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Pakistan Refinery Limited (PSX: PRL) was first incorporated in May 1960, and is a player in the downstream petroleum sector. PRL is engaged in both sale and production of petroleum products and is listed on the Pakistan Stock Exchange.

PRL started its operations from a refinery that was completed and became operational in 1962 in Korangi, Karachi. From then on, the company expanded to include another refinery in Southern Punjab, which expanded its operational capacity from 1 to 2.1 million tons of crude oil annually. The refineries have the capacity to process 47,000 barrels of crude oil per day into a variety of distilled petroleum products such as furnace oil, high speed diesel, kerosene oil, jet fuel and motor gasoline, etc. On the demand side, PRL''s customers include all the major oil marketing companies such as Shell Pakistan Limited, Total Parco Marketing Limited (formerly Chevron Pakistan Limited) and Pakistan State Oil Company Limited. According to company website, PRL is also a principal manufacturer and supplier of petroleum products to the Pakistan Defence Forces.

Pattern of shareholding The company is owned by a diverse number of stakeholders as illustrated in the graphic. Some 72.3 percent of the company is owned by associated companies such as Shell, PSO, and Hascol Petroleum. These companies are leading oil marketing companies so their stake in the company ensures demand. About 19.4 percent of the company is owned by the general public, and the rest is divided among banks, mutual funds, and company employees.

Financial performance Over the past several years, PRL''s financial performance has remained patchy. As noted in the company''s annual reports, one of the main reasons for that is the negative effect of the pricing mechanism of High Speed Diesel, whereby the refineries are required to pay the difference between actual import price and notional ex-refinery price. This pricing mechanism, introduced in 2013, discourages the firm to improve efficiency in this particular department and so is detrimental to the industry.

Despite this, the company was able to turn a profit in FY16, primarily due to the introduction of a new isomerisation unit, which was introduced in 2015. We see that even though the company''s revenue did not increase, its cost of sales decreased from 100.7 percent FY15 in to 96.9 percent of sales in FY16. That allowed the firm to turn in a profit. And it indicates better optimisation of processes.

Similarly, it is promising to see that earnings per share have also gone from negative to positive during FY16. However, they remain extremely low, at Rs 0.93. The situation has been somewhat controlled and changed by issuance of more share capital. According to PRL''s FY16 annual report, the management had issued right shares amounting to Rs 2.8 billion, as a result of which share capital stood at Rs 2.94 billion at FY16 close. This is important because the company has consistently had reserves in the red, amounting to negative Rs 4.27 billion in FY16. Similarly, net current assets have also been consistently negative for the past several years.

According to PRL''s annual report, the company made an attempt to enhance its running finance facilities to Rs 8.75 billion from Rs 8.1 billion by adding two more banks. This is worthy to mention because the fact that new banks trust the company with more credit indicates its credit worthiness. PRL''s debt turnover ratio was quite high in FY12 and FY13, but it dropped in FY14 and FY15. The company was able to redeem it and brought it to 32.35 in FY16. Similarly, its creditor turnover ratio took a hit in FY13 and increased to 7.79. Otherwise it has remained fairly consistent and low around 5.

It is important to note here that PRL has term contracts with international crude oil companies like Abu Dhabi National Oil Company of United Arab Emirates, thereby ensuring supply. Being one of the oldest refineries in Pakistan, PRL also has access to indigenous local crude oil, which makes about 20 percent of the company''s crude oil mix. On the other end of the spectrum, the company has long-term sales contract with all the leading oil marketing companies in Pakistan, thereby ensuring demand.

Financial highlights: FY16 With the introduction of the new isomerisation unit, introduced in 2015, and fully operational in 2016, the company has been able to turn a profit of Rs 283.4 million in FY16. We see that the introduction of isomerisation plant improved efficiency. Gross margin improved from -0.743 percent to 3.074 percent - the highest in the last five years. Similarly, net margin also increased in 2016 as the firm achieved greater operational efficiency.

However, revenue decreased significantly in FY16. Despite the fall in revenues, the company remained afloat and produced a profit, which is a testament to the efficacy and advantage of the isomerisation plant. However, the fall in revenues is extremely alarming and may hit investor confidence. The fall in revenue was primarily due to the increase in oil prices in 2016 and shows that the company is severely exposed to the market.

Another factor adding to PRL''s top line woes is the decrease in exports of the company, which fell significantly in FY16 to $30 million from $122 million in FY15.

