BOSICOR PAKISTAN LIMITED – Analysis of Financial Statements Financial Year 2004-3Q Financial Year 2011

Bosicor Pakistan was incorporated on 9th January 1995 as a public limited company and is listed on all the three stock exchanges of the country. At the time of inception, the company aimed at operate in the chemical, petroleum/petro-chemical and energy sectors.

Bosicor Pakistan started commercial operations in 2004. It completed its first turnaround on 15th August 2005 after starting trial operation in November 2003. The trial operations started with a capacity of 8,000 barrels per day. The capacity was subsequently increased to 18,000 barrels per day. BPL operates a refining facility at Mouza Kund Plant (MKP1), at Mouza Kund in Balochistan.

Bosicor Corporation Limited (BCL) and Abraaj Capital Limited (ACL), (a premier investment firm with specialized experience in private equity investments in the Middle East, North Africa and South Asia (MENASA) region and having executed some of the most compelling and successful transactions in the history of leveraged acquisitions across the region), have joined hands, in 2008, for further expanding Bosicor ventures in refining and petrochemicals by putting up concurrently Pakistan’s largest refinery and petrochemicals complex. These projects are being developed in Bosicor Chemicals Pakistan Limited (BCPL), (an under construction Aromatic Complex of 17,100 bpd), and Bosicor Oil Pakistan Limited (BOPL), (an under construction refinery of 115,000 bpd), from the ownership platform of Byco Industries Inc (BII), a joint venture company owned 60% by BCL and 40% by ACL. This venture has resulted in availability of additional foreign investment of US$ 135 million in Pakistan. Through the new venture, Abraaj will bring international reputation and foreign currency equity funds for timely completion of the ongoing projects while Bosicor in addition to its share in equity, will also contribute its expertise in oil refining, petrochemicals/marketing sector making a combination which will add value in improving the pace of delivery of the growth plan and polishing performance skills.

Recent results (3Q11)

Net sales declined to Rs 29 billion in 9M11 from Rs 31 in the 9M ending 2010. The decline in throughput was due to more than planned shutdown of BYCO, which led to a 12% decline in the throughput. Moreover, liquidity issues plaguing the energy sector also contributed to the decline in operations of BYCO. However, shutdown of refineries in Japan, and scheduled shutdown for maintenance in Asia along with higher demand from China kept the margins in positive generally along. Rising oil prices on the other hand, allowed the refineries to benefit from the deemed duty, at one point up to $ 9 per barrel on HSD. The Gross Profit was therefore recorded at Rs 683 billion up from Rs 211 billion in the same period last year. Operating loss was however lower at Rs 448 million as compared to Rs 672 million in the same period last year. Other income of Rs 1583 million failed to push Byco to the green as heavy financial charges kept it in the red. Loss after tax was witnessed at Rs 561 million with a LPS of Rs 1.43 as compared to LAT of Rs 1930 million and a LPS of Rs 4.92.

Byco’s performance was supported by the fact that the exchange rate remained relatively stable and at the same time the crude prices saw an increase of 52.4% which resulted in positive GRMs for the 9Ms under review.

Overview

Compared to the FY09, FY10 was a huge relief for the refinery sector in terms of low volatility in the international crude prices and the USD/PKR exchange rate. This led to mixed results in the refinery sector. With the relative stability of the average processing cost of a barrel ($2.5-$3), the Gross Refinery Margins for the sector are dependent on the international and local oil prices, which stayed below US$ 100 in FY10. Challenges in respect of depressed refining margins, unfavorable refinery product pricing mechanism, circular debt issues and liquidity crunch continued to haunt the sector. The decline in margins was also due to the poor spread on diesel and furnace oil, which account for 70% in local refinery production. To avoid losses, the industry was cutting on it back on the production of low margin products. This meant lower production and lower capacity utilisation, which stands at 78% in FY10.

The company has started getting limited quantity of local crude and has successfully blended it with imported crude oil while retaining product quality and yields. This has not only reduced the refinery’s exposure on currency fluctuations but also reduced the demand for foreign exchange. The company is seeking to increase its allocation of local crude oil and condensate. Good Maintenance and Operations ensured 100% availability of the 30,000 Barrels per Day (BPD) crude oil processing capacity at the Oil Refining Business (ORB). Other improvements included lower fuel and water usage, increased LPG recovery and further enhancement in the recovery of HSD, while maintaining operations costs below budget. While the immediate outlook of the refining sector, both internationally and locally is not conducive to further investments, the Company is completing studies to increase the processing capacity above 35,000 BPD, to implement as the trading scenario changes for the better. During the year under review, your Company acquired 100% shares of a private limited company, Universal Terminal Limited (UTL). UTL was principally engaged in the provision of bulk liquid storage services at within Karachi Port Trust.

