Fuel Prices Deregulation and its impact on Attock Refinery (ATRL)

The Pakistani government’s under discussion deregulation of petroleum product prices is set to reshape the country’s oil industry. This move, aimed at addressing the challenges posed by smuggled oil and escalating fuel costs, will have far-reaching consequences for industry players. Among these, Attock Refinery Limited (ATRL) is poised to reap substantial benefits due to its strategic location and operational dynamics.

What is IFEM?

Before delving into the impact of deregulation on ATRL, it’s essential to understand the term IFEM.

IFEM stands for Inland Freight Equalization Margin. It’s a mechanism used in the oil industry to compensate oil marketing companies (OMCs) for the transportation costs incurred in delivering petroleum products from refineries or import terminals to various parts of the country. This ensures a uniform selling price for consumers nationwide.

ATRL’s Strategic Advantage

ATRL, situated in the northern region of Pakistan, stands to gain significantly from fuel deregulation. Here’s why:

Geographical Advantage: ATRL’s location in Morgah, Rawalpindi, places it in a strategic position to capitalize on the deregulation of IFEM.
Potential for Increased Earnings: With the deregulation of IFEM, the price difference between petroleum products in different regions will become more pronounced. ATRL can potentially capture a larger share of the freight charges by supplying fuel to demand centers in Punjab, where prices are typically higher.
Estimated Earnings Boost: Based on projections, ATRL could experience an incremental annualized earnings impact of PKR 55.49 per share due to IFEM savings. This estimate is calculated considering a weighted average IFEM on Motor Spirit (MS) and High Speed Diesel (HSD), factoring in transportation costs through pipelines and bowsers.

Impact of Deregulation

The deregulation of petroleum products can bring several changes:

Price Variation: Fuel prices will fluctuate based on market forces, leading to differences in prices across regions and among OMCs.
Increased Competition: The deregulated environment will foster competition among oil marketing companies, potentially benefiting consumers with more choices and potentially lower prices in some areas.
Role of OGRA and Competition Commission: Regulatory bodies will play a crucial role in ensuring fair practices, product quality, and preventing market collusion.

Conclusion

The deregulation of petroleum products presents a substantial opportunity for ATRL to enhance its profitability. The company’s strategic location and the potential to benefit from IFEM deregulation are key factors driving this optimistic outlook. As the industry adapts to the new landscape, ATRL is well-positioned to capitalize on the emerging market dynamics.

Note:

Courtesy AHL report dtd 19-Apr-2024.
It’s essential to conduct a thorough assessment considering various factors, including market conditions, government policies, and economic indicators.
Falling Crude Oil Prices poses risks such as significant inventory losses for the entire refinery business