Pakistan Refinery Limited was incorporated in 1960 in Karachi and is engaged in production and sales of petroleum energy products as well as MTT, its only non-energy product. Its operations encompass extensive installations in refinery premises at Korangi terminal, storage facilities at Keamari and pipeline network Korangi to Keamari. Its products are include liquefied petroleum gas, motor gasoline, kerosene, jet fuel, high-speed diesel, and furnace oil. It supplies its products to the domestic markets, Pakistan defence forces and the Railways. Pakistan has five refineries with a total refining capacity of less than 270,000 bbl/d or 13.5 million tons per year. The consumption of oil products in Pakistan is highly skewed, with nearly 85% in the form of high-speed diesel (HSD) and fuel oil (FO). The refineries produce a full range of products, including lube base oils and asphalt. However, 60% of their production is HSD and FO, resulting in a significant mismatch between refined product output and market profile. Pakistan exports surplus gasoline and naphtha, and is self-sufficient in other petroleum products, such as kerosene and aviation fuels. Furthermore, the refinery sector is one of the highly volatile sectors where small changes in international oil prices can cause large swings in the industry's profit margins. Pakistan's demand for the year 2008 was around 400,000 bbl/d or 20 million tons for the year and it is expected that the consumption of oil and gas liquid products will increase to 466,000 bbl/d by the end of 2012. The projected increase is around 4% per annum from 2008 to 2012. The import requirement would therefore be approximately 388,000 bbl/d by 2012. This year, world market witnessed unusual rising trend of petroleum prices. Towards the end of the period under review, price of benchmark crude oil and Pakistan Refinery's main intake Arab light crude surged to all time high of $140.22/bbl and $138.52/bbl respectively. The country registered a growth of 8.34% in POL consumption during 2007-08 as compared with last year. Consumption of motor gasoline and high speed diesel in overall POL consumption increased by 28.47% and 14.54% in 2008 on a year on year basis (YoY). During the period 2007-08, the refinery operated at a capacity of 5,955 MT/day, which represents an increase of 10% in comparison with the corresponding year during which planned suspension of refinery operations had taken place. The refinery processed 323,991 M.Tons of local crude that is 38% higher as compared to the last year. The financial year 2008 witnessed a phenomenal growth in the profitability of the company. The company earned a profit after tax of Rs 211074 million during the year ended June 30, 2008 as against a profit of Rs 250.81 million in the last year. The increase in PAT was around 741.56%. Gross profit increased by 458.25%, this unusual increase in profitability was mainly due to the massive rise in oil prices and healthy international refining margins. Return on assets was around 8.88% which represents an increase of more than 7% as against the last years ROA figure. Profitability of the company, in fact of whole industry, is directly associated with the international oil price. Fickle prices also give rise to erratic demand trend as businesses and consumers switch to cheaper alternatives. FY06 witnessed rising trend of petroleum prices internationally. As a result, the prices of nearly all the products went up significantly. Though the profit margins of PRL plunged, yet the company was still able to post a robust after tax profit. In the first half of FY07, the international prices of oil plunged while in the second half; it rose thereby impacting the margins of the industry as a whole. The cost of operations rose considerably depressing the bottom-line of the company. ROA and ROE depicted an increasing trend in FY05 but decreased in FY07 owing to the reasons mentioned above. Depressed demand for the petroleum products like that of motor gasoline owing to availability of cheaper substitute like CNG was also a contributing factor which affected the profitability of PRL. Liquidity deteriorated slightly during the FY08 as compared with FY07 because there was a tremendous increase in accrued interest/markup. The amount for accrued interest rose by a staggering 3799.3%. In 2007, accrued interest were just fewer than 2 million rupees though at the end of the FY08 the amount increased to 77.5 million rupees. On the current assets side trade debts increased by 117.71% whereas stock-in-trade rose by 78.20%. Overall the current ratio fell from 1.38 in FY07 to 1.34 in FY08. Liquidity position of PRL is fairly strong as evident from its current ratio trend. Throughout the