Performance overview

The year 2008-09 has witnessed a consistent trend when it comes to crude oil prices. The price of Iranian Light Crude Oil-34 per barrel varied between US$ 62.88 to US$ 83.41 compared to US$ 39.81 to US$ 134.39 same time last year. Also the Arabian Light Crude Oil per barrel varied between US$ 59.69 to US$ 84.12 compared to US$ 39.51 to US$ 134.09 during the same time last year. The volatility was reduced as the after effects of the economic crisis started to wear off and economies started to bounce back. Also political tension between the US and Iran eased a little.

Also, there was a huge relief for the local refinery sector as the Pak rupee to the US dollar exchange rate took a consistent trend this year. The exchange rate varied between Rs 81.12 to Rs 85.06 for each US Dollar. The gradually falling rupee value was still a threat to the long-term profitability of the sector.

To avoid the repeat of last year’s transportation mistakes, the company has branched out its retail locations and storage facilities to many far flung areas such as has been strengthened with availability of storages at Keamari, Machike, Ghatti, Chaklala, Shikarpur, Tarujabba and Mehmoodkot. Moreover with entry into the White Oil Pipeline the Company is supplying the refinery’s product across every length and breadth of the country with more efficiency.

The crude throughput after revamp fell down in FY10 compared to that in FY09. The crude oil processed during the financial year came to 5.440 million barrels as compared to 7.037 million barrels processed during last financial year. The decline in activity was due to factors such as negative gross refinery margins (GRM) on some oil products due to falling prices. The company closed the activity of such loss making products, which resulted in low overall processing activity.

Due to unprecedented losses incurred during the year, the Company faced severe constraints in meeting its financial obligations on due dates and reasonably managed over-dues through tight cash flow monitoring. At this crucial phase, the company’s sponsoring shareholders again showed commitment and endorsed the financial plan prepared by the Management of the Company and arranged financial support amounting to Rs 4.2 billion. This enabled the Company to partially meet the required funding gap from the losses. In addition, the Company has successfully executed long term financing arrangement with a consortium of nine leading banks for Syndicated Term Finance Facility of Rs 5.573 billion to streamline the remaining gap.

Production and consumption

Bosicor Pakistan Limited’s activities in Pakistan are primarily based on the production and sale of petroleum products. The range of products include: light straight run naphtha, liquid petroleum gas (LPG), heavy naphtha, kerosene, motor spirits, high octane blending component, aviation fuels 1 & 4, high speed diesel and furnace oil. The company has a long-term sale and purchase agreement with Pakistan State Oil for marketing of its products.

Share of the petroleum products is about 40 percent of the current energy consumption in Pakistan. This consumption has grown sharply during 1980s at rate of almost 7 percent per annum but it has shown a decreasing trend during 1990s and later it gained the pace during 2004-2005 at about 10 percent per annum.

Oil consumption of different energy products is dominated by Gasoline and Fuel oil. Gasoline in Pakistan consists of high-speed diesel (HSD) and light-speed diesel oil (LSDO), while fuel oil is normally used in terms of furnace oil, which is being used for thermal power generation projects.

Transport and agricultural sectors are the two major users of gasoline. In recent years a high amount of subsidy was being provided by the government of Pakistan over gasoline due to which its consumption has increased. But in 2007, increase in oil prices in international market effected Pakistan economy due which government is no more in a position to provide same amount of relaxation on gasoline as before some years due to which government is gradually reducing the subsidy levels as result Gasoline prices are increasing locally also and effecting the consumption. Secondly government is promoting the compressed natural gas (CNG) sector in Pakistan and encouraging the transport sector to convert their transport on CNG. This indicates that in the coming years, Pakistan will see reduced consumption of gasoline products. But there is no alternative of gasoline in agriculture sector and as a result, this sector is facing extreme difficulties due to rise of gasoline prices.

Furnace oil or fuel oil is normally used for production of Electricity via thermal power plants. At the moment country is facing extreme energy crisis and government is planning for short term power generation plants that are oil based and also encouraging independent power producers to invest in the country. As all the new thermal power plants are oil based and also country has now very limited natural gas resources the consumption of furnace oil will also increase in the coming years.

