Foundation Research|

Equities REP-095

PAKISTAN
Pakistan Refineries
GRMs sustaining at record levels
Event
 Refinery sector would continue on higher trajectory given that GRMs for Jun’22
clocked in at ~US$26/bbl resulting in average of ~US$25/bbl in 4QFY22 versus
average of ~US$4/bbl in 3QFY22. We attribute this to widening spreads of HSD and
MS to (1) European ban on imports of HSD and crude from Russia, (2) depleting
inventory and (3) shortage of refining capacity.
GRMs hitting new highs  We highlight that risk to our call comes from higher than expected forex losses
40 Industry GRM Average associated with exceptional Rs-US$ depreciation recently.
35
Impact
30
25  Margins of value added products push refinery margins higher: Based on
20 widening spreads of HSD and MS, we anticipate sequential improvement in the local
15 refinery dynamics. As per our calculation, the spreads on HSD stand at ~US$57/bbl in
10
Jun’22 resulting in average of ~US$49/bbl in 4QFY22 versus ~US$12/bbl in 3QFY22.
5
Whereas spreads on MS has widened to ~US$42/bbl in Jun’22 resulting in average of
~US$30/bbl in 4QFY22 versus ~US$14/bbl in 3QFY22.
0
Feb-09

Feb-14

Feb-19
Aug-06

Aug-11

Aug-16

Aug-21
Oct-05

Oct-10

Oct-15

Oct-20
Jun-07
Apr-08

Dec-09

Jun-12
Apr-13

Dec-14

Jun-17
Apr-18

Dec-19

Jun-22

-5  Our estimated GRMs for Jun’22 stand at ~US$26/bbl resulting in average of

~US$25/bbl in 4QFY22 versus average of ~US$4/bbl in 3QFY22.
Source: PD, OCAC, FSL res earch, Jun 2022  High diesel GRMs amid war in Europe: HSD spread has widened due to (1) strong
rebound in diesel demand which has depleted global inventories to 30 year lows, (2)
Price Performance vs KSE-100 US and allies tapping strategic crude oil reserves but negligible strategic reserves
1.2
exist of refined products, (3) shutting down of refineries in US and Europe during
KSE100 ATRL NRL PRL
1.1
COVID amid longer term trend of declining refinery capacity given environmental
1.0
concerns and (4) lack of European refining capacity amid European ban on purchase
of Russian HSD.
0.9
0.8  Threat of exchange losses: The weakening Rs-US$ parity is expected to undo some
0.7 of the impact of the said. Rs has shed 5.6/12.5% against US$ so far in Jun’22/4QFY22
0.6 (versus 3.7% in 3QFY22). We highlight that further unfavorable movement in
0.5 currency given economic headwinds amid delay in resumption of IMF program
0.4 would adversely impact profitability of local refineries.
0.3
 Player-wise performance: On an individual basis, ATRL’s GRMs work out at an
Sep-21

Feb-22
Jul-21

Jan-22
Aug-21

Oct-21

Mar-22
Jun-21

Dec-21

Apr-22
May-22

Jun-22
Nov-21

average of ~US$26/26/bbl in Jun’22/4QFY22 versus ~US$8/bbl in 3QFY22. Whereas,

NRL GRMs are estimated to be ~US$28/27/bbl in Jun’22/4QFY22 against ~US$6/bbl
Source: PSX, FSL res earch, Jun 2022
in 3QFY22. PRL would be particularly advantaged with GRMs at ~US$28/27/bbl in
May’22/4QFY22 versus ~US$6/bbl in 3QFY22. However, NRL GRMs may vary due to
its lube segment.
Analyst
Outlook
Zeeshan Azhar zeeshan@fs.com.pk
 Refineries are poised to post stellar profitability amid elevated GRMs after patchy
+92 213 5612290 Ext 331
performance over recent years. Risk to our call comes from monetary tightening in
developed markets which could tip those economies into recession causing demand
destruction and pushing crude oil prices lower. Resultantly, we expect GRMs would
be driven back to lower LT average.
Foundation Securities (Pvt) Ltd
Tuesday, June 21, 2022  While we reserve our judgment on sector’s long-term outlook, we believe new
refinery policy would go a long way in improving sectors dynamics. However, success
remains largely dependent on the movement of prices of value-added products.