PRL in 1HFY17 Latest financial show that PRL is on its way to consolidate the profitability it showed in FY16. During the half-year ended December 31, 2016, the revenues continued to slump, thanks to still weak low oil prices. Yet the firm was able to expand its profitability margins by a notable degree. This owes mostly to better first quarter performance compared to the second quarter of the ongoing fiscal. Higher gross refinery margins and higher ''other income'' have supported the firm''s profit margins in the first half.

Yet, the company, as at December 31, 2016 had a negative equity of Rs 0.72 billion, which was due to accumulated losses worth Rs 4.15 billion. Also, PRL''s current liabilities exceed the current assets by a wide margin, of Rs 7.6 billion, as per the company''s latest stock filing. In the same notice to PSX, the company included an excerpt from the auditors'' report. The negative equity and liquidity situation "indicate that a material uncertainty exists that may cast significant doubt on the Company''s ability to continue as a going concern", as per the extract.

The stock has underperformed the broader index for much of 2016. The return to profitability, along with its credit lines and a visible reduction in negative equity since FY16 close, may provide some comfort to the firm''s shareholders.

Outlook PRL may have returned to profitability, but the storm is not over yet. There is still some time to go before it can regain a healthy financial footing overall. The commissioning of the isomerisation plant is good for the operational efficiency and cost savings. But the dropping top line will be a source of pain, even as uncertainty surrounds crude futures. In this scenario, company needs all the cash it can get to straighten up its finances. The company has indicated that it is planning to upgrade to government-mandated Euro-II diesel specifications, which will require the installation of a Diesel Hydrodesulphurization Unit. That will require more capex from an already-struggling firm.





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PRL: Pattern of shareholding No of Shares held % of total

(as at June. 30, 2016) shareholders shares

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Directors, CEO and their 4 83,185 0.03%

spouse and minor children

Associated Companies, Undertakings 5 212,563,900 72.30%

and Related Parties

Hascol Petroleum Limited 1 43,249,500 -

Pakistan State Oil Company Limited 1 70,875,000 -

Chevron Global Energy Inc. 1 2,625,000 -

Shell Petroleum Company Limited 1 94,500,000 -

Fossil Energy (Private) Limited 1 1,314,400 -

Modarabas & Mutual Funds 11 10,130,975 3.45%

Insurance Companies 2 5,180,934 1.76%

Banks, DFIs, NBFIs 6 130,580 0.04%

General Public (Local and Foreign) 8,797 57,001,191 19.39%

Others 98 8,909,235 3.03%

Total 8,923 294,000,000 100%

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Source: PRL Annual Report, 2016





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PRL: Historical financial position

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FY12 FY13 FY14 FY15 FY16

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Profitability

Gross margin 0.023% 1.475% -0.498% -0.743% 3.074%

Operating margin 0.011% 1.202% -0.551% -1.080% 2.147%

Net margin -1.270% 0.375% -0.608% -1.296% 0.438%

Liquidity

Current ratio 0.89 0.86 0.76 0.67 0.6

Quick ratio 0.63 0.42 0.39 0.34 0.3

Asset utilisation

Debtor turnover (days) 44.05 43.54 24.9 29.66 32.35

Creditor turnover (times) 4.82 5.21 7.79 5.07 5.33

Inventory turnover (times) 15.06 13.84 13.83 12.09 11.83

Total assets turnover (times) 3.72 4.82 4.93 2.96 2.61

Fixed assets turnover (times) 28 25.85 19.19 7.52 5.35

Investment

(Loss)/Earnings per share -7.4 2.27 -3.96 -5.42 0.93

Price earning ratio (times) * 35.81 * * 44.28

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Source: Company accounts *not applicable due to loss





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PRL: Latest financials

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Rs (mn) 1HFY17 1HFY16 YoY 2QFY17 2QFY16 YoY

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Net sales 34,305 37,380 -8.2% 17,066 18,151 -6.0%

Cost of sales 33,268 36,464 -8.8% 16,533 16,959 -2.5%

Gross profit 1,037 916 13.2% 533 1,192 -55.3%

Operating profit 1,162 737 57.7% 784 1,107 -29.2%

Profit after tax 690 209 230.2% 568 857 -33.8%

EPS (Rs) 2.22 0.69 221.7% 1.83 2.76 -33.7%

Gross margin 3.02% 2.45% 3.12% 6.57%

Operating margin 3.39% 1.97% 4.59% 6.10%

Net margin 2.01% 0.56% 3.33% 4.72%

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Source: PSX



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