Isomerization plant soothes Pakistan Refinery’s margins via volumetric growth in petrol: PACRA

June 11, 2019: Pakistan Credit Rating Agency has maintained entity ratings of Pakistan Refinery Limited (PRL) at ‘A-’ for long-term and ‘A2’ for short-term, along with assigning a stable outlook to the ratings of the company.

The ratings reflect the resilient business profile of PRL emanating from its sustainable operational history, strong demand for its products and its strategic importance in the domestic context. PRL's core business remains exposed to the vicissitudes in international crude oil, which in turn, may lead to reduced gross refining margins (GRMs).

In the recent period, PRL's refining margins have suffered deterioration due to unfavorable prices of Crude Oil and Petroleum Products heightened by Exchange loss. These factors have diluted the equity base of the company.

Additionally, an increase in short-term borrowing utilization undermines the financial risk profile of the company. The recent trend is showing positive Gross Refining Margins (GRMs), which the management expects to continue. They are revisiting their financial needs, wherein they may be enhancing the limit of short-term lines. The cash cycle of the company provides some respite. The design of PRLs’ plant offers relatively limited flexibility; in turn, low margin and high exposure to the volatile dynamics of international crude oil and refinery product pricing.

The respite is provided by the commissioned Isomerization plant, providing volumetric growth in petrol - a high-margin product. Additionally, margins are squeezed on account of HSD pricing, due to high Sulphur content, as the company did not install DHDS unit for making euro II compliant HSD, which in turn, affecting the profitability of the company.

The ratings could be impacted by prolonged constrain in refining margins and/or adverse changes in the existing regulatory framework leading to depressed core cash flows. Adequacy of cashflows viz-a-viz debt servicing remains critical for the ratings. Prudent management of financial matrix amidst new borrowing requirement is important.