Local oil Refineries to face huge inventory losses

Local oil refineries are likely to face huge inventory losses which may drag their earnings in red keeping in view of decline in average crude oil prices during second quarter of current financial year 2022-23.

Given 16%QoQ decline in average crude oil prices during 2QFY23, analysts expect local refineries to incur huge inventory losses which may drag earnings for few refineries in red.

Further erosion in earnings to stem from 17%QoQ decline in Gross Refinery Margins (GRMs) as product prices of major fuels including HSFO, MS and HSD in international markets sharply fell compared to crude oil price.Govt to allow 100% Financing for refineries’ upgradation projects

Going forward, we believe that refineries may witness net losses during 2HFY23 amid expected decline in oil prices due to ongoing global economic slowdown, resulting into inventory losses, Sherman Research said in a report.

Moreover, it may further weigh on GRMs which is already on a declining trend.

Similarly, sharp PKR devaluation will further dent earnings outlook for 2HFY23 (due to exchange losses) but improve earnings outlook for FY24 as refineries would be able to earn more on every barrel of crude they refine in local currency (assuming GRMs in USD terms to remain intact).

Attock Refinery (ATRL) given lower procurement cost and less exposure to exchange losses versus others, since company relies mainly on indigenous crude.

Moreover, better earnings and dividend outlook for its group companies may also support ATRL’s earnings from non-refinery business going forward, report said.

GRMs in 2QFY23 to decline by 17%QoQ GRMs which is the key determinant for refinery earnings are on a declining trend since last two quarters.

This is primarily due to higher price decline in global petrol and furnace oil prices which led to reduction in overall GRMs.

In 2QFY23, analyst firm expects GRMs to average around US$9 per barrel versus US$11 per barrel during preceding quarter.

Decline in GRMs of 17 %QoQ is mainly due to narrowing product spread of petrol versus crude oil.

It is expected that product spread between petrol and crude oil will be close to negative US $ 5 per barrel during 2QFY23 versus positive spread of around US $ 3 .5 per barrel during 1QFY23 .

Our GRMs calculation is based on product wise weightage of all refineries in Pakistan, Sherman said adding that we expect GRMs for fuel products for ATRL to remain around US $14 /bbl assuming 4 -10 % price premium of company’s petrol and diesel sales given ongoing price disparity between imported product prices and local prices .

On the other hand, GRMs of PRL and NRL are likely to remain around US $ 7 per barrel and US $ 5.5 per barrel, respectively.

ATRL 2 Q EPS expected at Rs17 , NRL and PRL to post losses Based on falling GRMs, our working suggest that refineries are likely to face reduction in their core refinery operations during 2QFY23 .

Further, refineries may also be exposed to one -time higher inventory losses during 2QFY23 given 16 % -24 %QoQ decline in crude and product prices.

We believe that NRL, ATRL and PRL may cumulatively incur inventory losses of Rs 7.5 – 8bn during 2QFY23, it said.

However, it had not incorporated any major exchange loss for these refineries since currency in interbank remains almost flat on QoQ basis . However, it said that their earnings estimate may vary on actual inventory and exchange losses.

We expect ATRL to post EPS of Rs17 during 2QFY23 which will translate into earnings of Rs85.5 during 1HFY23.

However, we have assumed inventory losses of Rs 3.5bn while any variation in inventory days may deviate earning expectations . On the other hand, we expect NRL to post loss of Rs35/share during 2QFY23 ( 1HFY23 loss of Rs90/share) while PRL to post loss per share of Re 0 .14 ( 1HFY23 EPS Rs 1 . 5 ) mainly due to inventory losses and declining GRMs .