Jordan Petroleum Refinery Company Equity Report June 14, 2009 Serene Zawaydeh Head of Research Awraq Investments szawaydeh@awraq.com P a g e 1
Table of Contents Executive Summary... 1 Financial Highlights... 3 Imports, Production and Sales... 4 Income Statement... 7 Balance Sheet... 11 Cash Flow Statement... 14 Government Subsidy and Increase in Oil Prices... 15 Crack Spread... 16 Jordan Petroleum Refinery Company s Stock Price... 17 Valuation... 19 Appendix... 24 Disclaimer... 25
Table of Figures Figure 1: Ownership Structure (June 3, 2009)... 1 Figure 2: Revenues, Cost of Sales and Net Profit... 3 Figure 3: Current Ratio, Quick Ratio, Net Working Capital Ratio... 3 Figure 4: Account Receivables Turnover Ratio, Total Debt / Equity, Asset Turnover Ratio... 4 Figure 5: Quantities of Imported Petroleum Products... 5 Figure 6: Imports, Production and Sales... 5 Figure 7: Quantities of Petroleum Products Sold... 6 Figure 8: Consumption of Petroleum Products by Sector (2007)... 7 Figure 9: Total Sales, Refinery and Distribution Sales and Oil Factory Sales... 7 Figure 10: Cost of Sales... 8 Figure 11: EBITDA and EBITDA Margin... 9 Figure 12: Net profit before Income Tax, Net Profit, and Net Profit Margin... 10 Figure 13: Dividends... 10 Figure 14: Balance Sheet Highlights... 11 Figure 15: Inventory and Current Assets... 12 Figure 16: Current Assets, Current Liabilities, Working Capital Ratio and Current Ratio... 12 Figure 17: Accounts Receivable... 13 Figure 18: Accounts Receivable Days (December 31, 2008)... 13 Figure 19: Cash Flow from Operating and Financing Activities... 14 Figure 20: CAPEX... 14 Figure 21: Government Subsidy Charged to Ministry of Finance... 15 Figure 22: Prices of Petroleum Products in Jordan (2002May 2009)... 15 Figure 23: Crude Oil Prices: Arabian Gulf Light Crude Oil and WTI... 16 Figure 24: Jordan Petroleum Refinery Company s Crack Spread... 16 Figure 25: JOPT s Stock Price Volatility... 17 Figure 26: JOPT s Stock Price vs Amman Stock Exchange Index... 17 Figure 27: JOPT Stock Price vs Arabian Gulf Light Crude Oil Spot Price... 18 Figure 28: EIA s Projected Prices of Petroleum Products... 19 Figure 29: Refined Products Produced from one Barrel of Crude Oil... 20 Figure 30: Jordan s Demand for Petroleum Products (20062018)... 21 Figure 31: JOPT s Actual and Projected Earnings Per Share (20032018)... 22 Figure 32: Sensitivity Analysis... 23 Figure 33: Conversion from Tons to Barrels... 24
Figure 1: Ownership Structure (June 3, 2009) Free Float 70.11% Social Security 20.49% Source: Securities Depository Center Ticker: JOPT JR (Bloomberg) Last: JD 8.32 (11June09) Islamic Developme nt Bank 6.25% Employees fund Jordan Petroleum Refinery 1.921% Arab Jordan Investment and Finance Bank 1.228% 52 Week Low (3Mar09): JD 4.82 52 Week High (19Jun08): JD 22.96 Target Price: JD 9.3 Recommendation: HOLD Serene Zawaydeh Head of Research szawaydeh@awraq.com Executive Summary Jordan Petroleum Refinery Company (JPRC, Ticker: JOPT JR) is the only refinery in Jordan. It is the sole provider of all petroleum products for the local market and the sole importer of crude oil. It refines imported crude oil, produces and distributes petroleum products including diesel, gasoline and LPG. Unlike many refineries in Arab countries which are government owned, Jordan Petroleum Refinery Company has always been privately held. It is a publicly listed company, with 70.1% free float. JOPT s 50 year Concession Agreement expired on March 2, 2008. The concession provided the Company with the exclusive right to establish and invest facilities for refining and processing petroleum and hydrocarbon products and derivatives; to engage in the storage, distribution and selling of these products; to own and lease lands; and other rights. The company s profit after income tax was fixed between 7.5% and 12% of the nominal value of the company s shares during the concession period. Any excess in revenues was delivered to the government, and any deficit was subsidized by the government. The Government controls the prices of petroleum products supplied for local consumption. Jordan Petroleum Refinery Company published the unaudited financial results for 2008 on June 8, 2009. It still needs to agree with the government on the financial terms following the end of the concession agreement. The effect of the end of the concession was reflected in the company s net profit reaching JD 17 million in the first 9 months of 2009 for the first time. Previously, net profit did not exceed JD 5 million. The government is still engaged with the company, despite the end of the concession agreement. The unaudited 2008 financials show that net profit for the full year 2008 stood at JD 7.7 million. Figures for 2007 were restated in the unaudited 2008 financial statements. JPRC is looking for a strategic investor, to implement a US$ 1.3 billion expansion project. This fourth expansion project in the life of the company aims at improving the quality of refined petroleum products produced, and increasing the capacity of the refinery. The company announced signing a non disclosure agreement with a potential strategic investor in April 2009. Local newspapers mentioned that the strategic partner is the French TOTAL, but this is not confirmed. The company signed a Settlement Agreement with the government, following the end of the concession in February 2008. It also signed a Service Agreement for importation, storage and distribution of oil products on February 25, 008. The service agreement was renewed till end of 2009, as the company was not successful in attracting a strategic investor by end of 2008. P a g e 1
