Course: Security Analysis

Group Members
Salman Hameed
Tariq Khan
Shariq Islam

Sector: Refinery
Companies:
1) National Refinery
2)

Assignment # 1
1) Introduction with Details of Business.
2) Industry Dynamics
3)

National Refinery
Board of Directors
Dr. Ghaith R. Pharaon - Chairman
Alternate Director: Abdus Sattar
Laith G. Pharaon
Alternate Director: Jamil A. Khan
Mofarrih Saeed H. Alghamdi
Alternate Director: Babar Bashir Nawaz
Shuaib A. Malik
Zaki Mohamad Mansoer
Shahid Ghaffar
Tariq Iqbal Khan
Chief Executive Officer
Shuaib A. Malik
Chief Financial Officer
Anwar A. Shaikh
Company Secretary
Nouman Ahmed Usmani
Audit Committee
Tariq Iqbal Khan Chairman
Abdus Sattar Member
Alternate to Dr. Ghaith R. Pharaon
Babar Bashir Nawaz Member
Alternate to Mofarrih Saeed H. Alghamdi
Shaikh Ather Ahmed Secretary

Human Resource and Remuneration (HR&R) Committee

Abdus Sattar Chairman
Alternate to Dr. Ghaith R. Pharaon
Babar Bashir Nawaz Member
Alternate to Mofarrih Saeed H. Alghamdi
Shuaib A. Malik Member
Nouman Ahmed Usmani Secretary
Auditors
A. F. Ferguson & Co.
Chartered Accountants
Solicitors
Ali Sibtain Fazli & Associates
Bankers
Bank Al-Habib Limited National Bank of Pakistan
United Bank Limited MCB Bank Limited
Allied Bank Limited Askari Bank Limited
Bank Alfalah Limited Samba Bank Limited
Faysal Bank Limited Habib Metropolitan Bank Limited
Habib Bank Limited
Registered Office
7-B, Korangi Industrial Area, P.O. Box No. 8228, Karachi-74900
UAN: +92-21-111-675-675
PABX: +92-21-35064981-86
+92-21-35064977-79
Fax: +92-21-35054663
+92-21-35066705
Website: www.nrlpak.com
E-mail: info@nrlpak.com

NRL AT A GLANCE
FIRST LUBE REFINERY
Design capacity 539,700 Tons per year of Crude processing
Design capacity 76,200 Tons per year of Lube Base Oils
Date Commissioned June 1966
Project Cost Rs. 103.9 million
FUEL REFINERY
BEFORE RE-VAMP
Design capacity 1,500,800 Tons per year of Crude processing
Date Commissioned April 1977
Project Cost Rs. 607.5 million
AFTER RE-VAMP
Design capacity 2,170,800 Tons per year of Crude processing
Date Commissioned Feburary 1990
Project Cost of Revamping Rs. 125.0 million
BTX Unit
Design capacity 25,000 Tons per year of BTX
Date Commissioned April 1979
Project Cost Rs. 66.7 million
SECOND LUBE REFINERY
BEFORE RE-VAMP
Design capacity 100,000 Tons per year of Lube Base Oils
Date Commissioned January 1985
Project Cost Rs. 2,082.4 million
AFTER RE-VAMP
Design capacity 115,000 Tons per year of Lube Base Oils
Date Commissioned June 2008
Project Cost of Revamping Rs. 585.0 million
SHAREHOLDERS EQUITY
June 1966 Rs. 20.0 million
June 2016 Rs. 36,822.4 million

Introduction
National Refinery Limited (PSX: NRL) was incorporated on August 19, 1963 as a public limited
company. The government took over the management of NRL under the Economic Reforms
Order, 1972 exercising control through its shareholding in State Petroleum Refining and
Petrochemical Corporation (PERAC).
In June 2003 the government decided to include NRL in its privatization programed. After
competitive bidding NRL was acquired by Attock Oil Group in July 2005. The Company has
been privatized and the management handed over to the new owner on July 7, 2005. NRL is
engaged in the manufacturing, production and sale of a variety of petroleum products. The
refinery complex of the company comprises of three refineries, consisting of two lube refineries
and one fuel refinery. The first lube refinery was commissioned in 1966 with designed capacity
of 539,700 tons per annum of crude processing and 76,200 tons per annum of lube base oils. The
second lube refinery was commissioned in 1985 with designed capacity of 100,000 tons per
annum of lube base oils.
The fuel refinery was commissioned in 1977 with designed capacity of 1,500,800 tons per
annum of crude processing with subsequent revamping increasing the capacity to 2,170,800 tons
per annum of crude processing. The BTX unit was commissioned in 1985 with design capacity
of 25,000 tons per annum of BTX. NRL enjoys a competitive edge, as it is the only refinery
producing LBO in Pakistan.

