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Coronavirus
VERY HIGH Source: covid.gov.pk
Pakistan Deaths
27,246
4024hr
Pakistan Cases
1,226,008
2,16724hr
4.22% positivity
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450,787
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32,769
Islamabad
104,242
KPK
171,388

FY19 wreaked havoc on the downstream oil and gas sector, especially the refining segment where the listed refineries showed staggering losses after tax for the fiscal year. Attock Group, which is the only integrated oil and gas group with booth upstream and downstream oil and gas operations, also saw difficult times in FY19

Attock Refinery Limited 
Rs(mn)  1QFY20 1QFY19 YoY
Net  sales          36,173          44,458 -19%
Cost  of  sales          36,430          45,080 -19%
Gross  profit/(loss)              (257)              (622) -59%
Administrative  expenses                179                186 -4%
Distribution  costs                  13                  12 8%
Other  income                864                626 38%
Operating  profit/(loss)                407              (194)
Finance  cost                353                744 -53%
Profit/(loss) after  taxation  from  refinery  opr.                    7              (727)
Non-refinery  income:                362                662 -45%
Profit/(loss)  after  taxation                370                (64)
Earnings  per  share  -  basic  and  diluted  (Rs)
Refinery  operations               0.07             (6.82)
Non-refinery  operations               3.40               6.21
              3.47             (0.61)
Gross margin -0.71% -1.40%
Net margin 1.02% -0.15%
Source: PSX

Both its refineries National Refinery Limited (PSX: NRL) and Attock Refinery Limited (PSX: ATRL) had abysmal financial performance during the year. Where ATRL saw its earnings nosediving from a profit of Rs579 million in FY18 to a loss of over Rs5 billion in FY19, NRL posted a loss of over Rs8.5 billion in FY19 versus a profit of Rs1.77 billion in FY18! The catalyst to the recent downgrade in profitability has been the phasing out of furnace oil as the refineries initially were unable to clear stocks, suffering from inventory losses and then later had no option but to lower petroleum refining due to lower furnace oil demand as well as age old refining process that inhibited operations.

National Refinery Limited 
Rs(mn)  1QFY20 1QFY19 YoY
Net sales        39,268        41,259 -5%
Cost of sales        39,456        41,781 -6%
Gross profit           (188)           (521) -64%
Distribution and marketing expenses            197            191 3%
Administrative expenses            234            227 3%
Other operating income            102              90 13%
Other operating expenses                5                4 22%
Operating profit           (523)           (853) -39%
Finance cost            371            468 -21%
Profit after taxation           (679)         (1,066) -36%
(LPS)/EPS (Rs/share)          (8.49)         (13.33) -36%
Gross margin -0.48% -1.26%
Net margin -1.73% -2.58%
Source: PSX 

While it might be too early to comment on how the refining segment would perform in FY20, there have been some streaks of improvement in ATRL's and NRL's financial performance in 1QFY20. ATRL has posted a profit after tax of Rs370 million versus a loss after tax of Rs64 million in 1QFY19, whereas NRL that continues to stay in the loss zone with losses of over Rs670 million, but the loss after tax is seen coming down by 36 percent year-on-year in 1QFY20. However, improvement in financial performance has not come from improving revenues, but a decline in exchange losses as portrayed by declining finance costs of the two refineries, which means that demand scenario is still the same: weak.

If the news reports are to be believed, the refining segment in the country is gearing up for some major overhaul with around six new refineries in the works. Such likely competitive environment should force the existing players to pick up their act and upgrade and work towards deep conversion refineries to remain relevant.

They should avail the 5-year window incentive given by the government along with other concessions in machinery and equipment import to upgrade. Simply banking on non-refinery operations to bail out (as in the case of ATRL) and pinning all hopes to the improvement in the lube segment (NRL is a lube refinery) would not cut it.

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