Refinery: ATTOCK REFINERY LIMITED - Analysis of Financial Statements Financial Year 2005 - 3Q - Financial Year 2011

Attock Refinery Limited (ARL) is a pioneer crude oil refining company and a major supplier of refined petroleum products in Pakistan. It is a subsidiary of The Attock Oil Company Limited, UK and its ultimate parent company is Bay View International Group S.A.
It began its operations in 1922 in Morgah, near Rawalpindi and was the first refinery in the region. ARL became a private limited company in 1978, and in 1979, the company was converted into a public limited company. It is listed on all the three stock exchanges of Pakistan.

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COMPANY SNAPSHOT

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Name of company     Attock Refinery Limited

Nature of Business             Oil Refinery

Ticker                                 ATRL

Share price(as on Sept 30th 2010)     Rs 80

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The company's primary activity is to refine crude oil. It also produces certain petroleum products such as liquefied petroleum gas (LPG), unleaded petroleum solvent grade (PMG), naphtha, premium motor gasoline, mineral turpentine (MTT), JP-1 and JP-8, kerosene oil, high speed diesel (HSD), light diesel oil (LDO), furnace fuel oil (FFO), low sulfur fuel oil (LSFO), and polymer modified bitumen (PMB). ARL has an edge over other refineries because of its configuration which 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 (JBO), processing oil, carbon oil, and wax.
Industry overview
Oil and gas sector has been a major contributor in the economic development of the country. It contributes more than Rs 230 billion to the national exchequer annually. Oil and gas sector can be divided into three categories:
* Upstream - Exploration and Production
Pakistan has so far discovered 1 billion barrels of oil and 54 trillion cubic feet of natural gas. Sedimentary area is Pakistan covers 827,000 Sq. km, 1/3rd of which is under exploration. At present, 17 foreign E&P companies including major multinational companies are operating in Pakistan. Pakistan Petroleum Limited, Pakistan Oilfield Limited, Deewan Petroleum and Mari Gas Limited are some of the local E&P companies.
Mid-stream - refining
There are 7 refineries currently operating in Pakistan.

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Refinery             Location    Capacity (MT)

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Pak-Arab             Mehmodkot             4.5

Byco                 Hub                 2.187

National Refinery    Karachi              2.07

Pakistan Refinery    Karachi               2.1

Attock Refinery      Rawalpindi           1.82

Dhodak               D.I.Khan             0.12

Enar Petrotech       Karachi              0.13

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Total refining Capacity                 12.927