Pakistan is in a midst of a fairly critical phase of development. Economic sanctions in

consequence to nuclear detonation have put severe constraints in the economy. In this backdrop,
the steep slide in oil prices, probably the lowest in last 15 years, and recent abrupt roaring
accession has led to the biggest ever disorder and instability in the refining industry in the world
over. Pakistan is a developing economy that cannot keep itself insulated from the effects if these
happenings. The financial destiny of refineries in Pakistan is linked with international crude oil
and product pricing and therefore, starting from mid of 1995 the global/regional pricing and
supply/demand influences started to act unfavorably on refinery economics [2]. With little
flexibility to vary the throughput levels, refineries in Pakistan survived in essence, from heavy
subsidy from the government. Along with this milieu of unhealthy macroeconomic situation the
refining industry is faced with an introduction of newer generation technologies, globalization
and deregulated market concept, which poses a challenge for refineries in Pakistan.
Pakistan is in a midst of a fairly critical phase of development. Economic sanctions in
consequence to nuclear detonation have put severe constraints in the economy. In this backdrop,
the steep slide in oil prices, probably the lowest in last 15 years, and recent abrupt roaring
accession has led to the biggest ever disorder and instability in the refining industry in the world
over. Pakistan is a developing economy that cannot keep itself insulated from the effects if these
happenings.
The foreign exchange reserve position has deteriorated over the past few years. Due to the lack
of forex reserves and the uncertainty of economic deals with the IMF and World Bank, oil sector
has to import raw materials at the composite rate which is higher than the official rate at which
the companies in this sector have been importing over the past few years .

Sector industry Dynamic

Lower crude oil prices are exerting pressure on oil exporting countries resulting in huge budget
deficits and lower economic growth. On the other hand, the situation on has a positive impact on
oil importing countries and Pakistan is no exception. The country witnesses better economic
growth, a declining inflation rate and lower Consumer Price Index. State Bank of Pakistan has
further reduced the Interest rates. Resultantly, macroeconomic factors of Pakistan are improving
and encouraging investors and entrepreneurs for business and investment activities. Together
with the opportunities available in the International Market your company did its best to derive
maximum possible benefits. As a result of concerted efforts your company has recorded the
highest ever profit in the companys history. The after tax profit t of the company reached at Rs.
7.69 billion compared to Rs. 3.71 billion last year.
After four difficult years, fuel segment of your company showed a profit of Rs. 2.02 billion as
compared to loss of Rs. 0.081 billion in the last year. Profitability of lube segment also
significantly increased to reach at Rs. 5.67 billion as compared to Rs. 3.79 billion in the last year.
Profitability improved due to favorable margins between product prices and cost of crude and
improved sales of HSD and Bitumen.

EXTERNAL ASSESSMENT
A number of opportunities existing in the industry make the industry viable to enter. Firstly, the
growth potential for the oil products is great, which comes from the population growth rates of
2.8%, has lead to the overall increase in the transport sector by 0.8%. As the number of cars in
the country is increases, the greater will be the demand for the fuel products and therefore the
more the company will be profitable. Apart from the growth rate of the population, the increase
in demand of Lube oils, which are used in machines, and also asphalts, used in the production of
roads.

As the fuel products are being deregulated, this is a great opportunity for the

companies, because previously the profit margins were also restricted because of regulation of
the fuel products, which will now be at the discretion of companies itself, to charge according to
their feasibilities. Also, restrictions in terms of the type of customers and suppliers will also be
reduced and therefore help the companies in becoming more competitive. Since Naphtha is the
only oil product exported abroad (Japan), as a result of this deregulation, the exports are likely to
increase and therefore the companies exporting Naphtha can enjoy greater profits if they
concentrate on its production. With the deregulation of the fuel products, the opportunities of
exporting more of the fuel products will also improve and thereby strengthen the companys
position.
Apart from the opportunities, a number of threats are also existent in the industry which help the
companies in taking guard and thereby make the companys more cautious in the future. The
entry of competitors in the industry is a threat for the existing companies. Since the existing
companies work under somewhat of collaboration, in importing the crude oil and also in sharing
the manpower resources as well, then the arrival of the new entrant is a potential threat to all the
participants in the industry.
The industry is susceptible to changes in the technology of the refining process. The more
sophisticated the refinery, the greater its output and therefore more profitable that company is in
the industry. Therefore constant technological changes should be used in order to change this
threat into an opportunity. The heavy dependency on the foreign suppliers is also a major threat
to the organization. Emphasis should be laid on indigenous crude oil processing, because it will

