PACRA Maintain Entity Ratings of Pakistan Refinery Limited

The ratings reflect the resilient business profile of PRL emanating from its sustainable operational history, strong demand of its products, and its strategic importance in the domestic context. The design of PRL's plant offers relatively limited flexibility; in turn, low margin and high exposure to volatile dynamics of international crude oil and refinery product pricing. However, with the successful commissioning of Isomerization plant, the company experienced volumetric growth in petrol - a high-margin product. Nevertheless, there has been a downward revision of HSD pricing, due to high Sulphur content, affecting the profitability of the company. Currently, the impact of the same is relatively small. Future profitability is dependent upon management's ability to timely arrange funds for Diesel Hydrodesulphurization Unit (DHDS) project and, hence its completion.

The ratings could be impacted by prolonged constrain in refining margins and/or adverse changes in the existing regulatory framework leading to depressed core cashflows. Adequacy of cashflows viz-a-viz debt servicing remains critical for the ratings. Prudent management of financial matrix amidst new borrowing requirement is important. Going forward, should accumulated losses will continue to rise that will raise concerns on company’s ability to continue as a going concern; will impact the ratings negatively.

About the Entity
Pakistan Refinery Limited (PRL), having refining capacity of 2.1mln tons per annum, is operational since Oct'62. Majority shareholding in PRL is held by Shell Petroleum Company Limited, UK, (~32%) Pakistan State Oil Company Limited (~24%), HASCOL (~15%). During 2015, Shell has decided to reduce its shareholding in PRL. PSO showed its intention to acquire the same. The transaction is in the process of regulatory approvals. Upon completion of the transaction, PSO would be the largest shareholder of PRL. Given likely change in ownership, clarity as to timeline and funding mix would emerge later. The company is also looking for capacity upgradation opportunities.

The company has eleven member board (including the CEO) – six representing sponsoring companies (currently three from PSO, two from Shell and one from Chevron), two representing Hascol and one independent director.

About the Instrument
PRL, issued two TFCs during CY13. TFC I, was redeemed at end Dec-16. TFC II, carrying fixed profit rate of 10.75%, has a tenor of 5 years and will be due for maturity in Dec'18. Although principal repayment is at maturity, instruments carry perpetual Put option. TFCs is secured by way of Hypothecation of a) Stocks and Receivables & b) Fixed Assets with certain margin. As of Dec-17, book-value of the TFC II is PKR ~229mln