Refinery Co: PAKISTAN REFINERY LIMITED - Analysis of Financial Statements June 2008-September 2009
OVERVIEW (November 14 2009): Pakistan Refinery Limited (PRL), was incorporated in 1960. It is situated in Karachi and engaged in the production and sales of petroleum energy products as well as MTT, its only non-energy product. Its operations encompass extensive installations in the refinery premises at Korangi, Karachi terminal, storage facilities at Keamari, Karachi and pipeline network: Korangi to Keamari. Pakistan Refinery Limited engages in the production and sale of petroleum products in Pakistan.
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 Defense Force, and railways. It is listed on Karachi and Lahore stock exchanges.
There are 5 refineries currently existing in Pakistan which are
1. PARCO; production 100,000 barrels per day equivalent to 4.5 million tons
2. NRL; production 65,000 barrels per day equivalent to 2.8 million tons
3. PRL; production 50,000 barrels per day equivalent to 2.2 million tons
4. ARL; production 40,000 barrels per day equivalent to 1.8 million tons
5. BOSICOR; production barrels per day equivalent to 1.5 million tons
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.
RECENT RESULTS 1Q09
The country witnessed a growth of approximately 19 percent in POL sales during the first quarter as compared to the corresponding period last year. The refinery operated at a capacity of 5,509 MT/day as against 5,262 MT/day from the corresponding quarter last year. Iran light crude and Arab light crude prices remained at average prices of USD 69.3/bbl and USD 68.9/bbl respectively. During the first quarter ended September 30, 2009 the overall sales volume increased by 8 percent from the same period last year.
However due to fall in prices, the sales revenue declined by 22%. Subsequent to a very challenging year, the first quarter for the year 2009-10 posted after tax loss of Rs 672 million as compared to loss of Rs 1,390 million for the same period last year. This figure includes an exchange loss of Rs 453 million due to depletion in value of Pak Rupee of approximately 2.6 percent during the quarter under review. Going forward, the refining margins are expected to remain fickle, though showing slight improvement from the last year's figures.
Name of company Pakistan Refinery Limited
Nature of Business Oil Refinery & Distributors
Share price (avg.) Rs 90
Market Capitalization Rs 3,765,650,000
CONSUMPTION AND PRODUCTION OF POL PRODUCTS IN PAKISTAN
Share of the petroleum products is about 40 percent of the current energy consumption in Pakistan. This consumption has grown sharply during 1980s at rate of almost 7 percent per annum but it has shown a decreasing trend during 1990s and later it gained the pace during 2004-2005 at about 10 percent per annum. Oil consumption of different energy products, is dominated by gasoline and fuel oil. Gasoline in Pakistan consists of high-speed diesel (HSD) and light speed diesel oil (LSDO), while fuel oil is normally used in terms of furnace oil, which uses in thermal power generation projects.
Transport and agricultural sectors are the two major users of gasoline. Transport sector, include both private and commercial types. In the recent past, a very big amount of subsidy was provided by the government of Pakistan over gasoline, which has increased its consumption. But in 2007, unprecedented increase in the oil prices in the international market affected Pakistan's economy, due to which government is not in a position to provide relaxation on gasoline as some years back.
The government is gradually reducing the subsidy levels; as a result, gasoline prices are increasing locally and affecting the consumption. Secondly, the government is promoting the compressed natural gas (CNG) sector in Pakistan and both encouraging and forcing the transport sector to convert on CNG. This indicates that in the coming years Pakistan will see reduced consumption of Gasoline products. But there is no alternative of gasoline in the agriculture sector thus it is facing extreme difficulties due to rise of gasoline prices.
Furnace oil or fuel oil is normally used for production of electricity via thermal power plants. At the moment country is facing extreme energy crisis and government is planning for short term power generation plants that are oil based and also encouraging independent power producers to invest in the country. As all the new thermal power plants are oil based and also country has now very limited natural gas resources the consumption of furnace oil will also increase in the coming years.
FY09 has been a very challenging year for the entire oil sector and especially for refineries. The refineries were badly affected due to highly depressed refining margins, reduction in deemed duty on certain refined products and inventory losses. Additional burden was placed on PRL due to liquidity issues resulting from high receivables and depreciation in the value of Pak rupee. Consequently, PRL incurred a post-tax loss of Rs 4,572 million during the year ended June 30, 2009 compared with a profit of Rs 2.111 million last year.
The year 2008-09 saw historical fluctuations in international petroleum prices with prices of Arab Light crude reaching all time high of USD 143.09/bbl and slumping to a low US $35.35/bbl respectively. This year witnessed an international financial meltdown and its impact trickled down on our national economy. The country recorded a decline in foreign exchange reserves and a steep raise in the interest rate. Petroleum products off-take in the country during the year almost remained at last year's level of approximately 187.7 million MT, including Furnace Oil and Diesel at 8.1 million MT and 7.6 million MT respectively.