not only help the company in maintaining its foreign exchange reserves, its will also help the
companies in maintaining their liquidity. The recent reduction of capacity utilization by the
government to 75% is a threat to the industry because with such a decision, the industry will
suffer and the demand supply gap will have to be met by importing thereby affecting the
countrys foreign exchange reserves. (The External Factor Evaluation Matrix is given in the
appendices: page 22)
Competitive Profit Matrix Analysis
For the refining industry, de-regulation of fuel oil has been identified as the most important
critical factor. De-regulation would allow refineries both in public and private sector to dictate
prices and determine their margins. However, this would not affect NRL as much because its
main products, which are lube-based oils, are already de-regulated, but would be a critical
success factor for PRL and ARL as they are purely fuel oil refineries.
Second most important factor comes out as devaluation and range of products. Since all
refineries use imported crude oil, they are highly susceptible to fluctuations in foreign exchange
rate as well as devaluation of local currency. Similarly, the ability of a firm to produce a varied
range of products including lube-based oil is important especially with new oil refineries being
set up. This ability allows a refinery to utilize its capacity to the maximum. NRL is differentiated
from PRL and ARL, as its the only refinery to produce lube-based oil among the three refineries,
allowing it to switch to the production of these products when faced with competition from other
refineries.
Technical advancement, level of skilled work force and availability of finance is the third most
important critical success factor. Modernization of plant is essential for the efficient use of
facility and capacity utilization. For this purpose, availability of funds is important. Funds are
also important to ensure continuous training of employees and adaptation of systems such as
SAP. Both PRL and ARL being in private sector have better access of capital whereas at NRL
most capital budgeting decision has to go through a lot of documentation. (The Competitive
Profile Matrix is given in the appendices: page 23)
TOWS Analysis

S O:
NRL has the highest production capacity of 100,000 bbl/d along with an opportunity arising from
the export of Naphtha to other countries, the company can capitalize on its strength and produce
by utilizing 100% capacity and therefore can also export other products to other countries as
well.
NRL has the strength of having the best technically trained workforce. An opportunity has arisen
in the market because of the growth potential for oil products due to the increase in population
growth rate by 2.8%. NRL can capitalize on this opportunity by having greater capacity
utilization, which is possible by employing greater workforce or by increasing the hours worked
by the workers.
With the largest product range and being the market leaders in the lube base oils along with the
export potential of Naphtha to foreign countries, NRL can utilize their strong market position to
cater to the needs of the market abroad.
W O:
A weakness with National refinery is that its processing plant is only able to process Arabian
Light and the Iranian light crude oil only and can barely process the indigenous crude oil. With
the deregulation of the fuel products is a form of an opportunity, NRL should reduce dependency
on the Middle East and the Iranian Oil companies and should emphasize more on indigenous oil
refining.
S T:
NRL s production capacity makes it the market leader in oil processing capacity, however, with
the advent of other competition like PARCO, they should concentrate more on Lube Base, which
is their monopolistic market and therefore should strengthen their position by differentiating in
the Lube Base Oil category.

W T:
NRL is facing liquidity problems arising from the lack of payment from PSO, as bad debts. Apart
from this, their dependency on foreign crude oil suppliers is making the companys financial
position worse off. The payments made to the foreign vendors are in $s and with greater
devaluation of rupee, the purchasing company ends up paying more and more. For this purpose,
the manufacturing process at the refinery should be such that they able to process the indigenous
crude oils as well.
NRL has no computer networking or proper database management system. It is because of this,
that most of the tasks and duties in the organization are overlapping, which hampers efficiency.
Also, because a major threat exists in the industry in the form of susceptibility to technological
changes in the refining process, NRL should develop in-house MIS system, based on local
computer experts instead of going for Systems Analysis Programming (SAP), which is extremely
expensive. It should not be forgotten that the companys major weakness is its Liquidity problem
and therefore maximum efforts should be directed towards costs reduction.
(TOWS Matrix is given in the appendices: page 24)

