Refinery: NATIONAL REFINERY LIMITED - Analysis of Financial Statement Financial Year 2008 - Financial Year 2009
OVERVIEW (October 26 2009): National Refinery Limited (NRL) was incorporated on August 19, 1963 as a public limited company. Government of Pakistan took over the management of NRL under the Economic Reforms Order, 1972 under the Ministry of Production, which was exercising control through its shareholding in State Petroleum Refining and Petrochemical Corporation (PERAC).
Government had decided to place the National Refinery Limited under the administrative control of Ministry of Petroleum and Natural Resources in November 1998.
Name of Company NATIONAL REFINERY LIMITED
Nature of Business Oil Refinery & Distributors
Share price (avg.) -
Market Capitalisation Rs 17,319,166,228
In June 2003, the government included NRL in its privatisation programme. The selling of 51% equity and transfer of management control to a strategic investor had been proposed accordingly, the due diligence process for the privatisation was initiated. After competitive bidding, the NRL was acquired by Attock Oil Group in July 2005.
The company has been privatised and the management handed over to the new owner on July 7, 2005.
The company's principal activity is to manufacture and supply fuel products, lubes, BTX asphalts and specialty products. It operates in two segments: fuel and lube. Fuel segment is a diverse supplier of fuel products and offers gasoline, diesel oils, kerosene and furnace oil. The lube segment provides different types of lube-based oils, asphalt and wax free oil for different sectors of the economy.
There are 5 refineries currently existing in Pakistan which are:
1. PARCO; production 100,000 barrels per day equivalent to 4.5 million tonnes
2. NRL; production 65,000 barrels per day equivalent to 2.8 million tonnes
3. PRL; production 50,000 barrels per day equivalent to 2.2 million tonnes
4. ARL; production 40,000 barrels per day equivalent to 1.8 million tonnes
5. Bosicor; production barrels per day equivalent to 1.5 million tonnes
Current crude production of Pakistan is 65,000 to 67,000 barrels per day and total capacity of the refineries is 285,000 barrels per day or 12 million tons hence 22,0000 barrels per day are imported.
FY09 proved to be full of challenges for the oil refineries and distributors sector. Declining crude oil prices and changing price structure of high-speed diesel and motor gasoline adversely affected the gross refining margin of fuel segment. The erosion of Pak rupee against the US dollar, further aggravated the scenario, resulting in huge losses.
The profit making ability of the company is closely linked to the international oil market. The economic recession of 2008 plummeting oil prices, with the Arabian light hitting a record all-time low of US $40 per barrel in November 2008. Asymmetric prices of company's product went drastically down as a result and eroded the profitability. The outgoing quarter NRL managed to book a recovery in terms of inventory gains as oil prices picked up a gradual climb. However, lower GRM masked this upside.
The situation was compounded by drastic exchange rate depreciation of Pak Rupee against US Dollar, resulting in a loss of Rs 2,385 million.
In addition to this, the government revised the pricing formula in August 2008 by cutting down deemed duty on HSD from 10% to 7.5% and also revised motor gasoline pricing mechanism that further lowered down refiners' margins. Circular debt in the power and oil sector not only slowed down economic activity, but also severely affected the refineries of Pakistan. Consequently overall banking and investments have reduced significantly.
A continuous and vigilant checking by the management ensured that the refinery was operated at its optimum throughput in order to curtail losses of fuel segment in periods of negative margins. However, due to adverse margins the profitability of the fuel segment ended at after tax loss of Rs 2,699 million in FY09 compared to profit after tax of Rs 3,064 million in FY08.
In lube segment, the demand remained depressed due to slower economic activity in the country and abroad. Declining price trend kept the customers away from routine buying. The company emerged with a profit after tax of Rs 1,533 million as compared to Rs 6,005 million in the last financial period.