Company's annual operational performance 2008-09 vs. 2007-08 remained as follows:
* 5.316 MT of crude oil were processed per day as compared with 5.955 MT/day last year.
* Sales volume of products decreased by 17% over last year.
* Local crude was processed at 945 MT/day as compared with 885 MT/ day last year.
The company desires to comply with Government directives of production of environmental friendly products by 2012. However, depleting financial reserves have seriously impaired the company's ability to achieve scheduled completion of Upgrade Project and Government support is imperative for timely completion of the project. The company management individually and collectively with other refineries has approached the government for support in installation of Hydroesulphurising Facility to meet EURO II applications for diesel production.
During the year, PRL entered into a USD 50 million short-term loan agreement with ECO Trade and Development Bank (ETDB) of Turkey at a very economical cost for the purpose of financing company's crude oil imports from Iran. This facility helped minimize the liquidity problems faced by the company faced by the company due to inter corporate circular debt issue of the energy sector. The circular debt problem resulted in additional financial charge of Rs 566 million to the company.
During 2008-09 the company recorded huge losses mainly due to unsustainable refinery product pricing mechanism, a steep fall in international crude oil prices, and adverse global refining margins. Rupee depreciation and the issue of circular debt all contributed to the huge loss. The company had smooth operations during the year and key performance indicators were maintained within the targets. There was no unplanned shutdown during the year. In November 2008, planned shutdown of ten days was carried out in order to improve plant's operational efficiency which was timely completed as per the budgetary limits and without any Lost Time Inquiry. During the year, plant throughput was 1.89 million MT which tantamounts to 5,316 M. Ton per day.
All efforts were made, including introduction of Distributed Control System (DCS) for Platformer unit, to maintain highest standards of safety, quality, engineering and environment while minimizing operating cost. The company has maintained improvement in reliability of plant to achieve the targeted four-year turnaround cycle length. Considering the difficult economic scenarios in which the refinery operated during the year 2008-09, the management made concerted efforts towards controlling operating costs and a number of initiatives were taken in this regard. PRL hence managed to operate with the lowest operating cost as compared to other refineries of the country. Control systems were strengthened and improved to contain possible losses and promote good governance.
The financial year 2008 witnessed a phenomenal growth in the profitability of the company. The company earned a profit after tax of Rs 2,111 million during the year ended June 30, 2008 as against a profit of Rs 250.81 million in the last year. However, the bottom line saw a drastic decline, recorded at a loss Rs 4,572 during the year ended June 2009. Cost of the sales incurred in this year exceeded the revenue generated by PRL. Other expenses registered a decline over the year; however, the finance cost for the company increased by 304%, and furthered aggravated the loss for the company.
Important constituents of the finance cost were the exchange loss and the mark-up on running finance. The loss incurred in FY09 worsened associated profitability indicators, the return on common equity being the worst affected. From historically high margins from FY08, the company's margins hit all time record low in FY09. Even though the trend of declining refiners' margins is in line with the other industry players, PRL stood the worst affected by the crisis that plagued the refining sector.
Liquidity deteriorated slightly during FY08 as compared to FY07 because there was a tremendous increase in accrued interest/mark-up. The amount for accrued interest rose by a staggering 3799.3%. In 2007 accrued interest were just fewer than 2 million rupees though at the end of the FY08 the amount increased to 77.5 million rupees. This deteriorating trend persisted in FY09, with both the current and acid test ratios registered a fall. This is especially worrisome for the company since this year the current liabilities exceed the current assets of the company by Rs 1,230 million. This is mainly at the back of the new short term borrowing of Rs 4,105 million acquired by the company.
Even though this should have improved the profitability of the company, the effect has offset by the significant 82.5% decline in the trade deposits and prepayment component of current assets, hence causing the decline in liquidity. Also there has been an increase in the trade debts by 52%. This represents money tied up with debtors, and being of most illiquid nature, it can potentially hurt the cash flow of the company.
The operating cycle increased during FY08 because of the increases in inventory turnover and day sales outstanding. DSO has increased because of the rise in trade debt from Rs 4.78 billion to 10.43 billion in FY08 on a YoY basis. Secondly Inventory turnover also rose from 16.74 days in 2007 to 17.58 days in 2008 because stock in trade increased from Rs 5.1 billion to Rs 9.1 billion in 2008 on a YoY basis. All in all the company's overall ability to manage its assets deteriorated as the found it difficult to get cash out of debtors and reduce stock in trade. Both sales/equity and total asset turnover improved during the FY08 because of higher sales and subsequent higher profits.
