining capacity and production of better, more environment-friendly petroleum products to maintain and expand its market. The plans include installation of a preflash unit, an isomerization complex and a diesel hydrodesulfurization unit in first phase. Further, the company is actively engaged in diversification of its operations within the energy sector which includes the white oil pipeline project and a power project. Projects targeting environmental and social improvement for community development are also being planned.
ARL's configuration enables it to process the lightest to the heaviest indigenous crude and produce a complete range of both energy and non-energy products. The non-energy products include lubes and greases, asphalt, solvent oil, mineral turpentine (MTT), benzene toluene xylene (BTX), jute batching oil, processing oil, carbon oil, and wax). Moreover, the company also produces premium motor gasoline, liquefied petroleum gas (LPG), kerosene oil (KO), high speed diesel (HSD), naphtha, solvent oil etc. The nameplate capacity of the company stood at 40,000 bpd at the end of FY06. ARL has the third largest refining capacity, after PARCO and the NRL. In FY06, ARL accounted for 26% of the listed refineries sales.
ARL operates under the Import Parity Pricing Formula whereby net profit after tax greater than 50% of paid-up capital is required to be diverted to a special reserve to offset any future loss of make investment for expansion or up-gradation of the refinery.
RECENT RESULTS 3Q'08The nine months ending March, 2008 bring an exponential growth in the profits of the refinery sector on the basis of the increased GRMs. (Gross Refinery Margins). Although during the third quarter, the international prices of crude and products have fluctuated, nevertheless the refineries have pocketed handsome profits.
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Refineries Sector's Profitability
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PAT (Rs m) EPS (Rs)
9 mths' 08 9 mths' 07 9 mths' 08 9 mths' 07 Chg.(%)
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1.ATRL 1,793 200 25.22 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 (13.56) 447.5%
Sub Total 6,747 1,328 408.0%
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Its performance for the third quarter has been mellow as compared to the previous two quarters, because of the fluctuations in the prices. Nevertheless, the company ended up with a profit from refinery operations of Rs 1,415 million as compared to a loss of Rs 49 million in the same period last year. The net profit after tax for 9M'08 is Rs 1,793 million with an EPS of Rs 25.22.
Pakistan's consumption of energy and non-energy products has increased at a CAGR of 5% over the last three years, bringing total consumption of petroleum products to 16.85mntn, against a total production of 10.86mntn in FY07. This discrepancy in demand and supply exists due to almost stagnant oil production and refinery capacity, combined with a much larger rise in demand. The deficit is compensated by imports of crude oil, which is then passed on to the local refineries for processing.
The product and crude oil price movements were favourable during the HY08, resulting in an improvement in gross refinery margins. As can be seen in the figure, even though crude oil prices have been registering a continuous hike, but a proportional rise in product prices has allowed an improvement in the refinery margins. Thus the refinery sector has shown a significant increase in profits from a loss of Rs 581m in HY'07 to a net profit of Rs 4,910m in HY08.
In tandem with the rising profitability of the sector, ARL reported a PAT of Rs 1,633 million in HY08, a growth of 27.2 times, over the HY07 result. This represents a remarkable progress, with gross margin of the company mounting to 5.1%, compared to a gross loss of 0.8% during the parallel period last year. Net margin rose to 4.4% in HY08 from 0.2% in HY07. This can be attributed to the improvement in gross margins, in addition to an increase in sales volume of the company. The company's production during the period stood at 7.327 million barrels, compared to 6.983 million barrels in HY07. Sales volume increased 3.3% to 6.951 million barrels for the same period, with a corresponding rise in sales revenue of 29% over the HY07. An increase in the sales of motor gasoline and HSD with escalating sales prices have also contributed to the growth in company profits.
In addition, the finance costs of the company have declined drastically, from Rs 234 million in HY07 to only Rs 4 million in HY08 as a result of repayment of the long term loan undertaken by the company last year.
PREVIOUS YEARS' ANALYSIS The FY06 was a difficult period for the company and for the refinery sector as a whole as crude oil prices and petroleum product prices fluctuated frequently. During the year, international oil prices followed an upward trend but the demand for refined products remained relatively steady. This resulted in a squeezing of margins throughout the world.
The FY06 saw a 34% increase in sales but a 42% increase in cost of sales which more than off set this improvement, reducing gross margins to a mere 1.02%. Moreover, the refinery product prices in Pakistan are linked to the prices in the Gulf region where the gross margins had remained low, especially in the third and fourth quarters of FY'06. This, again, led to declining profitability in the sector.