As mentioned earlier, the industry's profitability is directly related to the international oil prices since a major chunk of local demand is fulfilled through import of crude oil. During the past years demand and consumption pattern also witnessed a major change. While the demand of motor gasoline experienced a decline due to increase used of CNG and LPG, furnace oil demand remained depressed due to conversion to gas and coal based plants by sectors like cement.
In FY09, NRL's profitability declined considerably in the absence of windfall gains it had received in the previous years due to inflating crude oil prices. Gross profit margin declined by 49%. Exchange rate loss caused finance cost to jump up by 80%, and is the major contributor for the decline of net margin to 1.09% from 4.11%. Return to assets and common equity followed on similar lines, falling to 3.62 and 8.83 respectively. These ratios measure the company's ability to turn investor's money into income profitably. The decline from last year's returns is large and hence reflects a relative decline in profitability of the company.
As the company suffered a drastic fall of 290% in profit after tax in FY09, the loss in fuel segment of Rs 2,699 million was transferred to special reserve as per the pricing formula. This reserve was created under the directives of Ministry of Petroleum and Natural Resources with effect from July 1, 2002. Refineries were directed to transfer to a 'Special Reserve', from their profit after tax attributable to fuel segment, an amount in excess of 50% of paid-up capital, as on July 1, 2002 attributable to fuel segment, to offset against any future losses or to make investment for expansion or upgradation. An amount of Rs 4.232 million was therefore available for appropriation.
Current assets underwent a structural change as the company liquidated 95% of its investments. (2008: Rs 3,615 million, 2009: Rs 197 million) At the same time receivable (9% increase) and trade debts (46% increase) went up, which doesn't bode well for the future liquidity of the company. The growth of current ratio must be interpreted with caution but an assessment of quick acid test ratio shows an increase from 1.06 to 1.26. This shows NRL's improved ability to pay off its liabilities on time and comfortably manage unforeseen costs. However prudent measures should be implemented to monitor the receivables and to increase investments in near future.
Asset turnover and equity turnover are maintained at approximately the same level in FY09 as last year's, indicating NRL's consistent efficiency of utilising its equity and assets for its operations.
Inventory turnover declined only slightly (FY09: 33.88, FY08: 34.63), after several years of sustained increases. Day sales outstanding registered a growth to 38 days from 25 days last year. The inability of debtors to pay is not surprising given the liquidity crunch, shrinking incomes and peaking inflation in the economy. However, it is risky for the company to extend receivables and increases probabilities of default. Consequently operating cycle also expands to 72 days from 59 days. Operating cycle measures the time period it takes the company to convert its expenditure on raw materials into cash from sales. Longer cycles indicate poor policy implementation to collect receivables in a timely fashion. NRL can potentially lose out its improving liquidity this way.
Long-term debt of NRL is near to the ground and constitutes retirement obligations fund only, which declined by 57% in FY09. Zero long-term loans keep the company at a low risk position especially in times of high interest rates and uncertain economic conditions. Major financing comes through short-term debt. NRL had a strong interest paying ability until FY08 where it drastically fell down to 7.07 and further down in FY09 to 1.69. This decline came on the back of huge exchange rate losses due to depreciation of Pak rupee, which ballooned finance cost for the company.
The Pakistan Credit Rating Agency (PACRA) has maintained long-term rating and short-term entity ratings of Packages limited at "AAA" (triple AAA) and "A1+" respectively. These ratings denote a very low expectation of credit risk emanating from a very strong capacity for timely payments of financial commitments. The ratings reflect the company's demonstrated efficiency in the refinery industry of Pakistan. Also, the company has been consistent in maintaining its strong debt and interest-paying ability as compared to its competitors.
Earnings per share registered a fall in FY09 at the back of 74% drop in profit after tax. This was augmented by low investors' confidence witnessed by the crash of KSE in the second half of 2008, reflected in decline of NRL share price. Despite this, the company maintained its ability to pay shareholders' dividend. Book value per share is sustained at over FY09.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi