Pak Arab Refinery Limited

CREDIT RATING REPORT | Dec-24

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
06-Dec-24 AAA A1+ Stable Maintain -
08-Dec-23 AAA A1+ Stable Maintain -
09-Dec-22 AAA A1+ Stable Maintain -
10-Dec-21 AAA A1+ Stable Maintain -
10-Dec-20 AAA A1+ Stable Maintain -
About the Entity

PARCO, established in 1974, operates Pakistan's most modern refinery with a processing capacity of 120,000 bpd and an extensive cross-country pipeline network spanning over 2,000 kilometers. This network includes the Pak-Arab Pipeline Company Limited (PAPCO), a joint venture subsidiary in which PARCO holds a 62% stake. The Company’s equity investments extend to several other ventures, including PARCO Pearl Gas (Private) Limited (100%), Total PARCO Pakistan Limited (50%), and PARCO Coastal Refinery Limited (100%). The Company is governed by a ten-member Board of Directors, with six nominated by the GoP, including the Chairman and the Managing Director (MD), and four from the EAD, one representing OMV, Austria. Mr. Irteza Ali Qureshi assumed the role of MD in February 2024.

Rating Rationale

The ratings reflect Pak-Arab Refinery Limited ("PARCO" or "the Company") ownership structure representing the Government of Pakistan (GoP) – (60%) and Abu Dhabi Petroleum Investment Company (ADPI) through Mubadala Investment Company (based in Emirates of Abu Dhabi – UAE) – (40%). PARCO's strategic importance to the national economy is also factored into the ratings, as the Company plays a vital role in providing efficient and environmentally friendly energy solutions through the transportation of petroleum products via its integrated pipeline network. In FY24, Pakistan's total consumption of refined petroleum products was approximately 16.317 million metric tons (MT), down 3% from 16.853 million MT in FY23, largely due to slower industrial activity, reduced transport fuel demand, weaker auto sales, and high prices. Domestic refineries, including PARCO, supplied 10.081 million MT, meeting 62% of the country’s demand, while the rest was imported. PARCO achieved a 20% revenue growth in FY24, increasing sales volumes to 4.9 million MT from 4.3 million MT in FY23, aided by improved petroleum prices. However, in 1QFY25, the Company experienced a 22% decline in revenue, primarily due to a decrease in sales volumes to 1.2 million MT from 1.3 million MT in the same period of the previous year, coupled with lower petroleum product prices. The Company maintains a moderate leverage structure, funding operations through both internal resources and short-term bank borrowings. In addition to refining activities, PARCO’s revenue streams also strengthened by the returns from its investments in subsidiaries and associates. The equity base of the Company is strong and recorded at approximately PKR 180 billion as at end September, 2024. The approved "Refining Policy for Upgrade of Existing/Brownfield Refineries and New/Greenfield Refineries 2023" provides fiscal incentives, including tariff protection, for refineries undertaking upgrades. PARCO has completed the feasibility study for its upgrade project and further exploring cost effective options for Euro-V compliance and reducing Furnace Oil (FO) production.

Key Rating Drivers

The effective management of upcoming projects, consistency in government policies and technological advancements will remain critical. At the same time, sustaining a strong competitive position is also imperative.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Pak Arab Refinery Limited

rating analysis

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Profile
Legal Structure

Pak-Arab Refinery Limited ("PARCO" or "the Company"), established in 1974 as a Pakistan-Abu Dhabi joint venture, is a leading oil refining company in Pakistan. Through self-financed investments and a modular growth strategy, PARCO has evolved into one of the country’s largest energies conglomerates and plays a vital role in Pakistan's petroleum supply chain. PARCO is an unlisted public limited company, with its corporate office located at PARCO Corporate Headquarters, Korangi Creek Road, Karachi and its refinery situated at Mahmood-Kot, near Multan.

Background

The Company was founded with the objective of establishing a Mid-Country Refinery (MCR) and an associated pipeline system to transport crude oil from Karachi to the refinery site at Mahmood-Kot. The pipeline project was successfully implemented and commissioned in 1981. In 2000, the MCR was established, becoming one of the largest and most advanced refineries in Pakistan. Following a major revamp project, it now has a refining capacity of approximately 120,000 barrels per day.

Operations

The Company is primarily engaged in the refining, sale, and transportation of petroleum products. The refinery unit of the Company produces High-Speed Diesel (HSD), Motor Gasoline (MS), Furnace Oil (FO), Liquefied Petroleum Gas (LPG), High Octane Blending Component (HOBC), Kerosene, Jet Fuel (JP-1 & JP-8), Asphalt, Sulphur and Light Diesel Oil (LDO).

