Earnings of Local Refineries to Rebound in Second Quarter 2025
Staff Report :
Analysts anticipate that fuel earnings of local refineries will rebound in the second quarter of FY25 after experiencing a downturn in the last two quarters. Sherman Research in its analysis suggests that the average industry gross refining margin (GRM) is expected to stabilize around US$5.5 per barrel during 2QFY25, reflecting a 30% quarter-on-quarter increase.
However, GRMs may vary across companies depending on product mix and crude grade. Notably, GRMs have been improving monthly, reaching US$8.5 per barrel in the current month (see graph). We maintain a favorable outlook on Attock Refinery Limited (ATRL) due to its high-margin products, which constitute 73% of its product mix, and its substantial cash reserves of Rs750 per share, which provide a buffer against volatile fuel earnings and create opportunities for higher future dividends. ATRL remains one of our top alpha stocks for 2025.OCAC Warns Against Hasty Unilateral Decision on Oil Sector Deregulation
GRMs have improved to US$8.5 per barrel in January, driven by rising spreads on diesel (HSD) and furnace oil (FO). The industry GRM in January 2025 is close to US$8.5 per barrel, the highest in the last 10 months. In contrast, the lowest GRM of US$1 per barrel was recorded in June 2024.
The industry GRM represents the combined weighted average spread of all refined products, including petrol (MS), diesel (HSD), jet fuel (JP), and furnace oil (FO). The spread or crack is the difference between the price of refined products and crude oil.
The spread on diesel has reached US$20 per barrel this month, the highest in 10 months, driven by extreme cold weather in the US and Europe, which has increased heating oil demand, and news of additional sanctions on Russian oil supply. Additionally, furnace oil prices have improved relative to crude oil prices. Over the past 10 months, crude oil prices have declined by 10%, while FO prices have remained stable, resulting in a significant improvement in FO spreads. These developments favor NRL and CNERGY, which have the highest shares of FO and HSD in their product slates.
The Ministry of Energy (Petroleum Division) may extend the deadline for signing upgrade agreements under the New Refinery Policy. Industry sources suggest that the signing process is ongoing and may require an additional 1-2 months. Signing the upgrade agreements is contingent upon resolving sales tax issues with the Federal Government through a Deed of Settlement. The previous deadline, assigned by SIFC, was January 7, 2025. Relevant bodies, including OGRA, the Ministry of Energy, the Ministry of Finance, and the FBR, are working with refineries to resolve these sales tax issues. While refineries were granted interim relief to claim sales tax from IFEM, the modalities for covering these claims have yet to be finalized.
For 2QFY25, we estimate Attock Refinery (ATRL) to report an EPS of Rs41.5, up 33% quarter-on-quarter, assuming an average GRM of US$14 per barrel. The refinery is expected to operate at a capacity utilization rate of 73%. ATRL’s gross profit is projected to increase significantly to Rs5.7 billion in 2QFY25 compared to Rs1.8 billion in 1QFY25, though other income is expected to decline quarter-on-quarter due to reduced interest rates. Similarly, Pakistan Refinery Limited (PRL) is expected to post earnings of Rs0.7 billion (EPS of Re1.0) compared to a loss of Rs2.4 billion (loss per share of Rs3.7) in the previous quarter, driven by a recovery in GRMs. We expect PRL’s average GRM to be around US$7 per barrel. Additionally, we have factored in the FEED study cost of Rs1.4 billion in our 2QFY25 earnings estimates. No significant inventory gains or losses are anticipated for 2QFY25.
