Refineries: Deemed duty continues to support otherwise weakening GRMs in Jan-11

Jan-11 GRMs rise marginally: Gross refining margins (GRMs) for local refineries increased to USD3.92/bbl during Jan-11, up 5% MoM. We have re stated Dec-10 GRMs, trimming it by USD0.6/bbl, based on actual Arab Light average available for Dec-10 (released with a fortnight’s lag).

Rising deemed duty contribution continues to support otherwise weakening spreads: While GRM without duties expanded by USD0.06/bbl MoM to USD1.14/bbl in Jan-11, it remains weak in comparison to an average of USD1.9/bbl during 4QFY10 and USD1.7/bbl during 1HFY11. Contribution of deemed duty on HSD to overall GRM now stands at USD2.8/bbl, as opposed to USD2.2/bbl during 1HFY11.

Regulatory risk standing tall, shall keep sentiments weak: While we see little likelihood of permanent removal of deemed duty on HSD, we do not rule out a one time reduction. Recent media reports have also highlighted GoP intention to gradually phase out deemed duties which further adds to regulatory risk. We continue to advise caution on refineries.

Jan-11 GRMs rise marginally

Gross refining margins (GRMs) for local refineries increased to USD3.92/bbl during Jan-11, up 5% MoM. Increase in GRM was driven by rising impact of deemed duty on HSD, which alone expanded by USD0.14/bbl MoM, accounting for 70% of the MoM increase. Jan-11 HSFO spread at USD-16/bbl was the worst since Sep-08, a major downward drag on GRMs. HSD less HSFO spread (netting off negative spread on HSFO with positive spread on HSD), though increased by USD0.64 to USD3.65/bbl in Jan-11, was still significantly lower than 1HFY11 average of USD7.12/bbl. We have re stated Dec-10 GRMs, trimming it by USD0.6/bbl to USD3.72/bbl, based on actual Arab Light average for Dec-10 (released by OPEC with a fortnight’s lag). We last reported Dec-10 GRMs at USD4.27/bbl, based on estimated Arab Light price.

Rising deemed duty contribution continues to support otherwise weakening spreads

While GRMs (including duty impact), after rising to USD4.26/bbl – the highest quarterly average in the last two years – in 4QFY10, have trimmed only marginally (3QFY11 to date average at USD3.8/bbl), product spreads have weakened considerably. Major sustaining factor for GRMs has been the rising contribution of deemed duty on HSD, which increased from USD2.3/bbl in 4QFY10 to USD2.7/bbl during the first two months of 3QFY11. GRM without duty impact, on the other hand, is down from USD1.9/bbl in 4QFY10 to USD1.1/bbl in 3QFY11 (to date). While GRM without duties expanded by USD0.06/bbl MoM to USD1.14/bbl in Jan-11, it still remains on the weaker side. Contribution of deemed duty on HSD to overall GRM stood at USD2.8/bbl during Jan-11.

Regulatory risk standing tall shall keep sentiments weak

Removal of incidentals (1.01% of “FOB price + freight premium”) from Dec-10 onwards has already trimmed realized margins for local refineries by USD1.0/bbl. While we see little likelihood of permanent removal of deemed duty on HSD, we do not rule out a one-time reduction to keep local oil prices unchanged. Recent media reports have also indicated that GoP is considering phased reduction in deemed duties which further adds to regulatory risk. We continue to advise caution on refineries.

Economic & Political News

Discovery in Tolanj X-1 well in Tal block

MOL has found hydrocarbons in Tolanj X-1 well in Tal block, which flowed 16.3 mmcfd gas from upper 48 meters of Lamshiwal formation. The discovery, at the currently disclosed flow rates shall have an EPS impact of PKR0.05/share on OGDC, PKR0.19/share on PPL and 0.82/share on POL. The well has yet to reach target depth, where the operator plans to test Datta formation. The full extent of the discovery shall be known once the well reaches planned depth in two months time.
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