Pakistan’s Largest Refiner Poised For Strong Growth
Sarfaraz A Khan | Jun 05, 2018 06:01AM ET
Byco Petroleum Pakistan (KA:BYCO), Pakistan’s largest refiner, is also one of the fastest growing energy companies in the country. Its sales, income and profit margins have all grown significantly. The company may post record sales of around $2 billion. And the good times may continue in the future.
Pakistan’s Biggest Refiner
Byco Petroleum is Pakistan’s largest refiner in terms of capacity. The company’s flagship asset, its facility located in Hub in the Balochistan province, can process up to 155,000 barrels of oil per day (bpd) using two refineries. Byco’s refining capacity is significantly greater than that of its nearest competitor – PARCO – whose refinery located at Mahmoodkot in the Punjab province can process up to 100,000 bpd of crude oil.
At its design capacity, Byco alone can meet 30% of Pakistan’s petroleum products demand. Furthermore, Byco helps Pakistan in reducing its import bill. The country is not a major crude oil producer and therefore relies heavily on foreign oil to meet its energy needs. In fact, around three-quarters of Pakistan’s energy needs are met with imports of crude oil and refined products. However, Byco’s refineries have reduced Pakistan’s reliance on imports of the expensive refined products such as gasoline and high-speed diesel.
h3 Surging Sales/h3Byco has grown significantly in the last few years. In the second half of 2017 (H1-FY2018), Byco’s net sales clocked in at Rs. 62.63 billion – that’s 60% higher as compared to the corresponding period in the prior year. The company’s net sales for the six months ended Dec-2017 (H1-FY2018) alone have come close to the annual sales for the entire fiscal year 2013 (Rs 66.19Bn). The company looks well on track to post highest-ever levels of gross sales for the ongoing fiscal year of over Rs 200 billion.
Byco’s growth of sales, however, hasn’t been consistent. Ideally, a company should post higher levels of sales and revenues in every year. Byco’s growth, however, has been choppy. Although that’s not great, it’s not terrible either. It is important to remember that Byco is a refiner and, like most refiners, its sales are heavily influenced by external factors that it cannot control, such as oil prices. A reduction in oil prices, which is followed by a reduction in refined products prices at the gas stations, negatively hits the company’s sales.
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For instance, in FY2016, oil prices declined and that led to an increase in the demand for petroleum products. Back then, Byco posted 27% increase in sales volumes but this was offset by the 23% decline in oil prices. As a result, the company’s sales dropped.
h3 Growing Profits/h3For refiners, it’s more important to consistently improve earnings and margins than revenues – and that’s where Byco has excelled. For the last six months of 2017, for instance, the company posted an after-tax profit of Rs 2.3 billion. That’s a sharp turnaround from FY2013 and FY2014 when Byco posted annual losses of Rs 2.3 billion and Rs 5.9 billion respectively. At the same time, its gross profit margins have gradually climbed from less than 0.5% in 2013 and 2014 to 7.5% in the second half of 2017.
Byco, however, did report significant losses in FY2013 and FY2014, which looks bad on paper but it’s not a red flag. A closer look reveals that the losses weren’t driven by a poor operational performance, and therefore they shouldn’t be a major concern.
First, it is also important to remember here that Byco is still a young company that has invested heavily to build its assets. Byco initially spent around $750 million, or more than Rs 86.7 billion at the ongoing exchange rate, to build its refinery and its single point mooring (SPM) facility which is used to import crude oil. The SPM is an offshore platform located in the Arabian Sea that connects with Byco’s refinery through a 15-kilometer offshore and onshore crude oil pipeline. Byco plans to invest an additional $300 million, or Rs 35 billion, to upgrade the refinery.
Not surprisingly, Byco posted a massive after-tax loss of a total of more than Rs 8 billion in FY2013 and FY2014. But once the refinery came online, the throughput volumes increased and the company moved to profitability. Byco swung to an after-tax profit of Rs 72 million in FY2015 which surged to Rs 2.12 billion in FY2017. In the second half of 2017, as the company finally brought the 120,000 bpd facility online, its after-tax profits surged from just Rs 19 million in the last six months of 2016 to Rs 2.29 billion.
Secondly, it is also worth remembering that a large chunk of the above-mentioned losses can be attributed to one-time, external factors which are unlikely to occur every year. As mentioned earlier, one of those factors is oil prices while another one is the devaluation of the Pakistani rupee. The significant increase in losses for FY2014 can be explained in large part by these two factors. In fact, Byco booked a massive foreign exchange loss of Rs 836 million in FY2014 due to the devaluation of the rupee against the US dollar in the last six months of 2013. Note that the devaluation of rupee hurts all Pakistani refiners since any reduction in the value of the local currency increases the cost of importing crude oil which is priced in US dollars.
h3 Growth Driver/h3Byco has two primary sources of revenues and earnings – oil refining and petroleum marketing. Under the oil refining business, the company sells the output from its refinery to various businesses, including all of Pakistan’s leading oil marketing companies such as the government-owned Pakistan State Oil (KA:PSO) and Royal Dutch Shell(NYSE:RDSa)’s subsidiary Shell Pakistan Ltd (KA:SHEL). Under the petroleum marketing business, Byco sells refined production directly to consumers mainly from its 327 retail outlets that are located all over Pakistan.
