Gross Refinery Margins down by 7pc in January

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Though Arab light crude oil prices remained firm during the month of January (2012) against the previous month (December 2011), the middle distillate prices, except Naptha, declined in the range of 4-5 per cent, rendering into decline in the middle distillate crack spreads. The said price trend is estimated to reduce domestic gross refinery margins (GRMs) by seven per cent in January to $1.6 per barrel as against $1.7 per barrel last month, said a Topline research.
“With reduce spreads and regulatory risk that heightens after the escalation oil prices we hold ‘Market-weight’ stance on the Pakistan Refinery sector,” viewed Nauman Khan, an analyst at the Topline Securities.
The product-wise negative spread on Naphtha, he said, was expected to be reduced to (-ve) $5.5 per barrel as against $7 per barrel last month; while spread on HSFO could widened to (-ve) $11 as against $8 per barrel last month. In the superior product category, HSD and Kero spreads are estimated to decline to $10 per barrel previously from $16 per barrel while MS spreads are expected to dip into negative as against positive $1 per barrel last month.
The company-wise GRMs suggest that ATRL on account of higher weight-age of superior products (MS and HSD) in its product mix continue to lead the pack with company’s estimated GRMs standing to the tune of $2.3 per barrel, down nine per cent from $2.6 per barrel last month. Amongst other listed companies, NRL’s GRMs is likely to decline by five per cent to $0.6 per barrel while PRL and BYCO GRMs are estimated to stand around $0.9 and $1.0 per barrel, down 17 per cent and 11 per cent respectively.
With firm oil prices and their implications on domestic political and economic scenario, we believe the inherent regulatory risk associated with the reduction in deemed duty on HSD comes into lime light. Under the prevalent scheme 7.5 per cent custom duty is charged on imports of HSD, which in turn is providing a profitability cushion from domestic refineries.
In recent price revision, deemed duty is currently hovering around $9.5 per barrel in absolute terms while current levels of international HSD prices could push the same above $10 per barrel in the upcoming February price revision. This in turn could bring to life the deemed duty saga which we witnessed in the early part of the year.
Being the jugular vein of refinery sector profitability the reduction in the deemed duty from current levels could adversely affect refinery sector’s profitability. As per our estimates 2.5 per cent decline in the deemed duty would reduce ATRL and NRL’s (companies under our coverage) annual earning by Rs6 and Rs11 per share, respectively.