Monday, 26 August 2013

Corporate Briefing of BYCO Petroleum Pakistan Limited

BYCO: Corporate briefing notes
We organized a Corporate Briefing on 22nd August 2013 in Karachi Stock Exchange, where we hosted Byco Petroleum Pakistan Limited. Mr. Asad Azhar Siddiqui, Chief Financial Officer briefed about the industry and company outlook. Other key people from the group were Derek Alan Lawler, Country business head – Oil Refinery and Mujtaba Jafarey, Country business head – Petroleum Marketing. We have presented below key takeaways from the event.

About the company
Byco Petroleum Pakistan Limited (BYCO) listed in Karachi Stock Exchange operates in two business segments: Oil Refinery Business and Petroleum Marketing Business. Oil Refinery plant has a capacity of 35,000 barrels per day (bpd). Petroleum marketing business was launched in 2007 as a step of forward integration. The company has ~219 retail outlets for marketing of POL products.

Ownership structure
Byco Oil Pakistan Limited (BOPL) is the major sponsor of BYCO and has 87% stake in Byco Petroleum Pakistan Limited (BYCO) while remaining 13% is the free float in Karachi Stock Exchange.

New oil refinery to yield synergies
The company’s holding company, Byco Oil Pakistan Limited (BOPL) has put up the largest oil refinery of Pakistan with a capacity of 120,000bpd. This refinery would yield synergies for BYCO. The management highlighted that one of the key issues faced by BYCO was higher working capital cycle. Minimum quantity of crude import ship is 600,000bbls. Thus, for old refinery, process cycle of one ship was close to ~20 days. With new refinery expected to commence its operations within next 2-3 weeks, both refineries will import crude collectively. From one ship of 600k bbls, 420k bbls will be taken up by new refinery while BYCO’s refinery will take up 180k bbls. Total crude imports would then reduce process cycle steeply to ~5 days. The management said the working capital needs would substantially reduce after the commencement of new refinery. Having 5 days inventory process cycle, BYCO’s exposure to inventory gains/losses will be limited as price revision cycle is of 30 days and the company will carry 2-3 days stock.

Karachi Stock Exchange: BYCO Terminal to contribute to BYCO’s earnings
Byco Terminal Pakistan Limited (BTPL) is wholly owned subsidiary of BYCO. The company’s operations include management of port and transportation facilities. The company will provide terminal services to both group refineries and charge fee which would be equivalent to the amount of gains from the terminal. With this facility, the company will have an edge over other refineries as crude transfer process from SPM to tanks will reduce to 2 day process as crude will flow through a ~15km pipeline. PARCO, another refinery gets crude to its refinery through a 700km pipeline while PRL has to use bowsers.
BTPL would help reduce transportation cost and thus government has agreed to provide returns for the project through IFEM. BTPL would thus get some share from IFEM pool which is built in pricing of POL products. Increase in gasoline volumes would increase gains for BTPL.

Strategic arrangements to benefit further
BYCO has worked to shift its supply source from imported to domestically produced crude oil. The management has already completed contract with OGDCL for purchase of 5,500bpd oil.

Isomerisation plant to support MS volumes
BYCO refinery also has isomerisation plant with its refinery which converts Naphtha to motor gasoline (MS). It will start production with new refinery commencement and will have capacity of 12,500bpd. Naphtha is a low margin product and all of its domestic production is exported for consumption of Naphtha crackers. However, MS has a higher demand domestically and its product margins for oil marketing are also higher.
The unit will be able to process external Naphtha also and may procure Naphtha from other refineries also which is currently being exported.

Karachi Stock Exchange: Oil marketing business not a focus for now
BYCO has added outlets gradually during the last few years. The company currently has ~230 retail outlets and a market share of 0.79%. With new refinery supplies, other strategic sale agreements and 40 new outlets addition expected in FY14, management is eyeing a market share of 3.68% next year. The company will add outlets on highways mostly which has higher share of HSD sales.

The management is also focusing on improving brand image and presence in market by focusing on non-fuel businesses and other services. The management said that there is a very low possibility of reversal in upward revision of OMC margins on retail products announced in Apr-13. Margins are expected to stay at current levels or increase further.

Desulphurization unit of associated refinery to increase deemed duty
Government has recently offered an incentive of 1.5% incremental deemed duty to refineries for producing Euro-II compliant HSD. BOPL refinery also has desulphurization unit, which will also process diesel produced from BYCO’s refinery (old refinery). The benefit of incremental deemed duty would thus be shared between BOPL and BYCO on diesel supplies from BYCO.

Karachi Stock Exchange: Working capital limitations to reduce
The management suggested that they require a total of PKR25-27bn of working capital for operating both refineries. PKR15bn is required for old refinery (BYCO) and is available from banks while incremental PKR12bn is required for new refinery which shall be available over the next 4-6 weeks.

BYCO has benefit of owning both oil marketing and refinery business as oil marketing business gets credit from other refineries which can be used to fund working capital of the refinery. BYCO marketing gets PKR2bn monthly credit from refineries. BYCO refinery will also get 30 day credit period from domestic and foreign suppliers.

Karachi Stock Exchange: Debt restructuring to limit payment of financial charges
BYCO’s loans have been restructured and it shall pay finance cost after 9 years but book the charges in profit and loss account for now. Interest rate agreed with banks is KIBOR without any spread. Debt repayment would be paid periodically as operations improve.

Current long term debt owed by old refinery (BYCO) to banks is PKR19bn while BOPL has debt in the range of PKR12-14bn.

Other investment plans in pipeline
The company plans to set up Petrochemicals Complex Pakistan with an initial capacity of 27,300 bbls per day to produce petrochemical products which shall produce 120k tons per annum of Para Xylene. The management also plans to increase its production to 250k tons per annum to meet growing market demand.

Karachi Stock Exchange: Merger of BOPL and BYCO a possibility
BYCO group might merge both refineries in future. However, currently BYCO has deferred tax asset of PKR3-4bn which the company would like to use before merger. The management of both entities is sharing expertise for operating the businesses.

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