Note that the petroleum marketing business makes Byco a vertically integrated refiner – with backward integration from the SPM facility and forward integration from the retail outlets.
As highlighted earlier, Byco has posted strong growth numbers, particularly for the ongoing fiscal year. That growth has been driven in large part by the company’s oil refining business which benefited from the start-up of the 120,000 bpd facility in 2017. That has pushed Byco’s total refining capacity from 35,000 to 155,000 bpd, which depicts an incredible 343% increase. Consequently, the company’s throughput volumes have been climbing, which is fueling an increase in its revenues and profits.
By comparison, the growth of Byco’s petroleum marketing business, measured in terms of retail outlets, has been modest. At the end of June-2016, the company had 261 retail stations across Pakistan. By the end of last year, Byco had 310 outlets, which shows an increase of 19% in one and a half years.
h3 Source Of Profits And Margins/h3Since Byco is primarily a refiner, it typically generates around 60% of its revenues from the oil refining business, as per the company’s segment-wise results for FY2016, FY2017 and the last half of 2017. The oil refining business makes an even bigger contribution to the company’s profits. In FY2015, which was the first year of after-tax profits for Byco in the last several years, the oil refining unit accounted for a little over 50% of the company’s total segment profits. But as the refinery ramped up and production increased, the unit’s contribution to segment profits increased to 72% in FY2016, 81% in FY2017 and 87% in the last half of 2017.
By comparison, the contribution of Byco’s petroleum marketing business to revenues has been around 40%. In the last half of 2017, the unit’s earnings represented just 13.5% of Byco’s segment profits.
Byco’s top and bottom-line are heavily exposed to the oil refining business, as opposed to the petroleum marketing business, which is great since oil refining is a high-margin operation. In fact, the unit’s profit margins for the last six months of 2017 were 4.5-times higher than the margins from the petroleum marketing business. In this period, Byco’s oil refining unit reported a profit margin of 9.7% (almost double-digits!) which compares against petroleum marketing unit’s margins of 2.2%.
The strong profit margin seen in H1-FY2018 is not just a case of one great period. The refining unit’s margins have been consistently higher than the petroleum marketing’s margins since FY2016. This is shown in the image below.
In other words, the refining business is where Byco not only gets most of its revenues and profits but also margins.
h3 Looking Ahead/h3Byco looks well positioned to continue growing its earnings in the future.
The growth in margins at the oil refining segment seen in the recent past is likely due to the startup of the 120,000 bpd refinery following a two-year maintenance period. That likely led to an increase in throughput volumes and decrease in maintenance expenditure, which had a positive impact on margins.
Note that the refinery initially came online in 2015 but was shut down after three months when its crude oil heater caught fire.
Moving forward, as the refinery continues to ramp up and its output gradually climbs to close to its nameplate capacity, the margins should continue to expand. Byco’s refinery is currently running at close to 75,000 bpd, or at nearly half of its nameplate capacity. The management has indicated that they will gradually increase volumes in the near future to close to full capacity. This means that there is still significant room for growth.
The strong performance of Byco’s oil refining business can also be attributed to the strategy of the company’s management which has been relentlessly pursuing higher margins. The company hasn’t been going after growth just for the sake of it. Rather, Byco’s management has been focusing on growing in higher margin areas.
For instance, in FY2017, Byco’s management focused on growing sales of motor spirit, which is a high margin product. In that year, Byco posted a strong 54% increase in sales volume of motor spirits while keeping the high-speed diesel volumes flat and reduced furnace oil sales due to uncertainty regarding government regulation. Thanks in part to this approach, Byco managed to improve its segment profit margin of the oil refining business from 5.6% in FY2016 to 6.5% in FY2017, even though gross sales increased by just 1.6% to Rs 115.4 billion.
Byco has also invested in developing an SPM facility due to this margin-focused approach. The SPM allows Byco to capture cost efficiencies, which allows the company to improve its margins.
Now that the refinery is operating smoothly, Byco could start reporting improvement in profit margins at the petroleum marketing business as well. Byco’s management is also actively trying to increase its sales of high-margin products, such as aviation fuel for foreign buyers. The management’s approach towards this unit seems to be similar to what we’ve seen with the oil refining business – and it could yield similar results. In other words, the petroleum marketing unit’s margins could also expand in the future.
h3 Conclusion/h3Byco Petroleum’s sales, profits and margins have grown significantly in the last few years and its revenues may reach the $2 billion mark in the ongoing fiscal year. Although the company reported massive losses in FY2013 and FY2014, that’s not a major concern. Byco’s growth has been driven in large part by its oil refining business that witnessed 343% increase in production capacity. The company’s oil refining business is the key source of revenues, earnings and margins. The unit’s earnings and margins will likely improve in the near future as its refinery’s throughout volumes increase. That’s going to play a crucial role in fueling Byco’s growth.
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