Cnergyico Pk Limited (PSX: CNERGY) was incorporated in Pakistan as a public limited company in 1995. The company is engaged in oil refinery business and petroleum marketing business with the latter being launched in 2007. CNERGY was previously known as Byco Petroleum Pakistan Limited.

Pattern of Shareholding

As of June 30, 2023, CNERGY has a total of 5493.448 million shares outstanding which are held by 28,541 shareholders. Associated companies, undertakings, and related parties have the majority stake of 73.44 percent in the company followed by the local general public holding 20.67 percent shares. Around 1.2 percent of CNERGY’s shares are held by Modarabas & Mutual funds. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2019-24)

CNERGY’s topline slid twice during the period under consideration i.e. in 2020 and 2021. Its bottom line entered a negative zone in 2019. In 2020, net loss further mounted. This was followed by two successive years where CNERGY posted a positive bottom line. In 2023, the company registered the highest-ever net loss. 2023 was also the year where the company also recorded gross and operating losses, unlike other years under consideration. However, in 2024, the company posted net profit. The company’s margins which drastically fell in 2019 showed an upturn in the subsequent years to reach their optimum level in 2022. However, CNERGY’s margins fell into negative territory in 2023 (see the graph of profitability ratios). In 2024, CNERGY’s margins considerably recovered. The detailed performance review of the period under consideration is given below.

In 2019, CNERGY’s topline grew by 18.97 percent year-on-year which was merely the result of an upward revision in oil prices as well as the effect of currency depreciation. During the year, the company’s production slid by 8.7 percent year-on-year to clock in at 18.39 million barrels. This resulted in 33 percent capacity utilization in 2019, as compared to the 36 percent capacity utilization attained by CNERGY in 2018. In 2019, the company faced multiple challenges. Firstly, the demand for furnace oil (FO) drastically declined as FO was increasingly being replaced by LNG and coal for power generation. Secondly, there were abrupt changes in the international oil prices in 2019 with motor gasoline trading far below crude oil which further squeezed the industry’s margins. Pak Rupee depreciation added to the ado. This resulted in a 78.6 percent year-on-year slump in CNERGY’s gross profit with the GP margin falling down from 5.51 percent in 2018 to 0.99 percent in 2019. Administrative expenses surged by 9.17 percent year-on-year mainly on account of SAP maintenance charges, repair & maintenance, traveling & conveyance as well as utilities. Selling & distribution expenses also escalated by 22.82 percent in 2019 due to higher payroll expenses and depreciation charges. CNERGY was able to cut down its other expenses by 44.45 percent year-on-year in 2019 primarily by keeping a check on its late payment surcharge & penalties and also by booking lesser provisions for doubtful debts. Other income also shrank by 38.7 percent in 2019 due to the high-base effect as the company wrote back liabilities in the previous year. Operating profit registered a steep 89.91 percent decline in 2019 with OP margin falling down from 4.96 percent in 2018 to 0.42 percent in 2019. Finance cost inched up by 6.65 percent in 2019 on account of a higher discount rate and an increase in the company’s borrowings particularly finance against trust receipts for import and procurement of crude oil and petroleum products. Increased borrowing is also evident in the company’s gearing ratio (see the graph of gearing ratio & finance cost). CNERGY registered a net loss of Rs.1683.70 million in 2019 as against a net profit of Rs.5019.83 million in 2018. Loss per share stood at Rs.0.32 in 2019 versus EPS of Rs.0.94 posted in 2018.

