Refinery: ATTOCK REFINERY LIMITED - Analysis of Financial Statements Financial Year 2005 - 1Q 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. ARL is presently 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
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Nature of Business                  Oil Refinery
Ticker                                      ATRL
Share price (end of period)                Rs 80
Market Capitalization           Rs 6,811,498,980
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The company's primary activity is refining 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 & 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.
RECENT RESULTS (1Q11)
During the quarter July-September 2010, the Gross Refiner's Margin (GRM) substantially improved as compared to the corresponding period of last year where the GRM was negative. The major reason for improvement in GRM was the favorable fluctuation in international prices of crude oil and petroleum products. The financial results also improved due to decrease in exchange loss to Rs 41 million as compared to Rs 127 million in corresponding period of the last year and increase in other income on account of delayed payment charges of Rs 163 million recovered on Fuel supplies. Consequently, the financial results for the quarter, after inclusion of other income of Rs 321 million, showed a net profit of Rs 583 million as against loss of Rs 396 million in the corresponding quarter of the last year.
ARL operated at 101% capacity (September 30, 2009: 88%), and 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).
INDUSTRY OVERVIEW
There are 5 refineries currently operating in Pakistan.
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.
In terms of market share, Attock Refinery Limited currently possesses the third position, with PARCO being the market leader. The market share of ARL stands at 17%, an increase from a share of 14% during FY09.
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 stabilisation 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. The 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%.
PRICING FORMULA FOR REFINERIES
ARL operates under the Import Parity Pricing Formula whereby net profit after tax greater than 50% of paid-up capital is required to be diverted to a special reserve to offset any future loss or to make investment for expansion or up-gradation of the refinery.
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 2001-02 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 customs/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.
CONSUMPTION AND PRODUCTION OF POL PRODUCTS
Share of the petroleum products is about 40% of the current energy consumption in Pakistan. This consumption has grown sharply during 1980s at rate of almost 7% per annum. However, it showed a decreasing trend during 1990's 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.
FINANCIAL PERFORMANCE
Sales and production: For ARL, sales for the year stood at Rs 88.2 billion, a 15% rise YoY (FY'09: Rs 76.5 billion). The refinery throughput was 13.943 million barrels, a small rise over the previous year, which was 13.126 million barrels. The refinery operated at 92% of its capacity, a commendable achievement considering the liquidity crisis being faced. Diesel, furnace oil and motor gasoline were the largest contributors to production, providing 29%, 22% and 21% to output respectively.
PROFITABILITY
While sales increased over the year, cost of sales increased by a greater proportion, leaving the company with a gross loss of Rs 509 million. Cost of sales for FY10 stood at Rs 88.69 billion, as compared to Rs 75.3 billion the previous year. The largest component of cost of sales is crude oil consumed, which stood at Rs 86.5 billion.
As mentioned earlier, the erosion of the Gross Refiner's Margin (GRM) from USD 1.92 per barrel to USD 0.80 per barrel, a drop of over 58%, played a large role in reduction of profitability this year. Loss from refinery operations stood at Rs 476 million, as compared to a profit of Rs 406 million at the end of FY09. After addition of income from non refinery operations, the company stood at an overall profit of Rs 126 million (FY09: Rs 1.02 billion).
Administrative expenses for the year grew by 10%, an expected rise considering the factor of inflation and growing costs of carrying out business. The main component of administrative expenses is salaries and wages, which also grew by the greatest proportion. Distribution costs grew by 19%, again due to an increase in salaries and wages. Finance costs fell considerably over the period, standing at Rs 309 million, as compared to Rs 1.47 billion during FY09.
Gross profit margin for ARL stood at -0.58%, due to the inability of the company to cover costs of production (FY'09: 2.51%). Due to the addition of income from non refinery operations, the company succeeded in maintaining a positive profit margin, which stands at 0.14% (FY09: 1.33%). The profit margin of the company is above the industry average, which stands at -0.44%, showing that ARL's poor performance is not unusual given the circumstances faced by the sector. ROA for the year stood at 0.22%, while ROE stood at 1.04%. Deterioration of the ratios is a direct result of the deterioration in the company's profit and is common for the sector as a whole.
