Should investors avoid refinery stocks amid falling oil prices?

Key takeaways:

• Industry gross refining margins (GRMs) down to US$4.4/bbl, half of January 2025 peak
• Falling diesel spreads major reason behind GRM decline, impacting profitability
• Attock Refinery (ATRL) 3QFY25 EPS estimated at Rs. 32, down 35% YoY
• Pakistan Refinery Limited (PRL) expected to post positive earnings of Rs. 0.9 billion (EPS Rs. 1.4) vs loss last year

The refining sector in Pakistan is facing notable challenges as gross refining margins (GRMs) have steadily declined over the last three months, putting pressure on refinery profitability. The GRM is a critical profitability metric for refineries, reflecting the spread between crude oil prices and refined product prices.

Global oil prices show weakness

During the current year-to-date 2025 period, Arab Light crude oil prices have fallen 12%, while the US benchmark WTI dropped 14%. Following the US announcement of reciprocal tariffs early this month, crude prices dropped further with Arab Light crude down by 17% and WTI by 11%. These declines have coincided with volatility in global stock markets due to the ongoing tariff war, which continues to cloud oil demand prospects.

Despite a recent pause in the tariff hikes by the US, oil prices have shown no significant recovery, indicating that demand remains sluggish even as the northern hemisphere approaches the peak summer driving season. Meanwhile, OPEC+ has ramped up oil output, further increasing supply pressures.

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GRMs at a 6-month low of US$4.4/bbl

Pakistan’s local refineries are currently earning a combined weighted average GRM of about US$4.4 per barrel in April 2025, marking the lowest level in six months and nearly half of the peak GRM of US$8.8 per barrel seen in January 2025. The sharp decline in GRMs primarily results from the drop in diesel (HSD) spreads, which fell to US$13 per barrel from US$20 per barrel in January. Diesel accounts for more than 40% of local refinery output, so this narrowing spread has a major impact.

Earnings estimates for ATRL and PRL

Based on an average GRM assumption of US$13/bbl, Sherman Securities estimates that Attock Refinery (ATRL) will post an EPS of Rs. 32 in 3QFY25, down 35% YoY. This decline stems from lower gross profits expected at Rs. 3.1 billion compared to Rs. 5.3 billion in 3QFY24, along with reduced other income due to falling interest rates. Inventory losses incurred as oil prices tumbled towards the end of March 2025 are also factored in. Capacity utilization is expected to be around 75% during the quarter.

On the other hand, Pakistan Refinery Limited (PRL) is anticipated to post a profit of Rs. 0.9 billion (EPS Rs. 1.4) for 3QFY25, a marked improvement from a loss of Rs. 1.2 billion (loss per share of Rs. 2.0) reported in the same period last year. The turnaround is attributed to a modest recovery in GRMs, lower inventory losses, and the elimination of FEED study costs.

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Sector outlook and market activity

The refinery sector currently carries a market-weight stance with a market capitalization of around Rs. 153 billion. Average daily traded values have fluctuated but remain active with daily traded value averaging Rs. 1.2 billion over the past three months.

The refining sector in Pakistan is navigating a tough environment with declining GRMs and uncertain demand outlooks. While Attock Refinery faces profit pressure due to shrinking margins, Pakistan Refinery Limited is showing signs of recovery after prior losses. Investors should monitor global oil price trends, local product demand, and geopolitical risks from the tariff war closely as these will continue to influence refinery earnings in the near term.

Source: Sherman Securities (Pvt.) Ltd.

⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →