Refineries’ earnings to fall at least 39% if duty removed

KARACHI: The withdrawal of deemed duty on high speed diesel will decrease the revenue of oil refineries by at least 39 per cent, according to analysts.

The removal will result in a ‘doomsday’ scenario for local refiners, causing shutdown and disruption in oil logistics and raising concerns over future lay-offs, according to KASB Securities.

The government is considering abolishing the 7.5 per cent deemed duty on high speed diesel.

Gross Refining Margins (GRMs) on high speed diesel have averaged 17.9 per cent, inclusive of 7.5 per cent deemed duty, in the current quarter, however elimination of this duty will drag the margin down to 11.6 per cent, according to BMA Capital.

This will result in gross profit to drop by 39.4 per cent on high speed diesel, said BMA Capital analyst Muhammad Ali Taufiq in his research report.

Currently, refineries get deemed duty only on high speed diesel, which is the major contributor to their gross profits.

High speed diesel sales constitute 31.4 per cent of the total volumetric sales of the refineries.

The industry’s GRMs have improved to $4.23 per barrel from $1.75 per barrel but this will not be sufficient to offset the negative impact of the potential removal of deemed duty, said Taufiq.

While GRMs have continued to show sequential improvement recently, it should be noted that the current level is still substantially lower than the average of fiscal year 2008, said Taufiq.

“Both domestic circular debt and unfriendly international environment are not working in the sector’s favour and any negative regulatory stance would certainly aggravate the situation further, added Taufiq.

Company-wise loss

The proposal will reduce  GRM of National Refinery Limited (NRL), Pakistan Refinery Limited (PRL) and Attock Refinery Limited (ARL) GRMs by 39 per cent, 57 per cent and 53 per cent respectively, said KASB Securities analyst Muhammad Fawad Khan in his research report.

ARL and PRL will incur loss per share of Rs0.25 and Rs2 respectively in the current quarter, Khan said.

However, NRL’s earnings should be cushioned by the recent 16 per cent hike in lube prices.

NRL’s earning per share will be around Rs8.9 during the current quarter, said Khan.

PRL might be saved

PRL’s potential acquisition can overshadow its weak earnings performance in 9MFY10 and may provide downside cushion to the stock price, said Khan.

Pakistan State Oil has expressed its interest in acquisition of a refinery including PRL.

Published in The Express Tribune, June 23^rd, 2010.