Please Refer to last page for important disclosures and analyst certifications www.jamapunji.pk
Pakistan Refineries June 21, 2022

Fig 1: Refineries utilization stabilizing at ~61%... Fig 2: Product slate and GRMs (US$/bbl)…
16 Product share
Production (mn tons) Utilization % 90% 45% 80
14 80% 40% GRM (RHS)
60
70% 35%
12 40
30%
60% 20
10 25%
50% 20% 0
8
40% 15%
6 -20
30% 10%
5% -40
4 20%
0% -60
2 10%

LDO

Naphtha
HOBC
Motor Spirit

Kerosene

HSD

FO

Aviation Fuels
0 0%
FY09

FY21
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20

9MFY22

Source: PD, OCAC, FSL Research, Jun 2022 Source: PD, OCAC, FSL Research, Jun 2022

Fig 3: Oil prices supporting GRM highs (US$/bbl)… Fig 4: GRM on HSD at ~US$57/bbl
35 Arab Light (RHS) Industry GRM 160 65 HSD GRM
30 140 55
25 120
45
20 100
35
15 80
10 60 25
5 40 15
0 20
5
-5 0
-5
Jun-07
Apr-08

Jun-12
Apr-13

Aug-16
Jun-17
Apr-18

Jun-22
Aug-06

Feb-09
Dec-09

Aug-11

Feb-14
Dec-14

Feb-19
Dec-19

Aug-21
Oct-05

Oct-10

Oct-15

Oct-20

Jun-07
Apr-08

Jun-12
Apr-13

Jun-17
Apr-18

Aug-21
Jun-22
Aug-06

Feb-09
Dec-09

Aug-11

Feb-14
Dec-14

Aug-16

Feb-19
Dec-19
Oct-05

Oct-10

Oct-15

Oct-20
Source: PD, FSL Research, Jun 2022 Source: PD, FSL Research, Jun 2022

Fig 5: GRM on MS nearing recent peaks (US$/bbl) Fig 6: GRM on FO are negative (US$/bbl)…

40 MS GRM 30 HSFO GRM

30
20
20
10
10
0
Jun-07

Jun-12

Jun-17

Jun-22
Apr-08

Apr-13

Apr-18
Aug-06

Dec-09

Aug-11

Dec-14

Aug-16

Dec-19

Aug-21
Feb-09

Oct-10

Feb-14

Feb-19
Oct-05

Oct-15

Oct-20

0
Jun-07

Jun-12
Apr-13

Jun-17

Jun-22
Apr-08

Apr-18
Aug-06

Feb-09
Dec-09

Aug-11

Feb-14
Dec-14

Aug-16

Feb-19
Dec-19

Aug-21
Oct-05

Oct-10

Oct-15

Oct-20

-10
-10

-20 -20

-30 -30
Source: PD, FSL Research, Jun 2022 Source: PD, FSL Research, Jun 2022

2 Foundation Securities (Pvt) Limited

Pakistan Refineries June 21, 2022

Acronyms

FO Furnace Oil
GRM Gross Refining Margins
HSD High Speed Diesel
MS Motor Spirit (also known as gasoline or petrol)

Important disclosures:
Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained
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Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic
conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and
input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of
the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst
principally responsible for the preparation of this research receives compensation based on overall revenues of Foundation Securities and has taken reasonable care to
achieve and maintain independence and objectivity in making any recommendations.

Recommendations definitions
If
Expected return >+10% Outperform.
Expected return from -10% to +10% Neutral.
Expected return <-10% Underperform.

3 Foundation Securities (Pvt) Limited