Settlement Agreement The settlement agreement aims at restructuring the company, and separating distribution and storage from refining activities. The company will remain the only importer of crude oil. Four distribution companies will be in the market, one of which will be owned and operated by JOPT. The three other distribution companies will be obliged to buy 75% of the products from JOPT. They can import the remaining 25% of the products from outside the country. The 400 gas stations in Jordan will be divided among the four distribution companies. The shortlisted companies are expected to be announced in September 2009. According to JOPT s annual report for 2007, a logistics company will be formed in which the government and Jordan Petroleum Refinery Company own 59% and 41% respectively. The government and the refinery will each sell 20% of their share to private investors going forward. Part of the assets of Jordan Petroleum Refinery Company will be transferred to the logistics company. Recent news releases, issued in May 2009, that quoted the Ministry of Energy and Mineral Resources, mentioned that the Social Security Corporation could also be shareholders in the logistics company. Fourth Stage Expansion Project The refinery currently covers 80% of the demand for petroleum products in Jordan. The remaining quantities of petroleum products are imported. Feasibility studies proved the need for an expansion project, in order to increase capacity and meet the expected increase in demand. It will also improve quality of the refined products, to meet international specifications. The expansion project aims at tackling the following points: High cost of importing refined petroleum products from the international markets by sea to Aqaba; in addition to handling, storing and transporting these products by tankers to the consumption points in all parts of the Kingdom. The oil dock is unable to handle large quantities or various types of petroleum products in addition to crude oil. Declined demand for fuel oil, after being replaced by natural gas imported from Egypt. Conversion units need to be added to the existing refinery to convert cheap, unneeded heavy fuel oil, into higher value added petroleum products like diesel, kerosene, gasoline and LPG. Valuation Highlights The company s stock price closed at JD 8.32 on June 11, 2009. Awraq Investments valuation is based on the Discounted Cash Flow model. It is based on the assumption that a strategic investor will be introduced, and the US$ 1.3 billion expansion project will be implemented. The target price is JD 9.3. Our recommendation is Hold. P a g e 2
Financial Highlights The Company s revenues increased from JD 793 million in 2003 to reach JD 2.4 billion in 2008. Cost of Sales stood at JD 758 million in 2003, and reached JD 2.33 billion in 2008. Net profit increased from JD 4.43 million in 2003 to reach JD 17.34 million in the first 9 months of 2008. The company s unaudited financials for 2008 indicate that net profit for 2008 stood at JD 7.7 million. The company had a current ratio of 1.09 at the end of 2008; quick ratio of 0.53, and net working capital ratio of 7.5%. Total Debt/ Equity was 7.01 at the end of 2008; the asset turnover ratio was 4.49; while accounts receivable turnover ratio stood at 11.97. The following exhibits trace these financial indicators between 2003 and 2008. Figure 2: Revenues, Cost of Sales and Net Profit Revenues Cost of Sales Net Profit 3,000 2,500 2,000 1,500 1,000 500 4.43 4.43 793 758 862 823 1,124 6.74 1,072 1,607 4.60 1,548 1,821 4.40 1,777 2,403 7.72 2,334 2003 2004 2005 2006 2007 2008 10 8 6 4 2 Figure 3: Current Ratio, Quick Ratio, Net Working Capital Ratio Current Ratio Quick Ratio Net Working Capital Ratio 1.80 1.60 1.55 1.42 1.33 1.40 1.18 1.20 1.07 1.09 1.00 0.80 0.60 0.40 0.20 0.00 11% 0.37 0.44 20% 0.56 0.35 31% 27% 0.44 0.53 6% 7.5% 2003 2004 2005 2006 2007 2008, Awraq Investments P a g e 3
Figure 4: Account Receivables Turnover Ratio, Total Debt / Equity, Asset Turnover Ratio Account Receivables Turnover Ratio Total Debt/ Equity Asset Turnover Ratio 20.00 15.19 15.00 14.23 13.26 11.81 11.97 10.00 5.00 0.00 7.55 7.79 3.40 5.37 7.01 3.67 3.41 3.50 3.45 4.49 2004 2005 2006 2007 2008, Awraq Investments Imports, Production and Sales Imports Jordan Petroleum Refinery Company imports light crude oil from Saudi Aramco. It also imports petroleum products: Diesel, Liquefied Petroleum Gas (LPG), Gasoline, Avtur (Jet Fuel), and Avgas. Importation of fuel oil was discontinued in 2006, and was replaced by imports of Natural Gas from Egypt. The marked increase in crude oil prices between 2005 and 2007 led to a decline in consumption and imports. Imports from crude oil and petroleum products were the highest in 2005, and stood at 5.586 million tons. Total imports declined by 7% in 2006 and 2007, to reach 4.824 million in 2007. Crude oil imports constituted 75% of total imports of crude oil and petroleum products in 2003, compared to 85% of total imports in 2006, and 82% in 2007. The year 2005 registered the highest quantity of imported crude oil, which reached 4.5 million tons. Imports of crude oil declined by 2% in 2006, and declined further by 11% in 2007, to reach 3.9 million tons. This represents a decline of 495,004 tons in 2007, compared to an increase of 401,328 tons in 2004. Imports of petroleum products amounted to 957,615 tons in 2004, compared to 1.27 million tons in 2003. The decline of 309,963 tons of imported petroleum products in 2003 was due to an 86% drop in fuel oil imports in 2004 which reached 99,529 tons compared to 725,354 in 2003. Fuel oil imports constituted 57% of total imports of petroleum products in 2003, and dropped to 1.1% in 2005 with 11,252 tons imported. Diesel imports constituted 26% of total imports of petroleum products in 2003, increased to 57% in 2004, and peaked at 73% in 2005. Following the increase in oil prices in 2005, diesel imports declined to 67% in 2006 and 48% in 2007. The drop in diesel imports was substituted with an increase in imports of Liquefied Petroleum Gas. LPG imports constituted 13% in 2003, increased to 19% and 17% in 2004 and 2005 respectively; then increased to 24% in 2006 and 26% in 2007. Gasoline imports as % of total imports of petroleum products have been fluctuating. Gasoline imports constituted 3% of imports in 2003, and then significantly increased to 14% in 2004; stood at 9% in 2005 and 2006, and 19% in 2007. P a g e 4
