Pakistan State Oil

Pakistan State Oil (PSO) is the largest marketing company and has the largest market share in the OMC sector. It is involved in the marketing and distribution of motor gasoline (Mogas), high-speed diesel (HSD), furnace oil (FO), jet fuel (JP-1), kerosene, CNG, LPG, petrochemicals, and lubricants. It also imports products like Mogas, HSD JP-1, and furnace oil based on demand. It has the largest distribution network in the country.

PSO has strategically diversified its investments to capitalize on emerging opportunities and mitigate potential risks. These investments include infrastructure development, renewable energy projects, exploration and production ventures, and technological advancements.

Historical financial performance

The downstream oil and gas sector saw massive fluctuation in demand over the last few years due to COVID-19. Other factors steering demand for petroleum products have been the changes in the energy mix, particularly shifting away from furnace oil towards coal and LNG. As the industry leader, PSO has been driving trends in the sector. In FY17, PSO saw 8 percent growth compared to -9 percent to 4 percent in the previous six fiscal years. The rise in volumes along with higher prices and the RLNG business led to a 30 percent year-on-year surge in the PSO’s sales revenues and 77 percent growth in the bottomline.

Volumetric growth continued in FY18 in the retail segment, especially motor spirit and HSD. However, PSO’s furnace oil volumes declined by 29.6 percent year-on-year in FY18 as the energy mix shifted to RLNG and coal for the power sector. While topline was up by 20 percent, profit after tax went down by 15.2 percent year-on-year primarily on account of a one-time reversal of deferred tax assets; falling other income, and higher exchange losses.

FY19 was a difficult year for the OMCs due to the economic slowdown amid rising competition. Margins also fell due to falling volumes by the sector especially the furnace oil, while the retail fuels like diesel volumes also witnessed a decline due to falling demand from both the industrial sector and the transport sector, along with falling vehicle sales. Moreover, the high interest rate environment along with exchange losses, peaking circular debt and mounting receivables were key factors that dragged the sector’s performance, including that of PSO. And despite an overall decline of around 38 percent in volumetric sales, PSO’s revenues posted a modest increase due to a rebound in the company’s volumes in the last quarter of FY19. Profits slipped by 32 percent, which came from higher inventory losses, lower volumes, finance costs, and exchange losses. In FY19, PSO acquired a 52.67 percent stake in PRL, which lifted its consolidated earnings.

In FY20, PSO’s volumes in furnace oil reduced further due to the continuing impact of focus on RLNG. On the other hand, in the retail sector, PSO experienced an increase in petrol volumes against an overall decline in the industry due to PSO’s increased range amid low demand. Industry diesel volumes were affected due to weak industrial activity, construction activity, and reduced road and rail movement. However, PSO managed to gain volumetric growth.

The decline in gross profit for PSO was mainly due to inventory losses besides the falling volumes on account of the sharp decrease in international oil prices during the year. However, an increase in finance costs due to a higher average policy rate adversely impacted the bottom line. The decline in gross profit and increase in finance cost was partially offset by lower exchange losses and higher interest income recovered from the power sector during the year.

PSO reported record earnings for FY21 with a rebound in profitability, in contrast to a loss in FY20. PSO was able to reverse the trend of falling revenues with the FY21 topline growing by 9 percent year-on-year due to volumetric growth and price increase. A key feature for FY21 was the return of furnace oil in the fuel mix as its demand and usage increased during the year. PSO’s overall volumes increased by 24 percent year-on-year with the three key products: petrol, diesel, and furnace oil climbing by 21, 21, and 37 percent year-on-year. Improved fuel quality—PSO introduced Euro 5 standard gasoline, diesel, and HOBC during the year—has also contributed to PSO’s volumetric sales growth. The company’s earnings benefited from an increase in other income that comes from growth in late payment surcharge income; no noticeable rise in administrative and distribution costs; and a decline in finance costs due to weaker interest rates.

PSO witnessed a whopping earning growth in FY22, which stemmed from a fat topline. The volumes for PSO’s products MS, HSD, and FO grew by 15 percent, 26 percent, and 62 percent, respectively – year-on-year. Noticeable growth in volumes also helped PSO grow its market share in all three products.