Historical financial and operational performance

Sales revenue increased at an impressive rate from FY10 to FY14 with an increase of almost 88
percent. Although sales revenue for FY15 registered an increase of 34 percent when compared to
2010, it fell 28 percent when compared to FY14. Sales revenue eroded due to falling prices of
fuel products due to supply glut as well as geo-political situation.
PRL earned profit after tax of Rs3,709 million in FY15, an increase of over 3.5 times in year-onyear earnings. Profitability margins were highest in FY15 as compared to the previous three
years with a gross profit margin of 4.61 percent and a net profit margin of 2.50 percent.
The improved performance could be attributed to improvement in margins of refined fuel
products versus crude oil. During the financial year crude oil prices in the international market
dropped sharply from $109 to $44, settling near $60 in the last quarter. Lower prices of crude oil
enabled the company to invest unutilised funds to increase its interest income while stable
exchange rates during the second half of the year also helped improve profitability.
FY14 proved challenging for the oil refining industry as a whole with volatile oil production in
the Middle East and Africa due to internal conflicts. Core refining operations were negatively
affected due to expensive oil. The depreciation of the PKR since July, 2013 was considerable
resulting in a blow to the overall economy. Of the two segments, it is the lube segment that has
proved to be more reliable in profit contribution as NRL is the only player in the lube industry of
Pakistan. The fuel segment suffered losses while the lube segment reduced pressure on the
bottom line to a certain extent. The lube segment's share in total profit increased from 55 percent
in 1QFY13 to almost 500 percent in 1QFY14 once again reaffirming the profitability potential of
the segment.

Snapshot of 9MFY16 and Q3FY16

PRL earned a net profit after tax of Rs5.24 billion with an EPS of Rs65.50, compared to a net
profit of Rs1.16 billion and EPS of Rs14.53 in the same period last year. Although international
crude oil prices continued to weaken during 9MFY16, the decline in product prices had a laxer
dip generating healthier refining margins. Profitability from the fuel segment improved to Rs1.18
billion as compared to loss after tax of Rs1.38 billion during the same period last year.
The company attributed the increase in fuel segment profitability to higher margins, improved
production, higher sales and lower exchange loss due to stability of rupee dollar parity. The rate
of production witnessed an increase to 90.36 percent compared with 81.28 percent during the
same period last year.
The lube segment registered a net profit of Rs4.06 billion compared to Rs2.54 billion during the
same period last year. The increase in profitability was directly attributable to better production
and sale of lube base oils. Another factor was the significant increase in bitumen sales due to
strong demand in the country which also contributed towards the profitability of the segment.

Stock performance
NRL outperformed the KSE-100 benchmark index throughout the last year with investors being
optimistic about the company's growth prospects. The stock price of NRL increased from
Rs234.10 on 1 January to 371.49 on 30 May, 2016 showing an increase of almost a whopping
sixty percent.

Expansion plans and future outlook

PRL has ambitious expansion and up-gradation plans for the future with the work being divided
in two phases. Under the Phase-I the company is undergoing up-gradation of its plant to comply
with government directives to produce environmental friendly HSD and meet Pakistan's rising
demand of motor gasoline. According to company reports work on diesel desulphurization
(DHDS) and Isomerization (ISOM) projects is progressing rapidly with Chinese contractors'
already starting work on the projects.
Recent updates in the company's report reveal that the supply of material and equipment is under
way while the civil work is expected to be completed in the near term. The company expects its
plant up-gradation to be completed by May, 2017.
The company estimates that contract value plus other cost of the project would be $349 million.
The financing for these projects is being provided by a consortium of banks for an amount of
Rs24.2 billion at 1.7 percent above six months KIBOR.
Under Phase-II further up-gradation projects are expected to be undertaken after completion of
the Desulphurization and Isomerization projects. A two stage unit at Lube-1 refinery has been
planned to augment the installed crude oil processing capacity from 12,050 barrel per stream day
(bpsd) to 17,000 bpsd and vacuum fractionation capacity from 5,200 bpsd to 6,600 bpsd.
Another planned expansion is the installation of a crude distillation unit at the fuel refinery to
boost the installed crude oil processing capacity from 50,000 bpsd to 53,000 bpsd. The design

package and invitation to bid documentation is complete and the project is expected to be
awarded during this or the coming year.
The company also plans to install nitrogen gas generator increased efficiency by using nitrogen
gas as inert media for MEK units and for tank blanketing. The generator will utilise Pressure
Swing Absorption technology having a capacity of 400 normal cubic meter/hour. Lastly the
company also plans to set up a reverse osmosis plant with a capacity of 250,000 gallons per day
to counteract the dearth of water availability for refinery operations.
Considering these expansions plans coupled with the dominant position the company enjoys in
the lube industry and its impressive stock performance for the past year, the future of PRL looks
promising.