Ownership
Ownership Structure

PARCO is 60% owned by the GoP, represented by the Ministry of Energy (Petroleum Division), and 40% by the Emirate of Abu Dhabi (EAD). EAD's investment is made through Abu Dhabi Petroleum Investments LLC (ADPI), a majority-owned subsidiary of Mubadala Investment Company, the state-owned investment arm of the Abu Dhabi government.

Stability

Considering the strategic importance of the Company, stability is considered strong.

Business Acumen

GoP is focused on securing the nation’s energy needs through PARCO's refining and oil transportation capabilities. Meanwhile, ADPI, contributes technical expertise and global industry knowledge to the Company. Together, the business acumen of both the GoP and EAD strengthens PARCO’s position as a key player in Pakistan’s energy sector.

Financial Strength

The financial strength of PARCO's sovereign owners, the GoP and the Emirate of Abu Dhabi through Mubadala Investment Company, underscores the Company’s financial stability. This strategic ownership structure ensures access to substantial financial resources and reliable support, particularly during times of financial or operational challenges, further reinforcing PARCO’s critical role in the energy sector.

Governance
Board Structure

PARCO is governed by a ten-member Board of Directors (BoD), six are nominated by the GoP, including the Chairman and the Managing Director (MD), ensuring alignment with Pakistan’s energy policies. The remaining four directors are appointed by EAD through ADPI, representing the interests of the Emirate of Abu Dhabi. This balanced composition of the Board ensures that both stakeholders have a significant influence on the strategic direction and governance of the Company, combining the GoP's focus on national energy security and EAD's technical and financial expertise.

Members’ Profile

Mr. Momin Agha, the Chairman of Pak-Arab Refinery Limited (PARCO), brings a wealth of experience in general management. Currently serving as Secretary in the Ministry of Petroleum, Mr. Agha also holds a directorship at Oil & Gas Development Company Limited (OGDCL). PARCO’s board comprises of highly qualified members, mostly from well-renowned institutions. It has a blend of business studies, general management, law, engineering, and finance professionals. Experience profile of the board is rich.

Board Effectiveness

In FY24, the Board of Directors held several meetings to discuss strategic matters including the adoption of financial results, review the progress of ongoing major projects, and assess the annual budget. The Board is supported by four committees: Finance, HR, Audit, Risk & Compliance and Investment. Each committee is chaired by a board member and includes other non-executive board members, ensuring effective oversight and governance across key areas of the Company.

Financial Transparency

PARCO's auditor, KPMG Taseer Hadi & Co. Chartered Accountants, one of the Big Four accounting firms, holds a satisfactory QCR rating from the Institute of Chartered Accountants of Pakistan (ICAP) and is classified in Category "A" on the State Bank of Pakistan's panel of auditors under Section 35 of the Banking Companies Ordinance, 1962. They have issued an unqualified opinion on the Company's financial statements as of June 30, 2024.

Management
Organizational Structure

The organizational structure of the Company is divided into various divisions and departments. All the divisions are managed by General Managers (GM) / Divisional Heads. Despite the GoP’s stake in the ownership structure of PARCO, the Company enjoys operational autonomy.

Management Team

Mr. Irteza Ali Qureshi assumed the role of Managing Director at PARCO in February 2024. He has been with the Company for over three years. A UK-qualified Chartered Accountant, Mr. Qureshi brings over 25 years of experience in business strategy, value creation, operational turnarounds, organizational restructuring, and business development. He began his career at PriceWaterhouseCoopers (PwC) in London in 1991 and has since held senior management positions in general and financial management across both the private and public sectors, as well as multinational organizations in Pakistan and abroad. Mr. Qureshi possesses extensive expertise in operations, finance, audit, consultancy, treasury, and business development. The management team is well qualified, mostly associated with the Company since long.

Effectiveness

Over the years PARCO’s effective management played a significant role in empowering the organization through its progressive results. Additionally, management’s effective decision-making cause processes more systematic.

MIS

The Company generates MIS reports on daily, fortnightly, monthly, and annual basis. These mainly include daily cash position, daily production report, saleable stock position, Treasury and Accounts section MIS, monthly debtors aging, monthly management accounts, and Annual Financial Statements.

Control Environment

PARCO has upgraded to – SAP S/4HANA – Enterprise Resource Planning (ERP) solution, to streamline planning and coordination across business lines, thereby increasing overall efficiency.