years under discussion, the current ratio has remained consistently above 1. Decline in liquidity from FY06 and FY07 owes much to the very steep rise in the current liabilities. The operating cycle has increased during FY08 because of the increases in inventory turnover and day sales outstanding. DSO has increased because of the rise in trade debt from Rs 4.78 billion to 10.43 billion in FY08 on a YoY basis. Secondly Inventory turnover also rose from 16.74 days in 2007 to 17.58 days in 2008 because stock in trade increased from Rs 5.1 billion to Rs 9.1 billion in 2008 on a YoY basis. All in all the companies overall ability to manage its assets deteriorated as the found it difficult to get cash out of debtors and reduce stock in trade. Both sales/equity and total asset turnover improved during the FY08 because of higher sales and subsequent higher profits. Debt/equity ratio has increased from 2.06 in 2006-07 to 2.49 in 2007-08 because total liabilities increased by some 71.52% in FY08 on a YoY basis. Long-term debt to equity increased to 0.7% in FY08. Such a low long-term debt to equity figure represents a fact that most of the financing of assets in done through short-term debt. The debt/asset ratio rose from 67.28% in FY07 to 71.37% in FY08. The major increase is in the short-term debt of the company. This is also a reason for the increase in finance costs by 209.66%. Even though financial costs rose but TIE (times interest earned) increased from 7.09 to 13.76 in FY08 on a YoY basis due to an increase in the income. The major chunk of the financing for PRL comes through debt and more specifically short-term debt as indicated by elevated figures of debt to asset and debt to equity ratios and extremely low long-term debt to equity ratio. This has been consistently reflected over the years under consideration from FY04-07. As a result, the company's long term debt obligations are at a very lower side. Moreover, the interest paying ability of PRL has been mitigated by the temporary loss that the company is going through in the wake of rising oil prices and depressed demand. Too much of debt financing gave rise to higher financial charges, which eroded the debt paying ability of the company by a large extent. Otherwise the company is relatively on a stronger position than its competitors in terms of debt management and enjoys a high level of leverage The market outlook of PRL is very strong against other industry players because of its strong fundaments. The earnings per share have improved remarkably from Rs 7.17 in FY07 to Rs 60.31 in FY08. The price earnings ratio doesn't give a good indication though it is not worrisome in the long-run because Pakistan faced difficult economic conditions during 2008. The economy faced many crises and challenges both at the international and domestic level. Security and political concerns reduced the investment numbers causing a sharp decline in the stock market during many periods of the year. FUTURE OUTLOOKThe government continued to revisit the policy and tariff structure for past many years and has now amended the tariff structure by reducing the custom/deemed duty on HSD from 10% to 7.5%, withdrawing it completely from JP-8 and has also revised the MS formula. The change in the pricing formula of MS has no economic logic; consequently the price of MS has become cheaper than its raw material. There would be severe blow to the refinery's profitability and would hurt the investor confidence as the up-gradation project expects an investment of around $400 million. Oil prices surged to all time highs in FY08 this led to the phenomenal rise in profits of oil refining companies worldwide. An important implication in the next two years for oil refinery companies is that a worldwide economic recession is expected especially in the US and the developed European country. Economic slowdown has begun in the US, as it was evident from the weak manufacturing and job numbers of the US economy in September. We expect oil prices to stay above $60 a barrel based on the statement by the Opec countries earlier this year which said that "Oil prices would not go below the $60-70 mark as those days are gone when oil could trade below$50 a barrel." In such a scenario we expect the international refinery margins to fall sharply next year and than stay stable than onwards for the further two years. This prediction is based on the assumption that the US will go through a painful recession because it is facing a financial crisis and a falling business cycle. So both of these forces combined will impact all major exporters and industries of the World, which in turn will hurt the oil refining sector as economic growth is a major driver of this sector.