Final PR
The Pakistan Credit Rating Agency Limited

Rai Umar Zafar

Aman Zafar

Applicable Criteria

  • Rating Modifiers | Outlook and Rating Watch (Jun 16) [View]
  • Correlation between Long-term and Short-term rating (Jun 16) [View]

Related Research

  • Sector Study | Oil and Gas (Oct 16) [View]
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PACRA Maintains Ratings of Pakistan Refinery Limited
 Rating Type Entity Debt Instrument
 Action Maintain Maintain Maintain Maintain
 Long Term A- A- A A
 Short Term A2 A2
 Outlook Stable Stable Stable Stable
 Rating Watch - - - -

The ratings reflect strong business profile of PRL emanating from its sustainable operational history, strong demand of its products, and its strategic importance in the domestic context. The design of PRL's plant offers relatively limited flexibility; in turn, low margin and high exposure to volatile dynamics of international crude oil and refinery product pricing. However, with the successful commissioning of Isomerization plant, the company experienced volumetric growth in petrol, a high-margin product, which boosted profitability. The incremental cashflows are adequate considering size of the related debt obligations. In addition, the favorable oil prices supplemented the profitability and hence cashflows. The company is targeting up – gradation (Hydro-desulphurisation) and expansion (enhancing refinery existing capacity) projects.

The ratings could be impacted by prolonged constrain in refining margins and/or adverse changes in the existing regulatory framework leading to depressed core cashflows. The company has conducted a leveraged up-gradation of its operating platform. Since repayment pattern is aligned to expected cash flows, timely settlement of obligation is important. Prudent management of new borrowings related to expansion, thereby impacting coverages, is important.
About the Entity
Pakistan Refinery Limited (PRL), having refining capacity of 2.1mln tons per annum, is operational since Oct'62. Majority shareholding in PRL is held by Shell Petroleum Company Limited, UK, (30%) Pakistan State Oil Company Limited (22.5%), HASCOL (14%). During the year, Shell has decided to reduce its shareholding in PRL. PSO showed its intention to acquire the same. The transaction is in the process of regulatory approvals. Upon completion of the transaction, PSO would be the largest shareholder of PRL. PRL's DHDS project is still pending (GOP latest extension is till June'17). Given likely change in ownership, clarity as to timeline and funding mix would emerge later. The company is also looking for capacity expansion opportunities.

The company has eleven member board (including the CEO) – six representing sponsoring companies (currently three from PSO, two from Shell and one from Chevron), two representing Hascol and one independent director.

About the Instrument
PRL, issued two TFCs during CY13. TFC I, carrying fixed profit rate of 10.55%, had a tenor of 3 years was redeemed at end Dec-16. TFC II, carrying fixed profit rate of 10.75%, has a tenor of 5 years and will be due for maturity in Dec'18. Although principal repayment is at maturity, these instruments carry perpetual Put option. The TFCs are secured by way of Hypothecation of a) Stocks and Receivables and b) Fixed Assets with a certain margin.
The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.