Jordan Petroleum Refinery Company June 2009 Avtur was imported in 2005 and 2007, with 56,276 tons being imported in 2007 compared to 479 tons in 2005. Avgas has been imported since 2004, and reached 0.12% of total imports of petroleum products in 2007. The unaudited financial statements for 2008 do not provide the quantities imported, produced and sold in 2008. Therefore figures are available till 2007. Production Production of petroleum products was the highest in 2005, and stood at 4.2 million tons. This was followed by two successive declines in 2006 and 2007, which recorded negative growth rates of 4.3% and 5.7% respectively. Production of fuel oil constituted 36% of total production of petroleum products in 2004, and stood at 1.4 million tons. It declined to 1.204 million tons in 2007, constituting 32% of total production. Production of diesel was 1.187 million tons in 2004 (30% of total production), and increased to 1.213 million tons (32%) in 2007. Gasoline production constituted 15% in 2004 (578,820 tons), and 18% of total production (678,424 tons) in 2007. Figure 5: Quantities of Imported Petroleum Products 2003 2004 2005 Gasoline, 166 Avgas, 0.8 Avtur, 56.3 886 LPG, 233 Diesel, 429 756 Gasoline, 65 Avgas, 0.9 500 Diesel Gasoline Avtur LPG, 182 Diesel, 509 LPG, 168 Diesel, 335 Fuel oil, 725.35 Gasoline, 39 Thousand Tons 1,000 LPG, 178 Diesel, 785 Fuel oil, 11.25 Gasoline, 93 Avgas, 1.0 1,268 LPG, 179 Diesel, 543 Fuel oil, 99.53 Gasoline, 135 Avgas, 0.6 Avtur, 0.5 1,500 LPG Fuel oil Avgas Total imports oil products 1,068 958 2006 2007 3,789 4,750 886 3,938 4,017 4,727 756 4,433 4,197 5,083 4,518 4,844 3,947 4,824 1,068 2,000 4,245 4,000 5,111 Imports of Crude Oil Imports of Petroleum Products Production of Petroleum Products Sales of Petroleum Products Total Imports of Crude oil and Petroleum Products 5,586 5,189 5,203 958 6,000 3,844 1,268 3,694 5,168 Thousand Tons Figure 6: Imports, Production and Sales 2004 2005 2006 2007 2003 Page 5
Sales Quantities The refinery s sales include the following products: Fuel oil, Diesel, Gasoline, LPG, Avtur, Asphalt, Kerosene, and White Spirits. White Spirit is a byproduct that is produced during the refining process, and sold in the market. The highest sales quantity of petroleum products was in 2003 followed by 2005. Sales amounted to 5.17 million tons in 2003 and 5.08 million tons in 2005. Sales declined to 4.73 million tons in 2006 and stood at 4.75 million tons in 2007. The decrease was primarily due to the decrease in fuel oil sales to the power generating company as a result of its use of natural gas from Egypt as a firing fuel. Sales of Fuel oil declined from 41% of total sales quantities in 2002 to 26% in 2007. Diesel has been the highest product in demand since 2004. Demand for diesel declined with the increase in crude oil prices in 2006 and 2007, with sales quantities reaching 1.746 million tons in 2007 compared to 2 million tons in 2005. Diesel sales constituted 37% of total sold quantities in 2007 compared to 39% in 2005. Liquefied Petroleum Gas increased from 0.29 million tons in 2004 to reach 0.335 million tons in 2007. Kerosene sales quantities declined from 0.181 million in 2005 to 0.131 million in 2007. Sales of Gasoline increased from 13% in 2003 to reach 18% in 2007. Despite the increase in gasoline prices, consumption has been increased gradually as demand is inelastic to price. Gasoline sales increased from 0.668 million in 2003 to 0.840 million in 2007. Figure 7: Quantities of Petroleum Products Sold Thousand Tons 6,000 5,000 4,000 3,000 2,000 1,000 Fuel oil Diesel Gasoline LPG Avtur Asphalt Kerosene White spirit Total Sales 5,168 4,844 5,083 4,727 4,750 Fuel oil, 1,959 Diesel, 1,556 Gasoline, 668 LPG, 300 Avtur, 267 Asphalt, 203 Kerosene, 215 White spirit, 1.40 Fuel oil, 1,431 Diesel, 1,749 Gasoline, 670 LPG, 290 Avtur, 295 Asphalt, 210 Kerosene, 197 White spirit, 2.59 Fuel oil, 1,395 Diesel, 2,005 Gasoline, 697 LPG, 299 Avtur, 314 Asphalt, 190 Kerosene, 181 White spirit, 2.48 Fuel oil, 1,279 Diesel, 1,774 Gasoline, 741 LPG, 313 Avtur, 300 Asphalt, 168 Kerosene, 150 White spirit, 1.34 Fuel oil, 1,247 Diesel, 1,746 Gasoline, 840 LPG, 335 Avtur, 297 Asphalt, 154 Kerosene, 131 White spirit, 1.15 2003 2004 2005 2006 2007 P a g e 6
Consumption of Petroleum Products by Sector The transport sector consumes the highest quantity of petroleum products, followed by the industrial sector. The transport sector s consumption increased from 45% in 2005 to 48%in 2007. The industrial sector consumed 23% in 2005 and 2007. Households consumption of petroleum products declined from 19% in 2005 to 16% in 2007. With the increase in petroleum products prices, households reduced their consumption of petroleum products, and substituted these products by increasing usage of electric heaters and air conditions. The Services sector consumed 6% of petroleum products in 2005 and 5% in 2007, while other sectors and non energy use consumed 8% of petroleum products in 2005 and 2007. Figure 8: Consumption of Petroleum Products by Sector (2007) Services 5% Others 4% Households 16% Non Energy Use 4% Industry 23% Transport 48% Source: Ministry of Energy and Mineral Resources Income Statement Sales Revenues The increase in oil prices which started in 2005 led to almost tripling sales revenues between 2004 and 2008. Total sales reached JD 2.4 billion in 2008 compared to JD 862 million in 2004. Refinery and distribution sales which constituted 99% of total sale in 2006, grew by 43% in 2006 to reach JD 1.59 billion, and increased by 32% in 2008 to reach JD 2.23 billion. Oil factory sales constituted 0.9% of total sales in 2008 reaching JD 20.8 million, compared to JD 11.4 million in 2004. Cylinders factory sales amounted to JD 129 million in 2008 and JD 103 million in 2007. Transportation revenues were added as a separate item in the 2008 financials, and stood at JD 19.7 million in 2008 and JD 2.3 million in 2007. Figure 9: Total Sales, Refinery and Distribution Sales and Oil Factory Sales 2,500 2,000 1,500 1,000 500 862 850 11 Refinery and distribution sales Cyliners factory sales Transportation revenues Oil factory sales Total Sales 1,821 1,607 1,124 1,110 14 1,592 15 104 1,695 2.3 20 2,403 130 2,233 2004 2005 2006 2007 2008 19.7 21 150 100 50 0 P a g e 7