PSO’s gross profit growth was massive, primarily due to significant inventory gains on the back of increasing oil prices. Other income increased by 32 percent year-on-year due to higher interest received on delayed payments. PSO’s operating profits grew by over 183 percent yearly in FY22, with support from other income and the top line and gross profit growth. PSO’s bottom-line surged by almost three times in FY22 where much of the growth came from volumetric growth and inventory gains, reviving consumption and demand of petroleum products, price increases, higher other income as well as the company’s increased retail footprint and market share.

PSO in FY23

PSO’s topline growth was visible in FY23. Revenues were seen increasing by 38 percent year-on-year. This rise in revenues on a year-on-year basis in FY23 however, was solely due to higher selling prices of petroleum products because the volumetric sales of key petroleum products like motor spirit, diesel, and furnace oil declined by 17 percent, 25 percent, and 64 percent year-on-year, respectively. While the oil marketing companies had seen robust sales of petroleum products in most of FY22, the petroleum sales were the weakest in the last 5 years in FY23 due to the economic downturn, political turmoil, and flash floods.

PSO’s gross profit also took a hit in FY23 due to inventory losses amid weaker sales. The gross margin for the OMC settled at 2.21 percent in FY23 - down by more than 400 basis points year-on-year. Despite significantly lower reversals of provisions on financial assets and lower other expenses, the company’s operating margins fell due to weaker gross profits.

PSO also witnessed a decline in other income of about 46 percent year-on-year during FY23, given the lower interest received on delayed payments. Another bulkiness on the OMC’s bottom line was the finance cost that surged by 8 times in FY23, along with a share of loss from associates in FY23 versus profit in FY22. The OMC reported an unconsolidated profit of Rs12 billion in FY23 versus Rs184 billion in FY22 – a decline of 93 percent.

PSO’s topline growth stood at 7 percent year-on-year in 1QFY24. The growth in PSO’s revenues is due to higher selling prices of petroleum products as well as a jump in motor gasoline and high-speed diesel volumes by 7 percent and 8 percent, year-on-year respectively, due to low base impact from last year. Meanwhile, furnace oil volumes dwindled by 87 percent year-on-year during the quarter.

The company’s gross profit was seen growing by 9 times, while the gross margins were up from less than one percent in 1QFY23 to 6.35 percent in 1QFY24. The rise in gross margins was due to massive inventory gains due to substantial and continued hikes in fuel prices.

PSO witnessed a decline in other income of about 48 percent year-on-year during 1QFY24, likely due to lower interest received on delayed payments. Finance costs were also seen increasing by more than double due to higher short-term borrowings. However, PSO’s bottomline was able to absorb the higher costs and post hefty earnings for the quarter, which is a complete turnaround from the previous quarter, when the company posted a loss (4QFY23).

PSO in 9MFY24 and beyond

The OMC posted a weaker quarterly financial performance in 3QFY24, but growth for the overall nine-month period. The OMC giant’s earnings for 3QFY24 were down by 59 percent year-on-year, while the 9MFY24 earnings were up by 30 percent year-on-year.

On a quarterly basis, the first quarter of FY24 was impressive, with over Rs22 billion in profits, however, the losses of 2QFY24 of over Rs14 billion pulled the overall earnings of the company. PSO’s losses increased by more than four times during 2QFY24 on a year-on-year basis. And then in 3QFY24, PSO’s sprung back to profit after tax – despite the year-on-year decline of 59 percent – to Rs5.6 billion.

PSO’s revenue growth stood at 6 percent year-on-year during 9MFY24, which was primarily due to higher prices of petroleum products amid falling volumetric growth. PSO’s sales volume of petroleum products fell by around seven percent year-on-year. In terms of the breakdown of the three top fuels, the decline was led by furnace oil with a 79 percent year-on-year decline, followed by a 5 and 2 percent year-on-year decline in diesel and petrol volumes, respectively. PSO witnessed a growth in its retail market share, driven by growth in the market share of the petrol segment.

The company incurred overall inventory gains during 9MFY24 due to substantial and continued hikes in fuel prices, resulting in higher gross margins. Its earnings during the period were also supported by growth in other income, whereas the higher finance costs due to the increase in short-term borrowing and increasing receivables restricted the company’s profits.