Furthermore, the high international petroleum prices also hit the domestic industry as consumers and lobbies debate on the current pricing formula allowed to the refineries. Even though crude oil prices continued rising in FY07, but during year, the product prices also followed a positive trend, with the increase in product prices overpowering the increase in crude oil prices during the second half of FY07. Despite this, the profitability of the refinery sector fell by 14.0% to Rs 4.52 billion in FY07 as compared to Rs 5.26 billion last year.
For ARL, however, The FY07, however, brought about many positive changes. In contrast to the declining industry profitability, the EPS of ARL grew by 146.6% during FY07, the highest growth rate in the refinery sector.
ARL observed cascading profit margins for the FY06 in tandem with the declining profitability in the sector to the extent that gross margins and profit from refinery operations turned negative during the first half of FY07. The fluctuating crude oil and petroleum products prices were the major factors behind these results. However things started improving in the third quarter of FY07 as product prices increased more than crude oil prices, allowing the company to earn a net profit of Rs 504.33 million for the year and giving a much needed boost to the gross refiner's margin and net profit margin.
The profitability status varied over the four quarters of FY06, with the second and third quarters showing negative net profits whereas a positive margin was recorded in the first quarter. The last quarter showed an improvement in profit figures, bringing down the operating loss figures accumulated during the first 9months. The table below shows the quarterly break up of sales and gross profit for FY06. The 1st and 4th quarters pulled up the profitability, reducing the losses from the 2nd and 3rd quarters.
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Quarterly Performance
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(Rs '000) Jun-06 Mar-06 Dec-05 Sep-05
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Sales 16,015,279 14,305,039 12,401,195 13,340,861
Cost of Sales 15,488,748 14,818,282 2,323,525 12,860,125
Gross Profit 526,531 -513,243 77,671 480,736
Gross Profit Margin 3.29% -3.59% 0.63% 3.60%
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Sluggish demand for motor gasoline (PMG) due to high prices and unfavourable government policies also contributed to declining profits in FY06. PMG is a premium product for the company's profitability and the declining sales of the product forced the company to resort to the exports of naphtha. This transaction resulted in losses for the company because of the high transportation and handling costs and due to the lower margins available on sales of the product. Hence profitability crashed further during the year.
FY07 brought about a positive change in this regard as well as demand for motor gasoline increased, accompanied by a decline in naphtha exports. This was a result of curbing the smuggling of this product due to domestic rationing in one of the neighbouring countries and a change in the geo-political situation in the border areas. This development also contributed to the profitability of the company during the FY07.
The company also incurred higher financial charges during FY06 as a consequence of a long term loan acquired during the year. A 225% increase in other income and 202% increase in dividend income were the sustaining factors during the FY06. Moreover, the company also incurred 92% lower distribution costs during the year since it has stopped handling the direct exports of jet fuel.
FY07 saw a reversal of this trend, as finance cost declined 53% compared to FY06. This is because in Dec'06, the company had prepaid an entire outstanding long term loans amount of Rs 3.41 billion because of which the financial cost of the company decreased during the year. Other income once again contributed significantly to the bottom-line.
In terms of the liquidity measure generated by the current ratio, ARL lags behind its counterparts.
The liquidity position of ARL has been declining over the period under study and has reached dangerously low levels so that the current assets are no longer sufficient to cover the current liabilities. This decline was observed despite an increase in cash assets during FY06 from long term loans taken by the company as a portion of the loan matured and became due. The trade payables have been increasing rapidly over the last few years, thus making a significant contribution to the observed trend. This increase in trade payables may be traced back to rising crude oil prices over the years.
The deteriorating liquidity situation is a source of concern for the company and a threat to its financial strength. The company should, therefore, take appropriate measures to improve its liquidity position.
ARL appears more efficient than the industry in management of its inventory but lags behind in the collection of receivables. However, its edge in terms of inventory turnover has resulted in a shorter than average operating cycle.
The collection period for ARL improved in FY06 but rose in FY07 whereas the opposite is true for the inventory turnover (days). The inventory turnover jumped up during the FY06 but declined slightly during FY07. As a result of these fluctuations in DSO and inventory turnover, the operating cycle also declined during FY06 and increased during HY07. The total assets turnover has been on a declining trend since FY05 and the trend continued in FY06. The sales to equity, however, increased in FY06 as a result of a 34% increase in sales against a relatively small increase in equity. Despite higher sales in FY07 compared to FY06 the sales/equity as well as TATO have declined.
ARL is largely an equity-based company as evident from the low long term debt to equity ratio. The ratio had jumped up in FY06 as the company acquired long term loans but the repayment of the loans during the first half of FY07 has brought down the ratio to the previous lower levels.