In 2020, CNERGY’s topline slipped by 12.10 percent year-on-year. The company’s production further eroded by 5.2 percent year-on-year in 2020 to clock in at 17.43 million barrels with capacity utilization of 31 percent. While there was lower consumption of FO for power generation in Pakistan which had taken its toll on the refineries’ margins, in 2020, the International Maritime Organization (IMO) put restrictions on the usage of FO as bunker fuel, resulting in the dive in prices from November 2019 to March 2020. As the prices started stabilizing, COVID-19 hit the world economies which took a heavy toll on the demand for oil products resulting in a freefall in prices. For the first time in history, oil prices were quoted in negative. Reduced prices of oil in the international market coupled with the company’s proactive strategy of rationalization of crude cargos and change in cargo pricing in anticipation of price movement resulted in 47.79 percent improved gross profit posted by CNERGY in 2020 with GP margin rising up to 1.67 percent. Administrative and selling expenses posted an increase of 2.83 percent and 16.13 percent respectively in 2020 mainly on the back of higher payroll expenses and depreciation. Higher provision for doubtful debt resulted in a 65.83 percent inclination in other expenses in 2020. However, it was offset by a 34.78 percent rise in other income mainly as the company earned higher interest on balances due from customers as well as higher scrap sales made during the year. Operating profit rebounded by 83.89 percent in 2020 with OP margin mounting to 0.88 percent. Finance cost multiplied by 29.02 percent in 2020 due to a higher discount rate for the most part of the year as well as increased short-term borrowings which further drove up its gearing ratio. CNERGY’s net loss magnified by 44.37 percent in 2020 to clock in at Rs.2430.799 million with a loss per share of Rs.0.46.

CNERGY’s net sales continued to decline in 2021 to the tune of 18.26 percent. The actual throughput for the year was 14.2 percent less than last year with capacity utilization standing at 26 percent. As business activity began to resume, the demand began to gain momentum. CNERGY had already set up a fluid catalytic cracking unit (FCC) to convert FO into Motor Spirit (MS) and High-Speed Diesel (HSD). This bore fruit and the demand of MS and HSD significantly improved in 2021. 179.94 percent higher gross profit recorded by the company in 2021 was the result of better inventory management. GP margin also rose to 5.7 percent in 2021. This was also because GoP revised the pricing formula for MS and HSD and started computing their prices on a bi-monthly basis. OMC’s margin on MS and HSD also increased from Rs.2.81 per liter to Rs.2.97 per liter. Administrative expenses rose by 7.57 percent in 2021 as the number of employees increased from 867 in 2020 to 911 in 2021 which increased the payroll expense. Conversely, distribution expense tumbled by 0.32 percent in 2021 which was the effect of lower rent, rates, and taxes incurred. Higher provisioning for doubtful debts resulted in other expenses escalating by 22.12 percent in 2021. Other income eroded by 8.38 percent in 2021 due to lower interest income on account of monetary easing. Operating profit mounted by 310.98 percent in 2021 with OP margin reaching 4.42 percent. Finance costs dropped by 38.99 percent in 2021 on account of low discount rates and lesser short-term borrowings obtained during the year. CNERGY was able to record a net profit of Rs.3,595.84 million in 2021 with EPS of Rs.0.65. NP margin stood at 2.53 percent in 2021.

After two successive years of topline slide, CNERGY’s topline recorded a 19.6 percent rebound in 2022. Production volume drastically fell by 37.8 percent in 2022 with capacity utilization clocking in at 16 percent. During the 2HFY22, the refining industry made immense profits due to the Russia-Ukraine crisis which drove up the crack spreads to an unparalleled level. International oil prices surged beyond $100 per barrel. However, due to the steep depreciation of the Pak Rupee and current account woes, the local oil industry was facing difficulty in getting a Letter of Credit which restricted its performance. Nevertheless, gross profit grew by 35.32 percent in 2022 with GP margin touching its optimum level of 6.45 percent. Administrative and selling expenses surged by 10.15 percent and 2.86 percent respectively in 2022 which was mainly on account of higher payroll expenses. This was despite the fact that CNERGY streamlined its workforce to 895 employees in 2022. No late payment surcharge and penalties were incurred during the year which coupled with lesser allowance for doubtful debt allowed the company to cut back its other expenses by 5.88 percent in 2022. Other income shrank by 18.75 percent in 2022 due to lower scrap sales and no reversal of WWF, unlike last year. Operating profit revived by 41.32 percent in 2022 with OP margin reaching 5.23 percent. Finance costs spiraled by 22.61 percent in 2022 due to a higher discount rate. Net profit enlarged by 33.15 percent in 2022 to clock in at Rs.4787.876 million with EPS of Rs.0.87 and NP margin of 2.82 percent.