Cost of Sales Cost of sales includes the cost of purchased oil and oil products. It accounted for 97.1% of revenues in 2008. This resulted in a gross profit margin of 2.9% in 2008 compared to 4.5% in 2003 and 2004. Cost of sales after subsidy almost tripled between 2004 and 2008. It increased from JD 822 million in 2004 to reach JD 2.33 billion in 2008. According to the concession agreement, the government subsidizes part of the cost of purchasing crude oil. This cost is transferred to the accounts of the Ministry of Finance. Therefore the cost of sales included in the income statement is after deduction of government subsidy. Since 2005, the Company divides Cost of sales into the following units: Refinery, Lube Oil Factory, and Cylinders Factory. Transportation was added to cost of sales in the financial results for 2008, while previously it was under sales and distribution expenses. Figures for total cost of sales for 2007 were restated in the financial statements for 2008 to include transportation cost of sales. Total cost of sales for 2007 was JD 1.757 billion in the financials statements for 2007, and JD 1.777 billion as per the financial statements for 2008. The difference is the cost of transportation for 2007. The refinery accounted for 99% of the total cost of sales in 2005 and 2006. Its cost stood at JD 1.062 billion in 2005. In 2008, the refinery s cost of sales increased to JD 2.17 billion, accounting for 92% of total cost of sales. The lube oil factory accounted for 0.9% of the total cost of sales in 2008. Its cost stood at JD 10.5 million in 2005, and reached JD 15.3 million in 2008. The cylinders factory s cost of sales stood at JD 122.76 million in 2008, compared to only JD 42,519 in 2005 and JD 6,706 in 2006. The added cost in 2008 was due to maintenance of a large number of cylinders in 2008. Transportation cost of sales stood at JD 24.5 million in 2008 compared to JD 20 million in 2007. Figure 10: Cost of Sales 2500 2000 1500 1000 500 0 1,072 1,062 0.043 0.007 Refinery Cylinders Factory Lube Oil Factory Transportation Total Cost of Sales after subsidy 1,548 1,536 1,777 1,741 2,334 2,171 123 10 12 16 20 25 15 2005 2006 2007 2008 200 150 100 50 0 P a g e 8
Operating income and other income Operating income and other income includes: Income from transportation fleet; cylinders testing fees; other income; scrap sales; income from foreign exchange; income from the ports corporation; and dividends income. This category increased in the first 9 months of 2008 to reach JD 15 million, compared to JD 7 million in 2007. According to Jordan Petroleum Refinery Company, the increase was due to an increase in transportation revenue which was changed from JD 0.50 per ton during the concession in 2007 up to JD 7 per ton on February 8, 2008 with the end of the concession period. It was increased to JD 8.5 per ton by the end of 2008 due to Import Parity Pricing (IPP) formula in 2008. IPP will be discussed further in this report. EBITDA Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) stood at JD 35 million in 2007, with EBITDA margin of 1.9%. EBITDA reached JD 60.3 million in 2008, with EBITDA margin of 2.5%. Depreciation of fixed assets stood at JD 10.9 million in 2003, constituting 1.4% of revenues. It declined to JD 8.7 million in 2008, constituting 0.4% of revenues. Figure 11: EBITDA and EBITDA Margin 70 60 50 40 30 20 EBITDA EBITDA Margin 2.6% 2.7% 60.27 2.5% 2.5% 1.8% 1.9% 29.87 29.60 34.92 20.82 21.23 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 10 0.5% 2003 2004 2005 2006 2007 2008 0.0% Net Profit According to the concession agreement, net profit should not exceed 16% nor be lower than 7.5% of the nominal value of the company s shares. Profit for the period between 2001 and 2005 were settled with the government. The year 2005 recorded net profit before income tax of JD 7.78 million and net profit of JD 6.74 million. This was the highest net income in the period between 2003 and 2007. The end of the concession agreement was accompanied by an increase in net profit. For the first time, net profit reached JD 17.34 million in the first 9 months of 2008. The net profit margin increased from only 0.24% by end of 2007, to 0.91% for the first 9 months of 2008. The unaudited financial statements for 2008 show that net profit for 2008 was JD 7.7 million, with net profit margin of 0.32%. As the concession agreement has ended, the condition limiting net profit is expected to be eliminated, since the company should operate on commercial terms. P a g e 9
Figure 12: Net profit before Income Tax, Net Profit, and Net Profit Margin JD million 12 10 8 6 4 2 Dividends Net Profit Net profit before income tax Net profit margin 0.70% 0.60% 0.56% 9.66 0.60% 0.51% 5.70 5.66 4.43 4.43 Jordan Petroleum Refinery Company maintains a dividend distribution policy. In 2005, the company distributed 16% of the nominal value of the shares (JD 0.160 per share). Dividends per share for the remaining years during the period 2003 and 2007 stood at 12% of the nominal value (JD 0.12 per share). Figure 13: Dividends 7.78 5.99 5.73 6.74 0.29% 0.24% 4.60 4.40 7.72 0.32% 2003 2004 2005 2006 2007 2008 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% Dividends Dividends per Share 6.000 5.000 4.000 3.000 2.000 1.000 0.000 16% 12% 12% 5.120 12% 12% 3.840 3.840 3.840 3.840 2003 2004 2005 2006 2007 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% P a g e 1 0
Balance Sheet The size of the balance sheet increased by 78% in the first 9 months of 2008. Total Assets stood at JD 971 million on September 31, 2008 compared to JD 547 million by end of 2007. Shareholders equity stood at JD 77 million by end of September 2008, compared to JD 62 million by end of 2007. Total Liabilities increased from JD 484.6 million by end of 2007, to reach JD 894 million by end of September 2008. Along with the increase in net profit to JD 17 million in the first 9 months of 2008, Return on Equity increased to 22.5% by end of September 2008 compared to JD 7.1% by end of 2007. Return on Assets increased from 0.8% in 2007 to reach 1.8% by end of September 2009. The decline in oil prices in the last quarter of 2008 was reflected in a decline of the company s balance sheet size with inventory being valued at lower crude oil prices. Total assets dropped by 46% in the last quarter of 2008 to reach JD 524 million on December 31, 2008. Return on assets stood at 10% by end of December 2008. Shareholders equity stood at JD 65 million, with return on equity of 10% by end of 2008. Total liabilities dropped by 49% in the last quarter of 2008 to reach JD 458 million