As a consequence of the loan undertaken during FY06, the TIE plunged drastically for the year. However with the repayment of the loan, it is expected that the company will be able to gradually redeem its position. An initiation of the trend has been observed during FY07, as TIE rose slightly and finance cost declined 53%.
Considerable discrepancy is seen in terms of the debt ratios of the company. ARL has a history of higher than average debt to asset ratio whereas its long term debt to equity ratio has stood well below average for all years except FY06 when it had taken on additional loans. However the TIE ratio for the company is very low compared to the average industry.
When assessed in terms of the total debt to equity, the company does not fare so well. This is due to the high current liability figures, comprised mainly of trade and other payables and provision for taxation. This ratio had also jumped up in FY06 as a consequence of the long term loans but has not been able to regain its former level in FY07.
The strong debt ratios reflect the financial strength of ARL and with an improvement in the profit situation, the TIE may also improve. The declining profitability has taken its toll on the EPS which dropped to Rs 6.68 for FY06 as compared to Rs 26.68 in FY05. The FY07, on the other hand, saw a massive growth of 146.6% in EPS as a result of higher product prices and other factors mentioned above. Consequently, no dividends were paid for the FY06 and the book value has also followed a negative trend since FY05. For FY07, the directors declared a dividend of 40% per share. The EPS and Book value of the company's shares is mower than the average industry figures.
Future outlookAt present, the domestic demand for petroleum products is not being met by local refineries as demand has been growing at a much faster rate compared to refinery capacities. Consequently, in FY07, the industry could produce only 46% and 43% of total local demand for HSD and FO respectively due to capacity constraints. This supply deficit allows refineries to operate at their full capacity, resulting in a better utilization of assets. At the same time, with the open export avenues and the advantage of close proximity to countries rich in crude oil resources, the future of the local industry seems safe even if domestic demand declines.
The short term profitability of the refinery sector is closely related to GRM. Hence even though recent trend in crude oil and product prices movements have been favorable for ARL and the industry as a whole, but the future profitability of the company remains highly dependant on the future fluctuations in prices of both commodities. The crude prices are on an upward momentum and product prices seem to be adjusting accordingly, but the projected decrease in crude prices will have important consequences for the industry. A slight decrease could serve as a cushion to GRMs but a drastic decrease could harm the sales revenue and squeeze GRMs again.
The company has also bought stake of 30.0% in Attock General Limited, the plant has a capacity of 165MW. Construction work on the plant is in full swing, and the plant is expected to start commercial operation in the second quarter of FY09.
At present, the refining capacity of the local industry stands at 12.87m tons, which is expected to increase in the next couple of years, with the setting up of new refineries. According to the Annual Report of OGRA for FY07, two new refineries' licences have been approved, namely, Trans Asia Refinery Limited and Indus Refinery Limited. Another refinery, Khalifa Coastal Refinery is expected to come online in FY12. The new refineries may pose a threat for existing industry players, as they strive to expand their capacities and storage in order to maintain their existing market shares. However, considering the growing demand in the market, the addition of the new entrants will not have a significant impact on sales volume of existing players.
Moreover, the upward trend in demand for furnace oil, primarily in the power sector, along with the rising electricity demand in the country may have an adverse impact on GRMs, as FO is a negative margin product and increased demand for the product will require increased production of the same, hitting the GRMs of the industry.
Lastly, the power plant and investment in white oil pipeline project holds considerable potential for future income and the company's alliance with its group companies will provide an edge to ARL over its competitors.
The demand for POL products in Pakistan is growing and the trend is expected to continue in future. During FY07 the total POL consumption registered 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%. Although two new refineries, Indus Refinery and Khalifa coastal refinery are being set up In order to meet the growing energy requirements, but this increase in refinery capacity will not be able to keep up with surging demand. This demand-supply gap may represent growth potential for the refinery sector, and by enhancing their capacity, companies will be able to tap onto a larger portion of the market.
ARL has increased its refining capacity to 1.94m tons in FY07 from 1.82m tons last year.
ARL currently has a nameplate capacity of 40000 bpd and, as already mentioned, it plans to enhance capacity by adding a 12500 bpd Preflash unit and improve naphtha quality by adding an Isomerization unit. As the enhanced capacity comes online, sales are likely to grow more rapidly. The Preflash, Isomerization and Diesel Hydrodesulphurization units will also improve the operational efficiency of the company. Other than this, the future plans of ARL include the new 150MW Power Project to be set up by Attock General Limited (AGL), which is expected to commence operation later in CY'08 and in which the company has invested Rs 540m through the paid up capital of AGL.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for
Business Recorder.DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].