Lube it or leave it

Pakistans two major refineries, National Refinery (NRL) and Attock Refinery (ATRL) announced their much-awaited financial results for FY10 on Thursday. And both of which were in stark contrast to each other; NRL boosted its profits, whereas ATRL suffered a huge bow.
What explains such contrasting fortunes for two companies operating in the same industry one may ask? The answer lies in the lubes.
Yes, it is the lube oil segment of the NRL that continues to be the saviour for the company even in the worst of times. ATRL, on the other hand, enjoys no such luxury and remains on the mercy of the oil price volatility - and eventually the refining margins.
Both companies generated more revenues than the previous year, but it was due to higher oil prices. The production side of things tells a sorry story as both the NRL and ATRL lost 16 percent and 2 percent in their respective production volumes over the year-ago period.
The decline in the refinery throughput primarily stemmed from the ever-mounting circular debt, coupled with abysmally low gross refining margins during the period, which kept refineries at bay from operating at their optimal capacities.
The vast difference in gross profit margins of the two companies, therefore, only has one reason mentioned earlier: NRLs lubes advantage. Minus the lubes, the business of both firms stand almost on the same grounds with negative margins as their core refining business has not yielded positive margins for a long time now, owing to a variety of reasons, of which the refinery pricing formula is one.
The relatively stable worth of rupee (in the sense that it did not fall as drastically as it did in FY09) against the greenback during much of the reported period helped the refineries contain their exchange losses that had previously eroded a major chunk of whatever little operating profits remained.
The rupee-dollar parity remains a key variable for the refineries performance and FY11 may not be as good as FY10 in this regard, if economic conditions of the country remain in turmoil. The rupee is expected to depreciate 6-7 percent to about 90~92 against the US dollar by the end of this fiscal year.
Going ahead, NRL seems to be on the safer side as any potential negatives of a drop in oil prices would be mitigated by its lube business as furnace oil acts as the major feedstock. ATRL, on the other hand may continue to grind low or even negative refining margins, if the circular debt continues to haunt the whole industry and if there is no revision in the pricing formula.
For refiners, there are plenty of reasons to slip in the hole.

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NRL P&L                                                              ATRL P&L

Rs (mn)                 FY10      FY09  % chg        FY10        FY09   % chg

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Sales                110,186   109,579     1%      88,184      76,546     15%

Cost of sales        103,854   104,302     0%      88,694      75,342     18%

Gross profit           6,333     5,277     20%       (510)      1,918   -127%

Gross margin             5.7%      4.8%    19%       -0.6%       2.5%   -123%

Finance cost             696     2,394    -71%         309      1,472    -79%

PAT                    3,285     1,533    114%         126      1,017    -88%

EPS (Rs)               41.08     19.17                1.48      11.92

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Source: KSE notice