compared to JD 894 million by end of September 2008. Figure 14: Balance Sheet Highlights Assets Shareholders Equity 600 Return on Assets Return on Equity 10.5% 547 509 524 10.0% 500 400 8.0% 7.8% 410 7.7% 7.1% 300 219 250 200 2.0% 1.8% 100 1.6% 0.9% 1.5% 0.8% 55 57 64 60 62 65 2003 2004 2005 2006 2007 2008 Inventory of Crude Oil, Finished Products and Supplies 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% r The increase in total assets in the first 9 months of 2009 is due to the increase in international oil prices. This increased the value of inventory of crude oil, finished products and supplies, which represent current assets. Inventory reached JD 575 million by end of September 2008, compared to JD 296 million by end of 2007. Inventory is a primary item of the company s balance sheet. It constituted 62% of current assets by end of Q3 2008, and 59% of current assets by end of 2007. Current assets constituted 95% of total assets by end of Q3 2008, compared to 92% by end of 2007. Inventory of crude oil and finished products and supplies stood at JD 246 million at the end of 2008. This represents a 57% decline in the value of inventory as of end September 2008. Current assets dropped by 48% to reach JD 478 million by end of December 2008. P a g e 1 1
Jordan Petroleum Refinery Company June 2009 111 162 479 246 133 199 230 200 100% 50% 296 400 349 465 600 504 Inventory (Crude Oil, Finished Products and Supplies) Current Assets Inventory / Current Assets Current Assets / Total Assets 92% 91% 91% 88% 80% 74% 75% 59% 68% 67% 64% 51% 361 Figure 15: Inventory and Current Assets 0 0% 2003 2004 2005 2006 2007 2008 Current Assets and Liabilities JOPT has positive working capital, with current assets exceeding current liabilities. Working Capital (the difference between current assets and current liabilities) stood at JD 43 million by end of September 2008 and declined to JD 39 million by end of 2008. The highest working capital was in 2006, as it reached JD 139 million. The current ratio, which is calculated by dividing current assets by current liabilities, stood at 1.05 by end of September 2008 and 1.09 by end of 2008. The increase in inventory and the respective increase in current assets accompanied an increase in bank loans under current liabilities. Bank loans had increased from JD 98.9 million in 2006 to JD 171.9 million in 2007 representing an increase of JD 7 million. These loans increased due to the higher cost of financing crude oil supplies. Bank loans amounted to JD 215 million at the end of 2008. Accounts payable decreased by JD 48 million in 2007 to reach JD 151.4 million in 2007, down from JD 199 million in 2006. Accounts payable to Suppliers against drafts and purchase orders constituted 76% of accounts payable in 2006 and 69% in 2007. This item amounted to JD 119 million by end of 2008. Figure 16: Current Assets, Current Liabilities, Working Capital Ratio and Current Ratio Current Assets Current Liabilities Current Assets Current Liabilities Current Assets/ Current Liabilities 600 1.55 500 400 1.18 300 200 100 162 1.33 361 25 326 469 479 440 1.07 1.09 233 199 137 465 1.42 2.00 504 150 128 139 1.50 1.00 0.50 50 34 39 0.00 2003 2004 2005 2006 2007 2008 Page 12
Jordan Petroleum Refinery Company June 2009 Accounts Receivable Total accounts receivables increased from JD 54 million by end of 2003, to reach JD 223 million by end of 2008. By end of 2008, 50% of receivables (JD 114 million) were due within 89 days. Impaired accounts stood at JD 12.7 million on December 31, 2008. These are due in 180 days or more. Government institutions and the Ministry of Finance accounted for 86% of receivables at the end of 2008. Government institutions include Royal Jordanian, Jordanian Armed Forces, Central Electricity Generating Company, and other governmental institutions. Receivables from the Ministry of Finance constituted 44% of the refinery s receivables at the end of 2008. This constitutes the government s funding of the Kingdom s 60 day strategic inventory of crude oil and petroleum products. It stood at JD 100.4 million by end of 2008. The increase in accounts receivable is due to the increase in debit balance of the Ministry of Finance, which stood at JD 67 million in 2007 and JD 35 million in 2008. Provisions for doubtful debts stood at JD 5.35 million for the period between 2003 and 2007 and declined to JD 5.2 million in 2008. The strategic inventory includes crude oil, and the following petroleum products: Liquefied petroleum gas; unleaded gasoline Octane 90 and 95; Avtur; Kerosene; Diesel; Fuel oil and Asphalt. Jordan Petroleum Refinery Company, in agreement with the Ministry of Finance, fixed the value and quantity of strategic inventory to JD 157 million. This was based on March 2, 2008 prices at the end of the concession. Figure 17: Accounts Receivable Accounts Receivable 300 230 11.7 250 200 130 50 54 0.3 14 6 15 5 5 2003 67 63 15 0.3 18 8 34 2004 100 Ministry of Finance 6.9 1.0 100 Other accounts receivable 159 150 8 27 4 4 2005 Advances against staff end of service indemnity Employees receivable 82 65 17 Fuel customers 8 17 24 37 Other governmental institutions 9 27 10 2006 10 12 24 11 20 11 2007 26 26 2008 Central Electricity Generating Company Jordanian Armed Forces Figure 18: Accounts Receivable Days (December 31, 2008) 180 days 365 days JD 9 million (4%) 120 days 179 days JD 26 million 90 days (11%) 119 days JD 77 million (33%) More than 1 year JD 4 million (2%) 1day 89 days JD 115 million (50%) Page 13
