Refinery Profits Jump 43% on New Feedstock Rate

Profitability calculations for the refining industry show that implementing the new feedstock rate directive could raise annual profits of listed refineries by about $5 billion.

According to Ambassador Arjan, Iran's oil refining industry is in a position where a change in pricing can change its profitability by more than a few billion dollars.

The provided estimates of the performance of the refineries show that the continuation of the current calculations in emergency conditions will keep the annual profit of the industry in the range of 3.5 billion dollars; But the implementation of the new feed and products rate formula, assuming the current conditions of the global market, has the capacity to increase this figure to about 5 billion dollars.

This difference of 1.5 billion dollars, rather than the result of increasing the production capacity or building new units, is related to the change in the rules for calculating the price of crude oil and manufactured products. An issue that shows that the profitability of Iran's refineries, in addition to the global price of oil and the operational performance of companies, is heavily influenced by domestic regulations.

The importance of this development increases when the market value of the industry is estimated at around 2,600 hemats and the expected profit of this year is nearly 660 hemats. Such a combination shows a forward-looking price-to-earnings ratio of about 3.9 units; A ratio that can increase investors' attention to the refining industry in case of stable profits and reduction of regulatory uncertainties.

43% profit difference in two pricing formulas

The country's refineries made about 3.5 billion dollars in profit last year. If the emergency conditions continue and feed and product rate calculations are done with the current mechanism, the annual profit of the industry will remain in the same range in the next period as well.

On the other hand, the implementation of the new directive assuming crack spreads based on the calculation can bring the profit to about 5 billion dollars. The difference between these two scenarios is equivalent to 1.5 billion dollars or about 43% of the basic profit; A figure that is not a small change for an industry with the current market value.

Of course, this increase should not be attributed only to the cheaper feed. The profit of the refinery is obtained from the difference in the value of the manufactured products with the cost of crude oil, energy, transportation and other operational costs. Therefore, the real effect of the new directive should be measured by simultaneously calculating the feed rate and the selling price of the products.

Where does the profit of 660 Hemmati come from this year?

Quarterly estimates show that refineries made a profit of about 800 million dollars, equivalent to 113 hemats, this spring. For summer, according to the monthly performance of the companies and assuming the implementation of the previous formula, a profit of nearly 1.7 billion dollars or about 240 hemats is predicted.

In the second half of the year, calculations are based on the assumption that emergency conditions will continue and the new formula will not be implemented. Based on this, the autumn profit is estimated to be around 144 hemats and the winter profit is estimated to be around 160 hemats. The total of four seasons reaches 657 hemats, which, when rounded, constitutes the industry's profit of 660 hemats.

The important point is that the Riyal profit of the seasons has been calculated with different currency conversion rates. Therefore, part of the increase in nominal profit can be caused by the growth of the exchange rate, and not all of it should be attributed to the improvement of refining operations. Also, the figures of summer and the second half of the year are still estimated in this calculation.

P/E ratio close to 4; Value or risk reduction?

Assuming a market value of 2,600 hemtas and an annual profit of 660 hemtas, the future price-to-profit ratio of the refining industry will be around 3.94 units. At first glance, such a ratio can indicate a significant gap between the market value and the profit-making capacity of companies.

But a low price-to-earnings ratio does not always mean absolute value. The stock market usually looks more cautiously at gains that depend on temporary regulations, emergencies or exchange rate changes. The investor wants to know how much of this year's profit will be repeated in the following years.

In case of sustainable implementation of the new formula, this ambiguity can be reduced to some extent. In such a situation, in addition to increasing earnings per share, the market will probably reassess the sustainability of refineries' revenue streams. Therefore, the importance of the new formula is not only in the growth of the profit number; but also in increasing its predictability.

Which refineries benefit the most?

The effect of the new formula will not be the same on all refining companies. Refineries whose production mix has a higher share of higher value-added products may be more sensitive to product price changes. In contrast, firms with higher operating costs or a less efficient production mix will not necessarily enjoy the same increase in profits.

In the meantime, the quality of crude oil received, the complexity of refining units, the share of gasoline and diesel in the production portfolio, and transportation and energy costs are the determining factors. Even if the overall industry profit increases by 43%, each company's profit growth can be lower or higher than this average.

For this reason, extrapolating industry-wide price-to-earnings ratios to individual refining symbols can be misleading. For a more accurate evaluation, the effect of the new directive on the profit and loss statement of each company should be calculated, taking into account the production structure and its costs.

The $5 billion profit scenario is based on certain conditions of the global oil and products market. One of its most important assumptions is the crack spread or the distance between the value of petroleum products and the price of crude oil. This distance depends on global supply and demand, refining capacity, product inventory and energy consumption pattern.

If the crack spreads are reduced, even the implementation of the new formula may not fully realize the expected profit. On the other hand, an increase in refining margins could push the profitability capacity of the industry beyond current calculations.

From this point of view, the profit of 5 billion dollars should be considered a conditional scenario, not a definite result of the implementation of the directive. To turn this scenario into a reliable forecast, it is necessary to know the final text of the regulations, the time of its implementation and the assumptions of the global price of oil and products.

Hamid Ganjkhani, a capital market expert, said about the possible effects of refining feed rates: the importance of the 1.5 billion dollar increase in the industry's profit should be evaluated beyond the growth of companies' income.

This expert continued: Iran's refineries have faced the problem of unpredictability of profit flow in the past years; So that the changes in the guidelines have sometimes caused investors to not be able to have a reliable estimate of the company's profit for the next year, even in the presence of good operating performance.

He added: From this point of view, if the new mechanism can establish a clear and stable relationship between the price of crude oil and manufactured products, its most important achievement will be the reduction of regulatory risk. Such a change can, in addition to increasing profits, reduce the capital cost of companies and provide the basis for financing development plans.

Ganjkhani emphasized: if the profit increase is spent on cash distribution among shareholders, its effect on the long-term value of companies may be limited; But allocating part of the resources to improving the quality of products, reducing fuel oil production, increasing energy efficiency and modernizing equipment can also strengthen the future profit making capacity.

This expert stated: The possible increase in the profits of refineries can have important effects on the country's energy supply chain. Strengthening the financial power of these companies increases the possibility of implementing quality plans, reducing the cost of emergency repairs, and improving production efficiency; An issue that in the long run can help increase the production of more valuable products and reduce the pressure caused by the imbalance of some energy carriers.

The difference between the profit of 3.5 billion dollars and 5 billion dollars shows that changing the calculation mechanism of feed and products can be one of the most important fundamental drivers of the refining industry.

However, the economic value of the $1.5 billion increase will become clear once the final guidance is implemented and its effects are visible in companies' financial statements.

The main problem of refineries is not only increasing profits; Make sure to repeat it. If the new formula can reduce regulatory uncertainty in addition to improving profit margins, the refining industry may face a revision in its stock valuation in addition to increasing profitability.