Karachi 13, April, 2022: With Arab Light oil price flirting at US$100/bbl mark, margins of local refineries continue to grow as well with industry’s average gross refining margins (GRMs) improving by 34%QoQ to US$9/bbl in 3QFY22, says Farhan Mahmood at Sherman Securities in a research note.
Increase in GRM’s is due to the fact that petroleum product prices rose higher than that of crude oil, resulting in better margins. Our analysis is based on fortnightly oil product pricing by Oil and Gas Regulatory Authority (Ogra).
This is a positive development for local refineries as fuel earnings are set to improve further in 3QFY22 since their profits are directly linked to international GRMs — weighted average spread of all products versus crude oil.
34% QoQ growth in GRMs is due to better product spread on diesel (HSD) versus crude oil. Average spread between HSD and Arab Light crude stood higher at US$20/bbl (up 44%QoQ). On the other hand, spread on furnace oil (FO) further declined to negative US$17/bbl.
As far as local refineries are concerned, National Refinery Ltd (NRL) is likely to be the major beneficiary of rising trend in HSD spread as the product contributes more than 45% of the refinery’s fuel mix. Our back of the envelope working suggests that NRL’s fuel GRMs are set to double from the previous quarter. Similarly, Attock Refinery Ltd’s (ATRL) GRMs are expected to improve by 30%QoQ.
Thus we expect refineries’ fuel earnings to improve in 3QFY22 versus 2QFY22, however, there remains a risk on liquidity since government is providing subsidy or Price Differential Claims (PDC) on petrol and diesel.
Our working suggest that subsidy claims of ATRL and NRL, two major listed refineries, would be minimal at around Rs1.5bn each in 3QFY22. Thus, on net basis, refineries in 3QFY22 will be better off despite subsidy claims. However, there remains a risk that these claims may swell to Rs9-10bn each for ATRL and NRL by end of FY22 incase government maintains local oil prices and international oil prices stay at current level.