Cash Flow Statement The company s cash flow from operations was negative between 2004 and 2008. The company finances negative cash flow from operations through borrowing. Cash flow from operations stood at JD 57.4 million in 2003. It entered negative territory in 2004 dropping to JD 37.7 million, and has been negative since then. In 2005, cash flow from operations was the lowest, as it stood at JD 74 million. In 2003, the company invested 96% of the cash generated from operating activities: Cash flow used in financing activities stood at JD 54.9 million with cash flow from operations of JD 57.4 million. Financing operations through borrowing generates positive cash flow from financing activities. In 2006, the company s cash flow from financing activities was JD 16 million in excess of cash flow from operations compared to JD 4.9 million in 2005. The additional amounts borrowed in 2006 were used to finance operations in the following years. Figure 19: Cash Flow from Operating and Financing Activities 100 50 (50) (100) Cash Flow from (used in) Operating Activities Cash Flow from (used in) Financing Activities 79.18 91.42 57.39 41.99 29.02 10.53 12.98 54.92 37.72 25.59 74.30 69.50 2003 2004 2005 2006 2007 2008 CAPEX Capital expenditure for the refinery is very limited compared to the company s sales. CAPEX stood at JD 2.3 million in 2003, constituting 0.3% of total sales. The accumulated CAPEX between 2003 and 2007 amounted to only JD 17.4 million. Capital expenditure reached JD 10.2 million in 2008. Figure 20: CAPEX 15.00 10.00 5.00 2.30 3.59 CAPEX 2.77 4.69 5.71 10.21 0.00 2003 2004 2005 2006 2007 2008 P a g e 1 4
Government Subsidy and Increase in Oil Prices Crude oil prices started increasing in 2005, and reached US$ 60 per barrel. This was accompanies by an increase in prices of imported petroleum products and lube oils, which caused an increase in cost of sales. This resulted in a deficit in the cost of crude oil which reached JD 531 million. The state treasury had to bear the cost of subsidizing the consumer and some economic establishments. This deficit was a result of the imbalance between local sale prices and the price of crude oil and imported petroleum products. The refinery s cost of sales stood at JD 1,072 million compared to actual cost of JD 1,603 million. Jordan s liberalization of petroleum product prices started in 2006. Pricing of petroleum products is based on Import Parity Price (IPP). IPP depends on international prices, and integrates the cost of delivering the product to Aqaba and delivering the products to the end customer. This led to an increase in the company s sales revenues in 2006 and 2007. Government subsidy therefore declined to JD 214 million in 2006 and JD 306 million in 2007, with the end customer bearing the increase in prices. Petroleum product prices in Jordan were reviewed downwards following the decline in international oil prices which accompanied the global financial crisis. Figure 21: Government Subsidy Charged to Ministry of Finance Subsidy for Crude Oil Purchases and Derivatives Charged to Ministry of Finance 600 400 200 530.88 262.45 306.16 214.04 197.87 24.48 2003 2004 2005 2006 2007 2008 Figure 22: Prices of Petroleum Products in Jordan (2002May 2009) 1000 Gasoline, Unleaded (Octane 95). Fils/ Litre Gasoline: (Regular 20022007); Unleaded Octane 90 (Since 2008). Fils/ Litre Diesel, Kerosene. Fils / Litre Fuel Oil (Industry). JD /Ton Avtur (local companies). Fils / Litre Asphalt. JD/Ton Fuel oil (local and foreign Bunkers). JD/Ton Liquefied Petroleum Gas (12.5 Kg). JD/ Cylinder 8 Fuks / Litre JD/Ton 800 600 400 200 6 4 2 JD/ Cylinder 0 2002 2004 2006 Jan 08 March 08 May 08 July 08 1/9/0827/9/08 19/10/08 7/11/0815/11/08 15/12/0815/1/09 13/2/0912/3/09 17/4/0914/5/09 Source: Ministry of Energy and Mineral Resources P a g e 1 5
Figure 23: Crude Oil Prices: Arabian Gulf Light Crude Oil and WTI US$ 160 140 120 100 80 60 40 20 0 Bloomberg Arabian Gulf Light Crude Oil Spot Price US West Texas Intermediate (WTI) 2Jan02 2Apr02 2Jul02 2Oct02 2Jan03 2Apr03 2Jul03 2Oct03 2Jan04 2Apr04 2Jul04 2Oct04 2Jan05 2Apr05 2Jul05 2Oct05 2Jan06 2Apr06 2Jul06 2Oct06 2Jan07 2Apr07 2Jul07 2Oct07 2Jan08 2Apr08 2Jul08 2Oct08 2Jan09 2Apr09 Source: Bloomberg Crack Spread The Crack Spread is a measure of the refinery s profit after refining crude oil. The company buys crude oil at a certain price, and sells petroleum products after refining (cracking) crude oil. If the price at which the company sells the product is lower than the cost of crude oil, the crack spread is negative. If the selling price is higher than the cost of purchasing crude oil, the crack spread is positive. The crack spread therefore depends on International prices of crude oil and the selling prices to end customers, which are set by the government. The crack spread was negative in February 2008, April 2008 and May 2008. The highest crack spread was in October 2008. The cost of crude oil started going down, while the prices to end customers were still high. The crack spread declined in November 2008, as prices of petroleum products to end customers started dropping. There is a lag of two months between changes in oil prices and respective changes to petroleum products, and consequently the crack spread. Figure 24: Jordan Petroleum Refinery Company s Crack Spread Crack Spread (Gross Margin US$/bbl) 50 40.06 40 30 20 10 0 2.07 6.04 5.17 5.27 4.21 0.14 25.29 25.95 26.42 16.92 9.07 12.68 6.60 4.37 0.30 10 Feb08 Mar08 Apr08 May08 Jun08 Jul08 Aug08 Sep08 Oct08 Nov08 Dec08 Jan09 Feb09 Mar09 Apr09 May09 P a g e 1 6
Jordan Petroleum Refinery Company s Stock Price JPOT s stock price was the most volatile in 2008. Along with the boom in oil prices and stock prices in mid 2008, the share price reached JD 22.96 on June 19, 2008, mimicking Amman Stock Exchange index which peaked at 5043.72 points on June 19, 2008. Arabian light crude oil price reached US$ 143.41 on July 3, 2008. Following the global financial crisis and the drop in international oil prices, the share lost 79% of its highest value, reaching JD 4.82 on March 3, 2009. The share price is recovering. It closed at JD 8.32 on June 11, 2009. This accompanied the increase in crude oil prices. Light crude oil reached US$ 69 on June 11, 2009, up from US$ 33.63 on December 27, 2008. Volatility in JOPT s stock price and Amman Stock Exchange index are highly correlated to volatility of crude oil prices. We measured the correlation coefficient between Jordan Petroleum Refinery Company stock price, Amman Stock Exchange Index, and Arabian Light Crude Oil Spot prices for the period between January 2002 and June 2009. The correlation coefficient between JOPT stock price and crude oil price is 0.88. This means that 88% of the change in JOPT s stock price is explained by the change in crude oil prices. This is even higher than the correlation coefficient between Amman Stock Exchange Index and JOPT s stock price, which is 0.72. The correlation coefficient between Amman Stock Exchange index and crude oil prices is 0.79 between January 2002 and June 2009. International Crude oil prices clearly have a significant impact on Jordan s stock market and JOPT s stock price. Figure 25: JOPT s Stock Price Volatility 25 20 15 Jordan Petroleum Refinery Company (JOPT) Annual Low and High Stock Price 22.96 JD 10 5 0 7.59 8.31 8.79 5.97 5.01 6.15 3.53 4.75 2.13 2.95 3.97 4.72 4.82 2003 2004 2005 2006 2007 2008 Till June 11, 09 Source: Bloomberg Figure 26: JOPT s Stock Price vs Amman Stock Exchange Index JOPT Stock Price Amman Stock Exchange Index 25 5,000 JD 20 15 10 5 0 79% 4,500 4,000 3,500 3,000 2,500 2,000 1Jun07 1Jul07 1Aug07 1Sep07 1Oct07 1Nov07 1Dec07 1Jan08 1Feb08 1Mar08 1Apr08 1May08 1Jun08 1Jul08 1Aug08 1Sep08 1Oct08 1Nov08 1Dec08 1Jan09 1Feb09 1Mar09 1Apr09 1May09 Points Source: Bloomberg P a g e 1 7