Business Risk
Industry Dynamics

The combined refining capacity of Pakistan stands at 19.8mln MTPA. Total consumption of refined products including Motor Spirit, High Speed Diesel, Kerosene, Jet Fuel, Furnace Oil during FY24 stood at ~16.317mln MT (FY23: 16.853mln MT). The local refineries supplied 10.081mln MT (FY23: 8.971mln MT) of refined petroleum products during FY24, enabling the country to meet 62% of its demand while remaining was met through imports. The overall drop of 3% in the consumption pattern was owing to lower demand due to rising prices of MS and HSD while major drop in use of FO for power generation. Furthermore, the availability of HSD from irregulated segments in the local market has further adversely impacted the sold volumes of refineries leading to storage issues and lower capacity utilization. In addition, the refineries operating in Pakistan require technological/operational upgrades to improve product slates, enhance margins, reduce furnace oil production, and lower carbon emissions through better crude oil conversion. To address this, refineries are pursuing upgradation and expansion projects under the newly approved refinery policy.

Relative Position

PARCO, being the most advanced refinery in the country, consistently maintains a dominant market share. In FY24, PARCO's market share stood at approximately 48%, while Attock Refinery, Pakistan Refinery, National Refinery, and Cnergyico contributed around 17%, 14%, 11%, and 10%, respectively.

Revenues

PARCO achieved a revenue growth of ~20% in FY24, generating a turnover of PKR 1,143,395 million, compared to PKR 956,040 million in FY23. However, in the first quarter of FY25, PARCO experienced a decline of ~22% in sales, which amounted to PKR 247,537 million, down from PKR 317,443 million in 1QFY24 in view of globally declining prices and margins.

Margins

The Company's gross profit margins declined in both FY24 and 1QFY25, reaching ~8.0% (FY23: 12.0%) and 0.6% (1QFY24: 14.8%), respectively. Similarly, net profit margins mirrored this downward trend, falling to ~4.8% in FY24 (FY23: 7.0%) and 1.1% in 1QFY25 (1QFY24: 9.0%).

Sustainability

The approved Refining Policy provides tariff protection for refinery upgrades. PARCO, having finished a feasibility study for an upgrade, is now further exploring cost effective options for Euro-V compliance and reducing Furnace Oil (FO) production.

Financial Risk
Working capital

PARCO’s working capital requirements primarily stem from the need to finance its crude oil inventory and receivables, with the Company predominantly relying on internal cash flows to meet these needs. Over the years, PARCO has maintained strong working capital management, as reflected by its efficient net working capital days: 48 days in 1QFY25, 37 days in FY24, and 41 days in FY23. However, in 1QFY25, the Company utilized short-term borrowings totaling PKR 53,344 million, a significant increase compared to PKR 6,551 million in FY24 and PKR 22,186 million in 1QFY24. Receivables stood at PKR 89,790 million in FY24 and PKR 68,045 million in 1QFY25, compared to PKR 83,357 million in FY23 and PKR 80,784 million in 1QFY24.

Coverages

During FY24, the Company’s coverage ratios, while decreasing to 7.2x (compared to 54.3x in FY23), remained solid despite a slight rise in interest expenses and a reduction in profitability, leading to a moderate decline in cash flow generation from core operations. In 1QFY25, the coverage ratio further adjusted to -4.4x, mainly due to increased interest costs associated with borrowings of PKR 53,525 million, compared to PKR 22,276 million in 1QFY24. Additionally, although cash flows from operations (FCFO) were negative at PKR (6,052 million) in 1QFY25, driven by reduced profitability compared to PKR 35,638 million in FY24 and PKR 68,015 million in 1QFY24, the Company continues to benefit from steady dividend income from its subsidiaries and returns on investments, which support its financial resilience.

Capitalization

PARCO maintains a moderate-leverage capital structure, with leverage standing at ~23% at the end of 1QFY25, a notable increase from 3.7% at the end of FY24 and 22% at the close of FY23. The Company’s debt primarily consists of short-term borrowings, which have fluctuated in response to working capital requirements.

 
 

Dec-24

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Pak Arab Refinery Limited

financial summary

(PKR mln)