Capacity

In FY10, the company undertook a turnaround operation for it refinery. A turnaround in refining is required to make the refinery more efficient, more reliable, durable, and safer. In this recently concluded turnaround, 2nd phase of the debottlenecking study has been implemented and throughput of the refinery is increased from 30,000 barrels per day to 35,000 barrels per day. Detailed Engineering study is at hand to further debottleneck the constraints in the existing refinery and if economically justifiable, the throughput capacity will be further enhanced to 40,000 barrels per day.

Currently the company has a full capacity of processing 35,000 barrels daily, however, it has an average throughput of just 16,233 barrels per day in FY10 compared to the average throughput of 22894 barrels per day in FY09. This means that the company is only utilized 46% of its potential capacity in FY10 compared to the 76% in FY09. This was way below the industrial capacity utilization of 78%. During the year actual production was for 335 stream days as against 308 stream days last year.

The medium-term objectives of the company are aimed at infrastructure development, which will promote the company towards self-reliance in the supply chain. The company has made investment in a single point mooring to improve freight economy. In the longer term, ie 2010-11, the company will add an isomerization plant for converting and upgrading light naphtha into environmentally friendly motor gasoline. The gasoline obtained from isomerization can be exported to neighbouring countries at higher rates than naphtha or consumed in the local market with environmental advantages. This will add to the profitability of the company.

Profitability

The company had mixed profitability results. In FY10, the company achieved gross sales of Rs 48.5 billion compared to the gross sales of Rs 54.7 billion in FY09. Also it had net sales of Rs 41.1 billion compared to Rs 44.6 billion during the same period last year, with a decline of about 7.9% compared to the industrial sales growth of 1.63%. Sales went up in the first half of the FY10 due to the cross changes in prices of gasoline (down 1%) and CNG (up 6%). However, overall the sales fell down due to decline in oil prices. During the year the company achieved a gross profit of Rs 667.3 million compared to the gross loss of Rs 3.91 billion last year with an increase of about 117% compared to the 22.5% growth in gross profit of the overall industry. Operating loss for FY10 was Rs 565 million compared to the operating loss of Rs 4.504 billion during the same period last year. Net loss after taxation was Rs 1.61 billion compared to Rs 10.33 billion last year. This shows an increase of 84.3% compared to the industrial net income growth of 36.4%. The net loss decreased mainly due to the 84% decrease in exchange difference losses, which amounted to Rs 690 million compared to Rs 4.378 billion last year. The exchange difference amounted to Rs 690 million on account of consistent trend of USD/PKR exchange rate. At the end of the year the company had loss per share of Rs 4.12 compared to the loss per share in the previous year of RS 26.35. This was way better than the industry average loss per share of Rs 11.76. The company also had a PER of 2.77x compared to the industrial average of 21x. This shows low expectations from the investors due to the poor profitability performance of the company in the last few years.

The company had local sales worth Rs 39.73 billion in FY10 compared to the local sales of Rs 49.25 billion in FY09. This local fall in sales was mostly due to CNG overtaking the automobile and transport sector in the second half of FY10. Although CNG rose in the first half, customers still found them as a cost-effective alternative to petrol. The company also had exports of Rs 8.776 billion in FY10 compared to the exports of Rs 5.517 in FY09, showing a growth of 59%.

In FY10, the company had a gross profit margin of 1.62% compared to the gross loss of 8.76% in the previous year. This was a little higher than the industry gross profit margin of 1.42%. The company had a net loss margin of 3.93% compared to 23.16% in the previous year. This was below the industrial average net profit margin of 1.16%. The company had a return on common equity of -38.41% compared to the industry average of 36.8%. These profitability figures show that the results of the company were at par with those in the rest of the industry.

The company’s petroleum marketing business has been growing very rapidly and reached volumes of 417,082 MT in the current financial year vs. 135,215 MT in the previous year. The year on year growth has been a very impressive 208%. Market share in liquid fuels now stands at 2.1% vs. 0.8% in the previous year. In the financial year commencing on July 2010, our marketing business has successfully climbed to no. 5th position in terms of market share. During the financial year ended June 30, 2010, the marketing business earned a gross turnover of over Rs 24 billion with a gross profit of Rs 944 million. This business is now reported as an independent business segment within our notes to the financial statements.

Management has taken an aggressive step against costs by using waste products for other uses. The company has completed building the isomerization plant, which will convert the loss making naphtha into an environment friendly motor gasoline.