Figure 27: JOPT Stock Price vs Arabian Gulf Light Crude Oil Spot Price Jordan Petroleum Refinery Company Stock Price Bloomberg Arabian Gulf Light Crude Oil Spot Price 25 160 140 20 120 15 100 80 10 60 40 5 20 0 0 JD 1Jan08 1Feb08 1Mar08 1Apr08 1May08 1Jun08 1Jul08 1Aug08 1Sep08 1Oct08 1Nov08 1Dec08 1Jan09 1Feb09 1Mar09 1Apr09 1May09 1Jun09 US$ Source: Bloomberg P a g e 1 8
Valuation This valuation is based on the Discounted Cash Flow (DCF) Model with 10 years projections. It is based on the assumption that the refinery will have a new strategic investor, and the expansion project will be implemented. The following pages give an overview of the methodology and assumptions used to reach the target value. Strategic Investor to implement expansion project Jordan Petroleum Refinery Company imports Crude oil and refines it to produce petroleum products. The refinery covers 80% of the demand for petroleum products. Therefore, it has to import petroleum products in addition to crude oil, which are more expensive than crude oil. The refinery has been in operation for over 50 years. Capital Expenditure has been low, as any expenditure had to be approved by the government. The refinery therefore needs to implement an expansion project. The aim of this project is to increase the capacity of the refinery to cover 100% of the demand, and to improve quality of refined petroleum products. The refinery needs to convert fuel oil into higher quality products such as Gasoline. The expansion project costs US$ 1.3 billion and execution needs 5 years. This will be financed through a strategic investor along with borrowing. The company s capital is planned to be increased from JD 32 million to JD 65 million. The strategic investor will become a majority owner, buying 33 million shares. Projected Revenues Projected revenues are based on quantities of imported and produced petroleum products, and projected prices of petroleum products. Prices of Petroleum Products We used projected crude oil and petroleum product prices based on Energy Information Administration (EIA) figures. Prices to end customers in Jordan, however, could be different than EIA s projections. Prices in Jordan are based on Import Parity Price (IPP), and are difficult to project. Figure 28: EIA s Projected Prices of Petroleum Products US$ per barrel 180 160 140 120 100 80 60 40 20 Diesel Gasoline Avtur Crude oil Residual Fuel oil 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: EIA P a g e 1 9
Projected Quantities of Petroleum products The company s operation is based on 330 working days per year. The refining capacity was highest in 2005, and reached 100,286 barrels per day. It declined to 87,416 barrels per day in 2007. We assumed refining capacity will be 88,000 barrels per day between 2009 and 2014. According to the company, once the expansion project is completed, the refining capacity will reach 17,000 metric tons per day (124,525 barrels per day), and will remain at that level going forward. Based on JOPT s refining capacity, we were able to find the total quantity of imported crude oil each year. Based on the quantity of imported crude oil, and the quantity of petroleum products produced from each barrel, the total amount of petroleum products produced each year was calculated. The projected demand for petroleum products is based on the Ministry of Energy and Mineral Resources 25year projections model. The quantities of imported products are based on the quantity of produced products from each barrel of crude oil, and % of imports from total demand according to the refinery s estimates. Quantity Produced from Each barrel of Crude oil According to EIA, and as a general rule, a 42 gallon barrel of crude oil produces 44.68 gallons of petroleum products. The refinery s current production from one barrel of crude oil is as follows: 21.7% Gasoline; 33.8% Diesel; 3.7% Kerosene; 25% Fuel Oil; 8% Jet Fuel; 3% LPG; and 4.7% Asphalt. Following the expansion project, the refinery aims at reducing the quantity of Fuel Oil produced, to produce more value added products such as Gasoline and Diesel. The company is also substituting fuel oil with natural gas from Egypt, which is used by electricity generation companies and main industrial companies. Gasoline production will remain 21.7% between 2008 and 2014, and will increase to reach 31.3% in 2015 throughout 2018. This will be accompanied by a decline in heavy fuel production. Fuel Oil production will remain 25% between 2008 and 2014, and is estimated to decline to 15.4% in 2015 throughout 2018. The quantities of petroleum products produced by the refinery differ from the optimal quantities of EIA. This is because Arab light crude oil imported from Saudi Aramco has different specifications than crude oil used in USA. Furthermore, refineries have different production ratios, which depend on market needs. Figure 29: Refined Products Produced from one Barrel of Crude Oil % of Petroleum Products Produced from each barrel of Crude Oil 2008 (JOPT s Actual Figures) till 2014 (AWRAQ Projections) 2015 2018 (AWRAQ Projections) EIA Gasoline 21.7% 31.3% 42.9% Diesel 33.8% 33.8% 21% Heating Oil (Kerosene) 3.7% 3.7% 3.9% Heavy fuel oil 25.0% 15.4% 3.9% Jet Fuel 8.0% 8.0% 8.5% LPG 3.0% 3.0% 3.8% Asphalt (Other products, EIA) 4.7% 4.7% 16% Total 100.0% 100.0% 100.0%* * According to EIA: A 42gallon barrel of crude oil produces 44.68 gallons of petroleum products, EIA, Awraq Investments Research Division (Projections) P a g e 2 0
