Crisis in the energy market: Paz lost in the 2nd Q - only NIS 4 million

One of the worst quarters in the energy market, which included a fall of tens of percent in demand for fuel and a collapse in refining margins, ended in relatively minor damage to Paz shareholders. In the second quarter of 2020, the company lost NIS 4 million, compared with a profit of NIS 49 million in the corresponding quarter in 2019.
Adjusted net profit decreased by 67% in the past quarter compared to the corresponding period in 2019, and amounted to NIS 8 million. Adjusted net income neutralizes the timing differences between the date of purchase of crude oil and the date of sale of the distillates, as a result of economic protection, as well as losses or gains on crude oil inventory that the company does not hedge, and a provision for impairment of inventory.
The main reason for the transition to a net loss under accounting rules was the refining sector, which suffered the impact of the collapse in global refining margins as a result of declining demand for oil due to the corona crisis and the closure imposed following it. Refining margin is defined as the price difference between the refining products of the oil and the raw material.
The company's refinery in Ashdod, which was put up for sale, suffered a coordinated operating loss of NIS 66 million in the second quarter of 2020, compared with an operating loss of NIS 52 million in parallel in 2019. This is as a result of a 50% decrease in demand for diesel and gasoline in April 2020, and a decrease in the refinery's output to 70% in the last quarter.
The reported operating loss of the refining sector jumped to NIS 76 million in the last quarter, compared with a loss of NIS 22 million in the same period in 2019. This is as a result of the provision for the impairment of the company's unprotected inventory, which was offset by the effects of Paz's earnings from the market structure, with the future market price significantly higher than the price of crude oil for immediate delivery. This structure allows the company to post an immediate profit of NIS 29 million in the second quarter, when it sells the crude oil it purchases in a future sale.
The structure also explains how the company's refining margin in the second quarter of 2020 was $ 3.8 per barrel, and the KBC reference margin was $ 1.1 per barrel - while in the same quarter in 2019 the Ashdod refinery's margin was $ 3.3, and the reference margin was $ 4.6.
The retail and trade sector, which includes the gas stations in the Paz chain, the Yellow convenience store chain and the direct sales of petroleum distillates to companies and organizations and the Palestinian Authority, suffered a 60% decrease in revenue in the past quarter compared to the corresponding quarter, reaching NIS 815 million. The decrease was due to the fall in the price of oil, and a quantitative decrease of 32% in the quantities of fuel marketed by Paz both at gas stations and in direct marketing to companies and the Palestinian Authority.
The Yellow chain of stores showed relatively surprising resistance to the significant deterioration in gas stations, and its sales fell by only 2.4%, to NIS 246 million. Gas stations and convenience store chains are enjoying increased demand in August 2020, due to the sharp rise in domestic tourism.
The operating profit of the retail and trade sector decreased by 30% in the second quarter of 2020 compared to the corresponding period, and amounted to NIS 57 million - this is due to the quantitative decrease in sales and an inventory loss of NIS 8 million, partially offset by efficiency measures taken by the company. Paz's industrial sector - which includes Pazgaz, which markets liquefied carbon gas to individuals and the institutional market; Paz Oils and Pazkar, which manufactures sealing materials, and Paz Aviation Services, which markets jet fuel at Ben Gurion Airport, experienced a relatively good quarter.
Although the segment's revenues decreased by 22% to NIS 264 million due to the dramatic decrease in flights, operating profit increased by 9% to NIS 47 million. This is thanks to a 15% increase in Pazgaz's operating profit, to NIS 31 million, as a result of an increase in demand for gas in households, which offset the decline in demand from restaurants and hotels. Pesker has improved its profitability thanks to a wide demand for sealants, due to an increase in infrastructure works.