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Sep-24
3M		 Jun-24
12M		 Jun-23
12M		 Jun-22
12M
A. BALANCE SHEET
1. Non-Current Assets 40,344 39,573 36,871 36,544
2. Investments 112,127 110,252 102,886 67,113
3. Related Party Exposure 11,207 11,207 11,381 11,338
4. Current Assets 228,669 211,370 230,304 167,051
a. Inventories 131,938 96,472 114,196 85,893
b. Trade Receivables 68,045 89,790 83,357 56,223
5. Total Assets 392,347 372,402 381,442 282,047
6. Current Liabilities 129,285 157,220 127,638 121,717
a. Trade Payables 74,521 91,876 60,529 66,488
7. Borrowings 53,344 6,551 48,561 0
9. Non-Current Liabilities 29,935 31,669 31,961 18,795
10. Net Assets 179,783 176,963 173,283 141,534
11. Shareholders' Equity 179,783 176,963 173,283 141,534
B. INCOME STATEMENT
1. Sales 247,537 1,143,395 956,040 790,351
a. Cost of Good Sold (246,134) (1,050,778) (841,663) (658,490)
2. Gross Profit 1,403 92,617 114,377 131,861
a. Operating Expenses (2,901) (11,422) (8,186) (8,786)
3. Operating Profit (1,498) 81,195 106,191 123,075
a. Non Operating Income or (Expense) 6,016 10,574 8,144 (5,703)
4. Profit or (Loss) before Interest and Tax 4,518 91,769 114,336 117,372
a. Total Finance Cost (1,383) (4,934) (1,271) (1,948)
b. Taxation (314) (31,750) (46,469) (46,707)
6. Net Income Or (Loss) 2,821 55,085 66,596 68,718
C. CASH FLOW STATEMENT
a. Free Cash Flows from Operations (FCFO) (6,052) 35,638 68,015 99,689
b. Net Cash from Operating Activities before Working Capital Changes (7,009) 31,366 66,863 97,637
c. Changes in Working Capital (42,824) 57,327 (70,729) (43,106)
1. Net Cash provided by Operating Activities (49,833) 88,693 (3,866) 54,531
2. Net Cash (Used in) or Available From Investing Activities 4,505 7,651 (47,427) (31,024)
3. Net Cash (Used in) or Available From Financing Activities (8) (64,654) (22,043) (10,249)
4. Net Cash generated or (Used) during the period (45,336) 31,691 (73,336) 13,258
D. RATIO ANALYSIS
1. Performance
a. Sales Growth (for the period) -13.4% 19.6% 21.0% 134.4%
b. Gross Profit Margin 0.6% 8.1% 12.0% 16.7%
c. Net Profit Margin 1.1% 4.8% 7.0% 8.7%
d. Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) -19.7% 8.1% -0.3% 7.2%
e. Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Shareholders' Equity )] 6.3% 31.5% 42.3% 60.6%
2. Working Capital Management
a. Gross Working Capital (Average Days) 71 61 65 47
b. Net Working Capital (Average Days) 41 37 41 22
c. Current Ratio (Current Assets / Current Liabilities) 1.8 1.3 1.8 1.4
3. Coverages
a. EBITDA / Finance Cost -1.6 15.2 82.3 64.9
b. FCFO / Finance Cost+CMLTB+Excess STB -4.4 7.2 54.3 53.7
4. Capital Structure
a. Total Borrowings / (Total Borrowings+Shareholders' Equity) 22.9% 3.6% 21.9% 0.0%
b. Interest or Markup Payable (Days) 90.3 69.9 85.2 37.3
c. Entity Average Borrowing Rate 18.0% 16.6% 4.2% 9.5%

Dec-24

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Pak Arab Refinery Limited

rating scale

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Dec-24

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Pak Arab Refinery Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
    1. No director, officer, or employee of PACRA communicates the information acquired by him for use for rating purposes to any other person, except where required under law to do so. (Chapter III; 10-(5))
    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
    1. PACRA fulfills its obligations in a fair, efficient, transparent, and ethical manner and renders high standards of services in performing its functions and obligations. (Chapter III; 11-A-(a))
    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
    3. PACRA prohibits its employees and analysts from soliciting money, gifts, or favors from anyone with whom PACRA conducts business. (Chapter III; 11-A-(q))
    4. PACRA ensures before the commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest. (Chapter III; 11-A-(r))
    5. PACRA maintains the principle of integrity in seeking rating business. (Chapter III; 11-A-(u))
    6. PACRA promptly investigates in the event of misconduct or a breach of the policies, procedures, and controls, and takes appropriate steps to rectify any weaknesses to prevent any recurrence, along with suitable punitive action against the responsible employee(s). (Chapter III; 11-B-(m))
  4. Independence & Conflict of Interest
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    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
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  5. Monitoring and Review
    1. PACRA monitors all the outstanding ratings continuously, and any potential change therein due to any event associated with the issuer, the security arrangement, the industry, etc., is disseminated to the market immediately and in an effective manner after appropriate consultation with the entity/issuer. (Chapter III; 17-(a))
    2. PACRA reviews all the outstanding ratings periodically on an annual basis. Provided that public dissemination of annual review and in an instance of change in rating will be made. (Chapter III; 17-(b))
    3. PACRA initiates an immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating. (Chapter III; 17-(c))
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  6. Probability of Default
    1. PACRA’s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e., probability). PACRA’s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA’s Transition Study available at our website. (www.pacra.com) However, the actual transition of rating may not follow the pattern observed in the past. (Chapter III; 14-3(f)(vii))
  7. Proprietary Information
    1. All information contained herein is considered proprietary by PACRA. Hence, none of the information in this document can be copied or otherwise reproduced, stored, or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s prior written consent.

Dec-24

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