PSO – inventory losses diminish earnings

While the oil marketing companies had seen robust sales of petroleum products in most of FY22, the petroleum sales have been weaker in FY23 so far due to a significant shift in the economic downturn, political turmoil, and flash floods. Amid weaker sales, the oil marketing companies were also expected to incur significant inventory losses that would pull down earnings for the companies in the recent result announcements.

Pakistan State Oil (PSX: PSO) announced its financial performance for 1HFY23 last week and the company’s sales were up by 74 percent year-on-year during the period due to higher average selling prices of petroleum products despite declining sales volumes. Sales volumes of HSD, MS, and FO declined by 14, 17 and 32 percent year-on-year respectively for PSO in 1HFY23. PSO’s topline in 2QFY23 ascended by 61 percent year-on-year while sales volumes for HSD, MS, and FO dropped by 2, 10, and 55 percent, year-on-year, respectively.

PSO’searnings were seen falling from Rs32 billion in 1HFY22 to loss after tax of Rs3.3 billion in 1HFY23. Similarly, PSO incurred a loss after tax of Rs4.6 billion in 2QFY23 versus a PAT of Rs20 billion in 2QFY23. The decline in earnings was due to significant decline in ex-refinery prices, leading to higher inventory losses. PSO’s gross margins fell from 4.96 percent in 1HFY22 to 0.68 percent in 1HFY23. These margins were only 0.57 percent in 2QFY23 versus 5.1 percent in 2QFY22.

PSO’s bottomline were also affected by a drop in other income due to the absence of significant penal income from the power sector and exorbitant finance cost. There was a drastic decline in penal income for 2QFY23. And finance cost surged by 8.8 times year-on-year in 1HFY23 and by 9.8 times year-on-year in 2QFY23 due to higher interest rates and rise in short term borrowings.