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Major players in the industry are as follows:
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 42,000 barrels per day equivalent to 1.8 million tons
5. Byco; production 30,000 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 287,000 barrels per day or 12 million tons hence 22,0000 barrels per day are imported.
National Refinery is the second largest refinery of the country in terms of refining capacity after Pak Arab Refinery (Parco) and is presently selling its products both locally and internationally. On an average, it contributed 22.7% in the total production of the country during the last five years.
FY10 has been a very challenging year for the entire oil sector, especially the refineries. FY09 saw severe 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 USD 35.35/bbl respectively. In comparison, prices varied between USD 70/bbl to USD 87/bbl during FY10, which is a considerable improvement. However, the stability in prices was not sufficient to maintain profitability, as the guaranteed return for the refineries was withdrawn, causing an erosion of the gross refiners margin (GRM). The average GRM for the year was insufficient to cover production costs, and the refineries could not, as a result, post a profit in the fuel segment of their operations. Start of FY11 was not very good for refining sector when the worst floods hit Pakistan along with the unresolved issue of circular debt, which has been hampering the industry for the past two years, has added to the difficulties, posing severe risks to liquidity and disrupting daily operations of the refineries.
Petroleum products off-take for the year grew by 8.52%, with volumetric sales standing at 20,314,743 MT (FY09: 18,719,300 MT). Demand for Gasoline (HSD and LDO) dropped, while furnace oil sales expanded by 15%.
Currently Parco, the market leader, works under oil refinery formula with 25 percent guaranteed rate of return up to December 2008. The profit of NRL, PRL and ARL up to 2001-2002 is under 10 percent guaranteed rate. The IPP formula was modified in 2002 and minimum 10 percent guaranteed with upper limit of 40 percent was done away with.
Tariff protection was allowed to NRL, PRL and ARL giving incentive of custom/deemed duty of 10 percent on high speed diesel (HSD) and 6 percent on kerosene oil, light diesel oil (LDO) and jet propulsion (JP-4) in their ex-refinery prices to operate on self financing basis. The formula was further revised in 2007-08 by reducing deemed duty to 7.5 percent on HSD and removing 6 percent deemed duty on kerosene, LDO and JP-4/8 through budgets. This reduction in deemed duty twined with fall in global oil prices and caused a considerable decline in the profitability of the oil refineries.
The companies have been actively involved in deliberations with the government over changes in the pricing policy; however no progress has been over the past year.
Share of the petroleum products is about 40% of the current energy consumption in Pakistan. This consumption has grown sharply during 1980s at the rate of almost 7% per annum. However, it showed a decreasing trend during 1990s and during 2004-05, it gained pace at about 10% per annum.
Oil consumption of energy products is dominated by gasoline and fuel oil. Gasoline in Pakistan consists of high-speed diesel (HSD) and light-speed diesel oil (LDO), while fuel oil consists of furnace oil.
The transport sector and agricultural sector are the two major users of gasoline in Pakistan. In recent years a high level of subsidy was provided by the government of Pakistan over gasoline due to which its consumption increased. In 2007 however, the increase of oil prices in the international market affected Pakistan's economy, and as a result the government is no longer in a position to provide the same amount of relaxation as before. The government has been gradually reducing the subsidy level, causing the local prices of gasoline to rise, and the consumption to drop. Secondly, the government is promoting the Compressed Natural Gas (CNG) sector in Pakistan and is encouraging as well as forcing certain sectors within transport to convert to CNG. This indicates that in the coming years Pakistan will see reduced consumption of gasoline products in the transport sector. There is however, no alternative for gasoline in the agriculture sector, which is facing extreme difficulties as a result of rising prices.
Furnace oil or fuel oil is normally used for production of electricity via thermal power plants. At the moment Pakistan is facing an extreme energy crisis due to which the government is planning construction of short-term power generation plants that are oil based, and is also encouraging independent power producers to invest in the country. As all the new thermal power plants are oil based and as the country has very limited natural gas resources, the consumption of furnace oil will also increase in the coming years.
Recent results (3Q11)
For the 9 months of FY11 in refinery operations, the positive GRMs in the 1st quarter remained the saving grace as ARL faced refinery operational losses in the 2nd and the 3rd quarter 2011 due to depressed GRMs. Other operating income from interest income, interest on delayed payments etc led to the operating results being positive at Rs 1,806 million as compared to a loss of Rs 474 million in the same period last year. ARL was able to post better results due to its income diversification through investment in associates. Non-refinery income contributed Rs 1,068 to the bottom-line as compared to Rs 626 million in the same period last year. PAT was recorded at Rs 1.95 billion with an EPS of Rs 22.87 as compared to an EPS of Rs 0.81 in corresponding period of FY10.
The removal of incidentals by Ogra has affected the margins of the sector, although ARL and NRL are least affected due to their diversified earning base.
The refining throughput during the nine months period ended March 31, 2011 was 10.851 million barrels (March 31, 2010: 9.920 million barrels) while the sales volume was 10.414 million barrels (March 31, 2010: 9.559 million barrels).
