PACRA Maintains Entity Ratings of Attock Refinery Limited – Rating Watch

Business News English

Lahore, May 28, 2021 (PPI-OT): The ratings reflect ARL’s sound risk absorption capacity emanating from its sizable equity base. ARL’s core business remains exposed to the vicissitudes in international crude oil and products prices, which in turn, steer the gross refining margins (GRMs) of the Company. The country’s refinery sector is going through some significant challenges for an extended period, majorly pertaining to upgradation of the refining complexes. The global oil market was further struck by widespread uncertainty due to outbreak of COVID-19 pandemic. This had severely weakened the International Oil dynamics, creating a manifold impact on the domestic economy as well as the local refinery industry.

In order to cater the issue Working Group constituted by the Government, comprising of the Government officials and representative of refineries, had finalised a draft Refining Policy which envisages certain fiscal and tariff concessions to the refining sector which are likely to improve financial condition of the refineries enabling upgradation of plants. However the final approval and actual financial impact is yet to be seen. Inventory accumulation, NRV adjustments and POL demand slide pressurized the GRMs and profitability margins of the sector players drastically.

Nonetheless, the concerns are expected to reverse, going forward, as global prices head on a stabilization trajectory and demand takes a gradual uptick on account of eased lockdown. Having said this, uncertainty still prevails as to the timeliness of complete restoration and recovery of losses that the Industry has absorbed under the current situation. During the nine months period ended March 31, 2021, the Company suffered loss from refinery operations while the non-refinery income decreased as well. The margins started to slightly improve around December 2020.

However, afterwards with onset of third wave of the pandemic, the margins again started to shrink. Free cashflows from operations, and in turn, coverages, have deteriorated in 9MFY21. ARL’s strategic investments and sizable bank placements continue to contribute in the form of dividend and interest income. It provides support to the risk profile of the company. Recurring non-core income remained insufficient to absorb the net losses. The Company’s association with the country’s only integrated oil group – Attock Group (AG) – demonstrates to be a source of comfort to the ratings.

The ratings remain dependent on ARL’s ability to effectively shield its business profile from external vulnerabilities. Upholding of comforting factors, including income flow from other sources, remains imperative. Further outlook of the Company is expected to improve upon approval of proposed Refining Policy, which will enhance Refineries’ ability to upgrade and improve profitability. The entity has been put on rating watch on account of inevitable factors and unprecedented situation of Covid-19 outbreak.

For more information, contact:
Analyst,
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore, Pakistan
Tel: +92-42-5869504-6
Fax: +92-42-5830425
Email: hammad.rashid@pacra.com
Website: www.pacra.com