Asset management

The company’s asset management performance was way below the industry averages. Inventory Turnover (Days) went up from 36 days in FY09 to 43 days in FY10. This was due to the fall in sales in the current fiscal year. It was above the industry average of 31.8 days. However the company did show improvement in its Day Sales Outstanding (Days) numbers, which went down to 60 days in FY10 compared to 73 days in FY09. However it was still way above the industrial average of 45.5 days. Summing up these two, one gets the operating cycle of the company, which is the average number of days between buying inventory and getting its payment after sales. The company had an operating cycle of 103 days compared to 110 days in the previous. The industry had an average operating cycle of 87 days. These numbers indicate that the company was less efficient in recovering cash from its customers. This can be accounted to the circular debt crisis, which showed no signs of declining in FY10.

The company’s fixed asset turnover and total asset turnover fell down in FY10 on account of falling sales. Fixed asset turnover fell down by 3% to 2.93, while the total asset turnover fell down 9.4% to 1.28. These numbers show poor utilization of the assets in production activity. Also the company’s capacity utilization was at 46%, showing inefficient use of production assets.

Debt management

The company’s debt management performance has been somewhat poor compared to the overall industry results. Debt to asset ratio was 113% compared to 108.2% last year, which indicates an increase of about 4.5%. This was mostly due to the huge rises in the current liabilities with the trade and other payables going up by 8.7%, accrued mark-up by went up by 32% and the current portion of long-term liabilities also went up by 37%. However on the positive note, the company had started to pay back some of its unsecured long-term debt, which went down by 36.22%. The debt to equity ratio fell down to 4.51 from 5.12 in the last year. This was due to the rise in the accumulated losses of 13.14%.

The company’s return on asset ratio fell down by 84.6% to -5.03%, compared to -32.68% last year. This fall was due to the drastic fall in net losses, which decreased by 84.3% this year and the rise in total assets of 1.68%. The return on common equity also fell down by about 90.37% to -38.41% compared to 398.9% an year earlier. Company’s ROCE was at par with the industrial average of -36.8%.

Liquidity

The company did not show any commendable performance when it comes to liquidity. Its current ratio fell down by 29% to 0.52 compared to last year’s 0.72. This was mostly due to the changes in current assets, which fell down by 18.8% and the current liabilities, which went up by 13.85% due to the rise in trade and other payables. Company’s current ratio was below the industry average of 0.70, showing poor management performance of cash and other liquid assets compared to its peers. Quick ratio also showed similar performance, going down by 38% to 0.33 compared to the industry averages of 0.68. These numbers show that the company had a very poor liquidity performance in FY10 and it results in bankruptcy for the company. To solve this issue, the company should let go of some non-performing assets as well as borrow long-term finances instead of relying on the short term ones which can prove to be costly in terms of high interest costs and early maturity refinancing.

Future outlook

Future outlook for the company is good on account of the excellent performance by the Petroleum Marketing Business, which has been successful in setting up 160 retail outlets. Its staggering growth rate of 208% and 390% in retail sales makes it a promising business. The business has built on its customer base by acquiring major customers in the bunkering and marine business, industrial consumers, captive power projects, cement industry and consumer good companies. Also the company has carved a niche in the oil market by providing specialized fuels such as Ultra Winterized Diesel and RMG 380. Starting from next year, the company is expected to provide a one of its kind LPG auto gas facility at its retail stations, apart from marketing it through cylinders and in bulk, providing greener energy options to our customers and creating a cleaner environment in the country. The company also plans on launching an auto lubricant product, which is expected to be exported to UAE in the coming years. The company will soon be the biggest oil refinery in the country. The company is expected to increase its potential processing capacity to 40,000 barrels next year. Also the company’s management has been aggressive cost-cutting measures which have helped in lowering its wastage costs and will further decrease such costs in the future as well.

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CRUDE Million Tons 2007 2010 2015
Per Annum
=====================================================
Processing Capacity 12.61 22.45* 33.63*
Indigenous Supply of crude 3.86 4.8 4.8
Import Requirement 8.75 17.65 28.83
=====================================================

* Assumes planned refineries (Indus & Bosicor) are operational

** Assumes planned Coastal Refinery is operational

The future energy consumption poses a challenge for the country, mainly because of the projected increase reliance on foreign sources of supplies for crude. Such dependence means that the profitability of the refinery is closely interlinked with the international petroleum products and crude oil prices which is subject to much fluctuations. Petroleum prices are expected to rise in the coming few years due to bounce back from the economic crisis. Also the auto sector and the thermal energy production have shown significant growth in last 1 year and this growth is expected to carry on in the coming future.

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