In 2023, CNERGY’s topline grew by 14.06 percent year-on-year. The company’s throughput diminished by 26.7 percent in 2023 with capacity utilization clocking in at the lowest level of 12 percent. This was due to sluggish economic activity in the country due to which oil consumption fell by 26 percent in 2023. Furthermore, on account of dwindling foreign exchange reserves, oil companies were not allowed to obtain forward cover for their payments. Obtaining Letters of Credit even at exorbitant rates was not allowed to oil companies, resulting in underutilization of their available plant capacity. Oil prices in the international market crossed $110 per barrel during the year but dropped thereafter. However, the Pak Rupee depreciation didn’t allow the local companies to take optimum advantage of the plunge in oil prices. The devastating floods in the 1HFY23 destroyed the country’s infrastructure and affected the transportation of the company’s products during the year. All these factors culminated in a gross loss of Rs.9749.26 million recorded by CNERGY in 2023. Administrative expenses soared by 12.55 percent in 2023 due to a significant rise in payroll expenses despite the fact that the number of employees was reduced to 725 in 2023 from 895 in 2022. Lower depreciation on right-of-use assets resulted in an 18.84 percent reduction in selling & distribution expenses in 2023. Other expenses mounted by 51.97 percent in 2023 on the back of higher provisioning for ECL. CNERGY wrote back liabilities worth Rs.6081.235 million in 2023 which drove up its other income by 681.73 percent in 2023. This not only absorbed the company’s operating expenses but also greatly reduced the magnitude of operating loss incurred by the company in 2023. CNERGY registered an operating loss worth Rs.5635.29 million in 2023. The company’s performance was further exacerbated by a 122.06 percent hike in the company’s finance cost in 2023 which was the effect of the high discount rate. CNERGY recorded a net loss of Rs.12,663.279 million in 2023 with a loss per share of Rs.2.34.

In 2024, CNERGY’s topline grew by 24.09 percent. With the considerable decline in economic activity and increased smuggling, the demand for FO and HSD posted a slump; however, an increase in the retail prices of POL products for the most part of the year enabled the company to record growth in its net sales. Stability in the value of local currency off-late proved to be a boon for the oil companies. As a consequence, CNERGY recorded a gross profit of Rs.12430.15 million in 2024 with GP margin clocking in at 5.17 percent. In the face of low demand and curtailed capacity utilization, a surge of 24 percent and 32 percent in administrative and selling expenses respectively in 2024 appears to be the effect of inflationary pressure. Other expenses declined by 75.98 percent in 2024 possibly due to the high-base effect as the company booked hefty provisioning for ECL in the previous year. Lower exchange losses might also have played a role in driving down other expenses in 2024. Other income also dropped by 85.77 percent in 2024 which also appears to be the effect of high-base as the company massively wrote back its liabilities in 2023. CNERGY posted an operating profit of Rs.10872.13 million in 2024 as against an operating loss of Rs.5635.29 million posted in 2023. Finance costs mounted by 42.69 percent in 2024 due to high discount rates and elevated levels of short-term and long-term financing obtained during the year. CNERGY registered a net profit of Rs.1008.374 million in 2024 with EPS of Rs.0.18 and NP margin of 0.42 percent.

Future Outlook

The price of international crude oil fell from USD90 per barrel to USD70 per barrel from April 2024 to September 2024. This coupled with phased recovery in economic activity, stability in Pak Rupee and low-base effect will result in recovery in petroleum sales in FY25. However, for this optimistic forecast to materialize, the government needs to curb the crucial issue of petroleum smuggling across the Iranian border. This will not only be beneficial for the oil companies but will also help the government to meet its tall targeted revenue of Rs.1.289 trillion from petroleum levy.