The company's profitability continues to be governed under an import parity pricing formula as modified with effect from July 1, 2002 whereby the minimum rate of return of 10% on paid-up capital was dispensed with and net profit after tax (if any) above 50% of paid-up capital as at July 1, 2002 is required to be diverted to a special reserve fund to
offset any future losses and/or make investment for expansion or upgradation of the refinery. However, the
government has, from time to time, made unilateral modifications in the Refineries Pricing Formula adversely affecting refineries profitability with the last revision made in the formula for HSD and motor gasoline in August 2008.
As reported in the Annual Report for 2010, the Ministry of Petroleum and Natural Resources (MoP&NR) had been submitting various proposals on revision of pricing formula for the consideration and approval by the Economic Coordination Committee. However, the refineries have not yet been communicated of any revision in the pricing formula and the matter is still pending.
Liquidity
In terms of liquidity, the company's position remained relatively stable, with only a slight improvement. The current ratio rose from 0.87 in FY09 to 0.91 in FY10. The ratio for the quarter remained at 0.93, which shows slight improvement but it is still below the industry average of 1.1. Similarly, the quick ratio rose from 0.75 to 0.77.uring the quarter, we can observed that the cash position of the company has improved substantially, however, trade debts have increased by almost 17% which must be a concern for the company. This increase can be attributed to the unresolved issue of circular debt, which is still haunting all major industries in Pakistan.
Among current liabilities, trade payables are the only major component reflecting an increase of 16% as compared to the same period last year.
Asset management
The issue of circular debt further aggravated during the period under review as the overdue receivables of
Rs 24 billion at the end of June 30, 2010 accumulated to over Rs 29 billion at the September 30, 2010. Consequently, the company is handicapped in meeting its regular obligations related to crude oil supplies. While the government is being continuously reminded to resolve the issue of circular debt plaguing the entire oil industry, there has been no improvement in the situation, which is progressively worsening.
However, due to favorable refiner's margin and in the best national interest to ensure continued supply of petroleum products, the company managed to operate at 101% capacity (September 30, 2009: 88%) despite severe liquidity crises. The refining throughput during the quarter ended September 30, 2010 was 3.508 million barrels (September 30, 2009: 3.261 million barrels) while the sales volume was 3.553 million barrels (September 30, 2009: 3.143 million barrels). Further, all the processing units of refinery operated smoothly.
Debt management
Like asset management, debt management of ARL has been on a decline this year. The debt to asset ratio increased from 0.73 in FY09 to 0.79 in FY10, showing an increase of the company's debt. The company is, however, in line with the industry, which has an average debt to asset ratio of 0.78. Total liabilities for ARL stood at Rs 46.4 billion, a 43% rise YoY. Total assets on the other hand stood at Rs 58.6 billion, a smaller rise of 32% YoY. The increases in both the total assets and total liabilities were due to increases in the current portions of the two accounts. This is visible in the long-term debt to equity ratio which is only 0.01; showing that the company has almost no long-term debt. Non-current liabilities stood at Rs 140 million (FY09: Rs 120 million), while equity stood at Rs 12.2 billion (FY09: 12.1 billion). This amount has remained relatively stable over the past few years, due to stability in both amounts. The total debt to equity ratio on the other hand is very high, showing considerable risk of the company. The debt to equity ratio stood at 3.8 in FY10, from 2.7 in FY09. This is due to the large increase in current liabilities, as mentioned earlier. The company's debt to equity ratio is considerably higher than the remaining refineries, further proof that ARL is more severely affected by trade debts than the industry.
Market value
The market price of the stock has been on a decline, with the price dropping from Rs 155 per share at the end of FY09 to Rs 80 per share at the end of FY10. The beta for the stock is 0.87.
Future outlook
The revision of the pricing formula as notified in August 2008 has had an adverse effect on the revenues of the refineries with prices of the main products HSD and PMG having being adversely impacted. These measures were taken by the GoP under extreme public pressure in addition to the earlier modifications it made to the pricing formula from time to time in the form of withdrawal of deemed duties on Jet Fuel, kerosene oil, and LDO. The year under review witnessed relative stabilization of international prices of crude oil and petroleum products, but a heavy erosion of the GRM. Unless this margin improves, refineries run the risk of running heavy losses. Furthermore, with the impending issue of circular debt, the liquidity of the refineries has been severely affected, and urgent steps are required by the government to resolve the problem.
To improve product quality with changing environmental standards and value addition, ARL is seriously considering installation of an Isomerization Complex to upgrade its Light Strain Run Naptha, to produce PMG with low benzene and aromatics. A Diesel Hydro Desulphurisation Unit to reduce sulfur content in HSD has also been planned. Further investment in the industry however depends on the awaited decision of the government regarding the pricing policy, as the refinery will only be able to afford investment if profitability improves.
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].
Copyright Business Recorder, 2011