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. Similarly, the quick ratio rose from 0.7 to 0.75. These changes can be attributed to a greater proportionate rise in current assets as compared to current liabilities.
Current assets for the year stood at Rs 48.3 billion, a 50% rise YoY (FY09: Rs 28.1 billion). The largest component of current assets, which is trade debts, almost doubled over the period, standing at Rs 30.4 billion. This includes Rs 24.7 billion due from PSO, and amount which has been increasing with time and is posing a serious threat to the company's operations as it cannot be liquefied in the foreseeable future. While it is considered a current asset, it does not truly contribute to the company's liquidity, and the company's position is thus much worse than liquidity ratios show.
Current liabilities for the year stood at Rs 46.25 billion, with a 43% increase YoY (FY09: Rs 32.3 billion). Trade and other payables stand at Rs 44.2 billion, and is the only major component of current liabilities. As per the directives of Ministry of Petroleum and Natural Resources, amount due for the purchase of crude oil is to be withheld from suppliers for 90 days, in interest bearing accounts.
ASSET MANAGEMENT
In terms of asset management, ARL has shown some deterioration. Inventory turnover has risen from 26 days in FY09, to 32 days in FY10. This is due to the combined effect of a moderate increase in sales, and a considerable increase in inventory. Inventory for the period stood at Rs 7.76 billion, a 44% rise over YoY. While inventory turnover of ARL is in line with the industry, the company's debt repayment is considerably worse than other refineries. Days sales outstanding increased from 73 days in FY09 to 124 days in FY10. This again is due to the combined effect of the moderate increase in sales and the relatively large increase in receivables (trade debts). ARL has been affected more severely by the problem of circular debt as compared to other refineries, as is visible from the days sales outstanding. The operating cycle thus stands at 156 days, compared to 99 days in FY09.
Total assets turnover again declined, dropping from 1.7 in FY09 to 1.5 in FY10. With sales increasing by 15%, and assets increasing by 32%, the increase in the total asset turnover was restricted. The sales/equity ratio was the only asset management ratio to show improvement. The figure increased from 6.34 in FY09 to 7.23 in FY10. This improvement is due to the increase in sales, with equity remaining stable.
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.
While the companies finance costs have dropped considerably this year, from Rs 1.47 billion in FY09 to Rs 309 million in FY10, the TIE ratio has still deteriorated. This is due to the sharp drop in EBIT for the year, from Rs 1.47 billion in FY09 to Rs 204 million in FY10. The company was thus unable to cover finance costs through earnings. The TIE ratio stood at 0.66, as compared to 1.81 in FY09.
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. This is an expected decline, and is the direct result of the collapse and then stabilisation of the stock market. It does not indicate poor performance of the company itself. The beta for the stock is 0.87, which means it provides less return than the average stock in the market, but is also less risky.
Earnings per share for ARL stood at Rs 1.48 per share, a decline of 88% YoY (FY09: Rs 11.92). The price earnings ratio stands at 53.9, as compared to 12.9 at the end of FY09. This shows that investors remain confident about the company's prospects despite the drop in earnings, and the share price has not fallen as much as the earnings would indicate. Book value remained relatively stable, with an increase of only 1% YoY. Book value stands at 143, as compared to 142 in FY09. Due to the difficulties faced by the company over the year, they were unable to announce any dividend to shareholders.
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 stabilisation 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 have been severely affected, and urgent steps are required by the government to resolve the problem.
ARL, in order to sustain economical operations, made strong representations to the Government jointly with other refineries for a review of the pricing formula and held several meetings and negotiations during the year. The government though acknowledging the refineries' difficulties remains under public and other pressure, and has not taken a concrete decision as yet. The refineries have emphasised on the government that a revision in the pricing formula is extremely essential in order that the refineries are able to maintain their normal operations to continue supplying petroleum products to the domestic market.
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 Naphtha, to produce PMG with low benzene and aromatics. A Diesel Hydro Desulfurisation 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].