Quantity of Imported Petroleum Products The Quantity of Imported Petroleum Products is projected based on several variables: 1. Projected percent of imports of petroleum products from total demand between 2008 and 2013, which is provided by the refinery. 2. The Total Demand of petroleum products, provided by the Ministry of Energy and Mineral Resources. LPG, Kerosene and Diesel are projected to increase at a Compounded Annual Growth Rate (CAGR) of 4.1% between 2008 and 2018; Gasoline and Jet Fuel are expected to grow at CAGR of 3.8% and 3.7% respectively. Demand projections for fuel oil are not available. The company is substituting it with natural gas from Egypt. Based on feedback from Jordan Petroleum Refinery Company, imports of petroleum products from total demand will be in the following ranges in the coming 5 years: LPG: 65%75% Diesel: 20%25% Gasoline: 15%20% There will be no imports of Fuel Oil, Jet fuel, Kerosene between 2008 and 2018. The increase in imports in the coming five years is due to increased demand while maintaining the same refining capacity throughout the period of execution of the expansion project. Awraq Investments made the following assumptions: 1. LPG imports will increase from 65% to 75% of demand during the period 2008 to 2013. Awraq Investments estimated imports of LPG to be 68% of demand for LPG on average between 2014 and 2018. 2. Diesel imports will increase from 20% to 25% of total demand during the period 2008 to 2013. Awraq Investments estimated imports of Diesel to be on average 20% of demand for diesel between 2014 and 2018. 3. Gasoline Imports will increase from 15% to 20% of the total demand during the period 2008 to 2013. Awraq Investments assumed that following the expansion project, there will be no Gasoline imports. This accompanies our assumption that the quantities of produced gasoline from each barrel of crude oil will increase in 2014. Produced quantities will cover gasoline demand in the Kingdom. Figure 30: Jordan s Demand for Petroleum Products (20062018) 3,500,000 Demand for Petroleum Products Diesel Gasoline LPG 3,000,000 Jet Fuel Kerosene 2,500,000 Ton Oil Equivalent (TOE) 2,000,000 1,500,000 1,000,000 500,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Ministry of Energy and Mineral Resources P a g e 2 1
Projected Gross Profit Margin The gross profit margin stood at 3.8% for the first 9 months of 2008, with cost of sales accounting for 96.4% of total revenues. For the period between 2008 and 2014, we anticipate that the cost of sales will be 96% of total revenues. The cost of sales is expected to decline after the completion of the expansion project in 2015, with the decline in petroleum products imports. Awraq Investments estimated the cost of sales to be 95% between 2015 and 2018, with the gross profit margin improving to 5% going forward. Funding of the Expansion project Jordan Petroleum Refinery Company estimates the cost of the project to be US$1.3 billion over to be invested over the 5 year period of execution of the project. This would require an investment of US$ 260 million per year. Awraq Investments valuation is based on the following assumptions for funding of the project. 40% of the project will be funded through equity, and 60% through debt. The company s capital will be increased to JD 65 million with 65 million shares. The strategic investor will buy 33 million new shares at around US$ 520 million. The amount will be invested in the first 2 years of the project, and therefore there will be no borrowing during this period. The company will borrow around US$ 780 million over three years starting 2012. This would be equivalent to US$ 260 million per year at an interest rate of 5%. The interest due will be JD 9.2 million in 2012, JD 18.5 million in 2013, and JD 27 million in 2014. The government will repay back part of the debt it owes to JOPT in 2010 and 2011. Therefore the interest expense in 2010 and 2011 is expected to be 15% lower than interest paid in 2009. Capital expenditure will be JD 200 million over 5 years, between 2010 and 2014. Projected Earnings per Share The following figure indicates the resulting estimated Earnings per Share based on these assumptions. EPS was limited during the concession period. Following the end of the concession in the first 9 months of 2008, EPS reached JD 0.54. The number of shares is based on the assumption that the capital will be increase to JD 65 million in 2010. There will be a significant improvement on Earnings per share following the termination of the project in 2014. Figure 31: JOPT s Actual and Projected Earnings Per Share (20032018) 2.00 Earnings per Share 1.69 1.69 1.68 1.72 JD 1.50 1.00 1.10 0.50 0.14 0.14 0.21 0.14 0.14 0.24 0.21 0.27 0.32 0.23 0.21 0.00 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F Source: Company Financials till 2008, Awraq Investments Forecasts P a g e 2 2
Sensitivity Analysis The following Sensitivity Analysis shows that average for the Free Cash Flow to Equity (FCFE) and Free Cash Flow to Firm (FCFF) valuation methods lies between JD 6.8 and JD 12.3. Figure 32: Sensitivity Analysis Cost of Equity (Ke) Average for 11.1% 10.1% 9.1% FCFF, FCFE WACC 8.3% 8.1% 7.9% 2.5% 6.77 8.15 10.05 Terminal Growth Rate 3.0% 7.76 9.32 11.48 3.3% 8.32 9.98 12.30 Source: Awraq Investments Based on Cost of Equity of 10.1%, Weighted Average Cost of Capital (WACC) of 10.1%, and a Terminal Growth Rate of 3%, our estimated target price is JD 9.3. This is the average for the FCFF and FCFE valuations. The long term fair value using the Free Cash Flow to Equity is JD 9.31, and JD 9.33 using Free Cash Flow to Firm method. The share closed at JD 8.32 on June 11, 2009. While the long term fair value of JOPT is 11% higher than the current market price, which warrants a buy recommendation, we would prefer to wait for some time. This is in order to get a clearer picture on the ongoing negotiations with the potential strategic investor, and pending further clarity on the final agreement which will be signed between the Ministry of Finance and Jordan Petroleum Refinery Company. Our recommendation for Jordan Petroleum Refinery Company is Hold. P a g e 2 3