FY08 FY09 % change
Inventory turnover 17.58 20.16 14.68%
Day sales outstanding 19.64 33.80 72.10%
Operating Cycle 37.23 53.95 44.91%
The operating cycle further went up in FY09, corresponding to increases in DSO and inventory turnover. Decline in sales revenue and rise in trade debts contributed to this deteriorating trend. Sales/equity ratio shows a drastic increase from 14.04 times in FY08 to 35.27 times in FY09. This is mainly at the back of 68% decline in equity, which decreased due to the diminution of the special reserve.
Total Assets turnover reduced in FY09, indicating a fall in income generating ability of the assets utilized, despite an increase in total assets by 37%. There has been an increase of 140% in the value of property, plant and equipment. The company has initiated projects to produce more profit generating products and it is expected that such an investment will turn around the poor profitability of the company and generate positive returns in the future.
Debt/equity ratio has increased from 2.06 in 2006-07 to 2.49 in 2007-08 because total liabilities increased by some 71.52% in FY08 on a YoY basis. Long-term debt to equity increased to 0.7% in FY08. Such a low long-term to equity figure represents a fact that most of the financing of assets in done through short-term debt. The debt/asset ratio rose from 67.28% in FY07 to 71.37% in FY08. The major increase is in the short-term debt of the company. This is also a reason for the increase in finance costs by 209.66%. Even though financial costs rose but TIE (times interest earned) increased from 7.09 to 13.76 in FY08 on a YoY basis.
In FY09, debt/equity ratio climbed up to 13.94 (FY08: 2.49) due to the fall in equity as well as the increase in short term borrowing, particularly the short term loan acquired from the ECO Trade & Development Bank (ETDB) of Turkey. Long term debt to equity decline to 0.20 (FY08: 0.69) as the company did away with its balance of deferred tax. Debt to assets tool took a leap and stood at 93% at the year-end (FY08: 71%). This means that the company is increasingly relying on short-term borrowing to funds its working capital and its non-current assets. Due to negative earnings recorded in this year, times earned ratio couldn't be calculated. This ratio is significant to the creditors of the company.
CRUDE Million Tons per Annum 2007 2010 2015
Processing Capacity 12.61 22.45* 33.63*
Indigenous Supply of crude 3.86 4.8 4.8
Import Requirement 8.75 17.65 28.83
The market outlook of PRL took a drastic turnaround since the company registered a massive blow to its profitability on the back on fluctuating international oil prices, reduction of deemed duty, and depletion of Pak Rupee against USD. Security and political concerns reduced the investment numbers causing a sharp decline in the stock market during many periods of the year. The average price of the share was recorded Rs 90 in FY09 as against Rs 151 in FY08. At the back of the loss incurred in FY09, the earnings per share declined to negative Rs 130.6 from Rs 60.3 in FY08. Owing to the losses in the FY09, no dividends were announced for the shareholders.
*Assumes planned refineries (Indus & Bosicor) are operational
**Assumes planned Coastal Refinery is operational.
The future energy consumption poses a challenge for the country, mainly because of the projected increase reliance on foreign sources of supplies for crude. Such dependence means that the profitability of the refinery is closely inter-linked with the international petroleum products and crude oil prices, which is subject to many fluctuations.
The revision of the Pricing Formula by the Government is not in the interest of the refinery. The reduction in the deemed duty has been a blow to the profitability, the situation being further augmented due to the depreciation of Pak rupee against the US dollar. Issuance of Rs85bn TFC for the clearance of circular debt has failed to bore desire result in the elimination of the liquidity crunch for the sector. Of the total disbursed amount, the refinery sector received only Rs 21bn of which Rs 19bn was allocated to PARCO (which was adjusted against payable to the GoP) while the residual was disbursed to PRL and BOSI. Whereas the other two listed refineries, NRL and ATRL reaped little fruits of the disbursement.
DECLINING CAPACITY UTILIZATION IS EXPECTED ON THE BACK OF THE FOLLOWING REASONS:
i) subdued POL product spreads
ii) reduction of deemed duty by 250bps to 7.5% on HSD and
iii) inflated working capital financing on account of circular debt
The refinery has undertaken an upgrade project, primarily to meet the Government's regulations for introducing Euro II fuel specifications for the year 2012. The effort will specifically address reducing sulfur content in High Speed Diesel (HSD) from 10,000 ppm to 500 ppm. Subsequently, project objective is to improve refinery profitability by partially converting High Sulfur Fuel Oil (HSFO) into HSD and therefore shifting slate to a more profitable product mix, ensuring sustainable profits for the company.
Several options, for future funding of the project, are being explored by the company to execute the project. However, depleting reserves may hamper the pace of work in progress on the upgradation project and Government support is imperative for timely completion of the project.