AKD securities turned bullish on oil refineries in Pakistan

Islamabad: The refinery sector remains in the limelight on the back of incentives provided in the budget for oil refineries in Pakistan.

The government has proposed several incentives in the budget for oil refineries in Pakistan to execute up-gradation projects.

We expect the refinery sector to remain in the limelight on the back of incentives provided. An increase inadequate duty protection on MS makes ATRL stand out, with the company’s MS yield standing at 27% vs. 17/10/13% of BYCO/NRL/PRL, AKS Securities said in a research note.

For the refinery sector, including a ten-year tax holiday on up-gradation and establishing new deep conversion refineries, and increasing adequate duty protection on MS to 7.5% from 0% while maintaining adequate duty protection on HSD at 7.5%.

An increase inadequate duty protection on MS is materially positive for local refiners, in our opinion, where assuming MS price of USD71.5/bbl and 70% utilization, annualized impact stands at PkR22.3/1.7/13.3/0.8/sh for ATRL/PRL/NRL/BYCO.

Though the minimum capacity limit on upgradation projects is being taken up by local refiners with authorities, as things stand currently,

Byco primary beneficiary

In contrast, for the incentives regarding upgradation, BYCO turns out to be the primary beneficiary. BYCO turns out to be the primary beneficiary of the new refinery policy, with the company’s capacity exceeding 100,000 while the up-gradation project is already underway.

Duty protection on MS

In the recently announced Budget FY22, the government has included several incentives for the oil refineries in Pakistan, including an increase inadequate duty protection on MS to 7.5% from 0% while maintaining adequate duty protection on HSD at 7.5%.

The incentives are in a bid to encourage oil refineries to upgrade and improve their product slates of MS and HSD in Pakistan at the expense of Furnace Oil, whose yield stands at 25-30% currently. An increase inadequate duty protection on MS is materially positive for local refiners, in our opinion, where assuming MS price of USD71.5/bbl and 70% utilization, annualized impact stands at PkR22.3/1.7/13.3/0.8/sh for ATRL/PRL/NRL/BYCO.

Under discussion, the refinery policy proposed adequate duty protection on MS and HSD of 10% each with 0% duty on import of crude; hence, the proposed changes in the FY22 budget are not in line with refinery policy doing rounds earlier.

However, the burden on oil is till one year initially and, as per our channel checks, can be reduced to 0% after Jun’22. Ten years tax holiday proposed for new refineries and upgradation projects:

Another major incentive to local refiners is a ten-year tax holiday on establishing new deep conversion refineries of at least 100,000 BPD. At the same time, upgradation projects of at least 100kbpd of current refineries will also be liable to a ten-year tax holiday. However, a minimum limit on upgradation was not part of the refinery policy, which was being reported initially.

As per news reports, refineries have raised this concern to the authorities. Only BYCO’s capacity is above 100k BPD among local refiners and has an up-gradation project already underway.

Additionally, as per our channel checks, a feasibility study is also underway. Refineries will install a joint Catalytic Converting Unit together; however, the research is in very initial stages and is not conclusive.

Additional measures related to refinery include the imposition of a 17% sales tax on crude oil, which will result in a buildup of refund claims even though it is not going to increase costs. Moreover, there is a proposal to reduce the turnover tax on oil refineries in Pakistan to 0.5% from 0.75%.

Investment perspective

The proposed policy can transform the local refinery landscape, in our opinion, where local oil refiners in Pakistan have mainly been provided a lifeline. In terms of pricing, ATRL turns out to be the primary beneficiary of the increased inadequate duty protection on MS, with ATRL’s MS yield standing at 27% vs. 17/10/13% of BYCO/NRL/PRL. For the incentives regarding upgradation, BYCO turns out to be the primary beneficiary, with a company meeting the minimum capacity requirement set for upgradation while the project is already underway.

Byco plans to acquire Puma Energy

As per news reports, the company is also planning to acquire PUMA energy which is expected to provide further impetus, in our opinion.

PUMA energy currently has 542 retail pumps in the country and has a market share of 2% in the retail fuel category. Once acquired, BYCO will become the 6th most prominent player in the retail fuel segment with a market share of 5.3% from its current standing of 8th largest.