Analyst
Jibran Cheema
jibran.cheema@pacra.com
+92-42-35869504
www.pacra.com
Applicable Criteria
Related Research
PACRA Maintains Entity Ratings of Pakistan Refinery Limited | Rating Watch
Rating Type | Entity | |
Current (09-Jun-20 ) |
Previous (10-Dec-19 ) |
|
Action | Maintain | Maintain |
Long Term | A- | A- |
Short Term | A2 | A2 |
Outlook | Stable | Stable |
Rating Watch | Yes | - |
The ratings reflect the resilient business profile of Pakistan Refinery Limited (PRL) emanating from its sustainable operational history and its strategic importance in the domestic context. PRL's core business remains exposed to the vicissitudes in international crude oil and products prices, which in turn, steer the Gross Refining Margins (GRMs) of the company. PRL’s margins are also impacted on account of low HSD price, due to non-installation of DHDS Unit needed to produce Euro-II compliant Diesel. The country’s refinery sector has been going through significant challenges for an extended period, majorly pertaining to up-gradation of the refining complexes and management of furnace oil (FO) produce. The FO offtake has further obstacles on the export avenue as the IMO 2020 came into play, since Jan’20. Depressed crude and POL prices in the International market coupled with the underlying issues of the sector had hampered the performance indicators of the industry players in FY19. Adding to the woes, the global oil market was further struck by widespread uncertainty due to the outbreak of COVID-19. Inventory accumulation, NRV adjustments and POL demand slide pressurized the GRMs and profitability margins of the sector players drastically. Nonetheless, the concerns are expected to reverse, going forward, as global prices move towards a stabilized trajectory and demand takes a gradual uptick, on account of ease in lockdown. Having said this, uncertainty still prevails as to the timeliness of complete restoration and recovery of losses that the Industry has absorbed, under the current situation. Likewise, PRL’s financial risk profile exhibited a precarious position with considerable short term funding to cater working capital needs along with persistent net losses, which turned the equity negative. Pakistan State Oil (PSO) holds a majority ownership share (60.0%) in PRL, as at End-9MFY20. The purpose of the investment is backward integration which allows PSO a more assured source of supply. Strategic oversight and financial strength of the parent company and resultant benefits in value chain mechanics, is considered positive for PRL.
The ratings are dependent upon the company's aptness to arrest the adversities impacting its risk profile in a timely manner. Improved performance indicators, including reversal of equity losses and sanguine financial discipline, are imperative to the ratings. Meanwhile, the ratings are placed under “Watch” to reflect the need to oversee the risk profile of the company against unavoidable challenges, going forward.
About
the Entity
PRL is a public company incorporated in Pakistan in 1960. The refinery is situated at Korangi, while it has a tank terminal to store products at the Keamari terminal. PRL, having refinery capacity of 2.1mln tons per annum, came fully online in Oct’62. PRL, a hydroskimming refinery, is designed to process various imported and local crude oil to meet the strategic and domestic fuel requirements of the country. Majority shareholding in the company is held by Pakistan State Oil (60.0%), HASCOL (14.7%), and individuals (18.3%). The company has an eleven member Board of Directors (including the CEO). Board comprises six non-executive, four independent and one executive board member. Mr. Zahid Mir, the Managing Director and CEO of PRL, is a petroleum engineer by profession and has a Masters degree in Business Administration. He is supported by a team of qualified and competent individuals.