How to Understand ATRL, NRL and PRL Profitability? Important things to know

Learn about the critical factors that influence the profitability of refineries in Pakistan and how investors can make informed decisions in the volatile energy sector.

Oct 2, 2023
How to Understand ATRL, NRL and PRL Profitability? Important things to know

Quiz Questions on How to Understand Refinery Profitability

If I am not wrong, nothing has rallied more than Attock Refinery in 2023! It is up almost 80%!
I was one of those who used to hate the refinery sector and this is why I didn't make a single penny while it was going up!
Coming back to the quiz. My question to you about the refinery sector in Pakistan is:
  1. What is the one thing that you should follow if you want to predict the profitability of refineries?
  1. Looking at the table below, which refinery do you think will make the most money when international refinery margins go up?
    1. notion image


  1. The straight answer to one thing that a refinery investor should follow is the international refinery margins. The higher the number, the better their profits.
Before I go into detail and tell you where to follow these margins, let me first explain how the sector works.
We know that crude oil can't be used as is, unlike natural gas. It needs to be processed to make different products like Petrol (MoGas), Diesel (HSFO), Kerosene, Furnace Oil, lubricants, etc.
Exploration companies explore crude oil and then sell it to refineries. What price do they charge? (recall old emails). They charge the prevailing international oil price.
When a refinery gets the oil, it processes it and makes different products. As a rule of thumb, one barrel of crude oil makes the following products:
1. Furnace Oil (25%)
2. Diesel (40-50%)
3. MoGas (20-25%)
There is a simple calculation that happens here.
For example: If one ton of oil is worth USD100 and the weighted average refinery margins are USD110. This means the refinery will be making a 10-dollar profit on a per-ton basis.
When this goes up, they make more money, and when it comes down they either make a loss or make less money!
This is a free website that I follow to track international margins.
But, as I said before, following their product mix is also.
Let's talk about that today.
See, if international margins are high, it doesn't mean that refineries in Pakistan will make money. Because not all of the products they make earn them money.
For example, furnace oil is a negative-margin product. That means it doesn't even cover the cost of oil it uses. But at the same time, Diesel and MoGas (petrol) make money for them.
Now think as a refinery owner. Would you not want more products that make profits and fewer negative margin products? Of course. But it requires a lot of capital investments and that's where refinery policy comes in.
But what are the profit-making products and which ones are the loss ones?
Petrol and Diesel are known to be the profit-making products. However, furnace oil is a loss-making product.
So if a refinery makes more Petrol and Diesel and less FO, it will make more money than a refinery that has more FO and less petrol/diesel.
How do we know which refinery in Pakistan has what share of these products?
These are the refinery shares.

  1. PRL has the best product breakup. 70% of high-margin products and just 18% of FO are negative-margin products.
    1. notion image
ATRL comes next (67% and 21%) while NRL can be said to have the worst breakup (63% and 23%).
But there is one thing that you didn't know! Exchange losses! When we account that for, ATRL becomes the best pick!
See, ATRL gets the crude oil from local E&P companies while NRL and PRL import it.
This means that though the refinery margins should be better for PRL (which they are), exchange losses take away a heavy cut from their earnings.
For example, last year (FY23) PRL earned Rs3.3 PBT. But the exchange losses were Rs990mn. Had there been no exchange losses, they would have made Rs4.3bn PBT.
The same goes for NRL. They made a loss before taxation of Rs5.1bn while the exchange loss was Rs9.8bn. This means had there been no exchange loss, the company would have been in profit.
This is the only difference but it changes everything!
That’s why ATRL made the most money last year, followed by PRL and a loss by NRL.
This changes when there is no rupee depreciation. In that case, actual refinery margins come into play (hint)!
So, to recap - Whenever considering refineries for trading or short-term investing (to me they don’t qualify for long-term investments), see these things:
1. What are the international margins – check the website I gave you!
2. Remember their product mix. You should know that if diesel margins are going up, which refinery will benefit the most?
3. See exchange losses