BUSINESS RECORDER KARACHI FRIDAY 17 JUNE 2011

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Brief recordings
ational Refinery Limited (NRL) is a downstream energy company incorporated on August 19, 1963 as a public limited company. It is principally engaged in refining of crude oil and production of petrochemicals. The companys product portfolio includes, fuel products, lube base oils, asphalt and specialty products. The NRL is the sole producer of Lube Base Oils in Pakistan. The company operates three refineries, consisting of two lube refineries and one fuel refinery and a BTX (Petrochemical) plant. Its refineries are located in Karachi. NRL handles its business under two segments, namely, fuel segment and lube segment. It markets its products both at nationally and internationally. The company is headquar- propulsion (JP-4) in their ex-refinery prices to operate on self financing basis. The formula was further revised in 2007-08 by reducing tered in Karachi, Pakistan. 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.

National Refinery Limited

Analysis of Financial Statements FY05 3QFY11
Financial performance (3Q11) Positive GRMs, higher throughput and stable rupee contributed, along with positive performance of the lubes sectors contributed towards the increased profitability Of NRL. Net sales witnessed an increase to Rs. 106 billion as compared to Rs. 74 billion in the same period last year. Gross profit almost doubled from Rs. 3.6 billion to Rs. 7.1 billion. Other operating income surged by Rs. 1 billion while the selling, administrative and other expenses remained in line with inflationary pressures. Financial charges remained lower by Rs. 90 million. ratio further increased to 63% on YoY basis in this quarter. The company is however still in a better position than the industry, which has an average debt to asset ratio of 78%. Total liabilities for NRL stood at Rs. 37 billion. Total assets on the other hand stood at Rs. 58.7 billion. The increases in both the total assets and total liabilities were largely 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 0.7%; showing that the company has almost no long-term debt.

Sector 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 827,000sqkm, 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 are some of the local E&P companies. NRL enjoyed a tremendous boost-up in its PAT, which stood at Rs. 4.8 billion as compared to Rs. 1.96 billion the year ago, yielding an EPS of Rs. 60.60. Fuel segment showed a turnaround from losses in 9M10 due to better GRMs experienced specially in the 1Q11. Lube segment, despite 24 days planned shutdown performed satisfactorily. Sales (including exports) increased to 161,820 tons compared to 138,839 tons, which contributed significantly towards the improvement in profitability. However, sales of asphalt were 84,278 tons compared to 146,614 tons on account of lower demand from the public sector. As a result of the considerable drop in the companys finance costs this year, from Rs. 2.4 billion in FY09 to Rs. 696 million in FY10, the TIE ratio has shown improvement. The TIE ratio stood at 7* as compared to the 2* last year. Market value Throughout the quarter, the market price of the share showed a continuous increase. The share price, which dropped last year, slowly and gradually increased reaching 202 as on 30th September 2010. This reflects the improving conditions of the companys profitability and decreasing risk associated with investment. Earnings declared in the quarterly report showed a 100% increased as opposed to last year on YoY basis. EPS for NRL stood at 16.87 Rs as opposed to 8.17 last year in the same period. This shows that while the companys earnings have improved over the period, the market has not responded and investors remained doubtful, as the share price did not increase significantly.

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 * Mid Stream - Refining and Fuel oil. Gasoline in Pakistan consists of High Speed Diesel There are 7 refineries currently operating in Pakistan. (HSD) and Light Speed Diesel Oil (LDO), while fuel oil consists Major players in the industry are as follows: 1. PARCO; production 100,000 barrels per day equivalent to 4.5 of furnace oil. 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 220,000 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). On an Transport and agricultural sectors are the two major users of average, it contributed 22.7% in the total production of the country gasoline in Pakistan. In recent years, a high level of subsidy was provided by the government of Pakistan over gasoline due to during the last five years. which its consumption increased. In 2007, however, the increase of oil prices in the international market affected Pakistans 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. 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 start of FY11 was not very good for the refining sector as 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 2001-02 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 custom/deemed duty of 10 percent on high speed diesel (HSD) and 6 percent on kerosene oil, light diesel oil (LDO) and jet

Liquidity In terms of liquidity, the companys position remained relatively stable, with only a slight deterioration as compared to the same period last year. NRL is performing better as compared to the sector in terms of liquidity, and its current ratio of 1.46, which is well above the industry average of 1.10. The issue of circular debt continued haunting the company during this quarter; however the company managed to keep the overdue receivables at a constant figure of Rs 9,393 million. Oil industry is looking towards the government to develop a mechanism that could settle the aggravating issue of circular debt.

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.

Future outlook NRL, 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 emphasized 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. On continuous persuasion by all refineries of the country, it is encouraging to note that the government is revisiting the issue to rationalize the Pricing Formula. The company is hoping that the revision of pricing formula would provide a Gross Refining Margin that allows reasonable returns to the stakeholders. Also the Current assets at the end of the quarter stood at Rs 54.9 billion as issue of circular issue is likely to be resolved in this financial year against Rs 47.9 billion in the 1st quarter of FY09. The largest pro- due to continuous pressure from the IMF. All this is reflecting a portionate change was seen in stocks in trade, which is a rise of positive outlook for the oil industry and NRL. 36% indicating a troubling liquidity position for the company. Trade debts, another large component of current assets grew by only 10%, which is an achievement for the company given the current situation of circular debt which is affecting the sector. Current liabilities for the year stood at Rs. 37.5 billion as opposed to Rs 31.9 billion last year. Trade and other payables stand at Rs. 33.3 billion, and are the only major component of current liabilities. Asset management In terms of Asset Management, NRL has remained relatively stable, with only a small decline. Inventory turnover has remained steady, at 34 days during both FY09 and FY10 and it has continued during the quarter. This is due to the stability in both sales and Economics and Finance Department, Institute of Business inventory over the period. Days sales outstanding increased from Administration, Karachi, prepared this analytical report for 38 days in FY09 to 43 days in FY10 and another increase of 2 Business Recorder. days in this quarter. This again is due to sales remaining stable, Disclaimer: No reliance should be placed on the [above informaand receivables increasing by a relatively larger proportion. The tion] by any one for making any financial, investment and business operating cycle thus stands at 79 days, compared to 72 days in decision. The [above information] is general in nature and has not FY09. The companys operating cycle is considerably shorter than been prepared for any specific decision making process. [The newsthe industry average, which stands at 96 days. paper] has not independently verified all of the [above information] Debt management and has relied on sources that have been deemed reliable in the Like asset management, debt management of NRL also declined past. Accordingly, the newspaper or any its staff or sources of inforover the year. The debt to asset ratio increased from 59% in FY09 mation do not bear any liability or responsibility of any conseto 62% in FY10, showing an increase of the companys debt. The quences for decisions or actions based on the [above information].