Pakistan State Oil (PSO)

Fuelling the nation for the past 38 years, Pakistan State Oil (KSE: PSO) is the largest oil marketing company (OMC) in Pakistan that is involved in storage, distribution and marketing of various petroleum products. The OMC has motor gasoline, furnace, high speed diesel, kerosene, LPG, jet fuel, CNG, petrochemicals and lubricants in its portfolio of products.
PSO has the largest storage capacity of one million ton in the country, which is around 74 percent of the nation's total storage capacity. With the largest storage capacity, the OMC also has the vastest retail network that serve the automotive sector, and supplies fuel to the railways, aviation industry, armed forces, power projects and the agriculture sector.
Operations FY15 With an overall market share of over 56 percent, PSO continued to control the market with its share in the Black Oil and White Oil segments standing at 66.6 percent and 49.8 percent respectively. In FY15, PSO's sale volume of motor gasoline (petrol) grew by 18.5 percent year-on-year due to upsurge in demand of petrol on account of fall in prices of the same and shortage of CNG. Moreover, high speed diesel (HSD) sales also saw an increase of 0.9 percent over similar period last year despite the stiff competition faced in the industry.
During the year FY15, the key trends in the OMC segment were marked by an increase in petroleum consumption by almost five percent, year-on-year. The motor gasoline saw in increase of 22.5 percent year-on-year in FY15, while the growth in HSD was 7.5 percent, year-on-year. Industry consumption of furnace oil declined by around three percent year-on-year in FY15, mainly due to the overall decline in the electricity generation in the country.
Financial performance FY15 A major portion of FY15 has been a challenging one for the oil marketing segment in the country; the second and the third quarters of FY15 were bruised by heavy inventory losses in the sliding oil price scenario. During these two quarters, oil prices nosedived by more than 40 percent compared to similar period of FY14. However, the fourth quarter came as a sigh of relief where the OMC segment and particularly PSO incurred inventory gains due to slight respite in the oil price drop. But the damage done in the two disastrous quarters weighed heavy on the inventory gains of the 4QFY15.
PSO announced a 68 percent year-on-year decline in its earnings for FY15 primarily driven by the inventory losses. However, the 4QFY15 witnessed inventory gains, and that along with rising petroleum sales by the OMC soothed the firm's earnings' decline.
Overall, the firm's revenues dropped by 23 percent year-on-year in FY15, but volumes continued to grow steadily on the back of demand for petroleum products amid declining POL prices. The company increased its sales volume in petrol by 18.5 percent year-on-year as a result of an upsurge in demand fall in petrol prices and shortage of CNG as fuel for vehicles. However, decrease in gross profit was by 36 percent year-on-year on account of huge inventory losses due to sharp decline in oil prices by 46 percent, year-on-year.
The firm's operating profit for FY15 was lower by 46 percent year-on-year due to 28 percent year-on-year decline in other income, which generally offers backing to the bottom line. The drop in other income came from less receipt of mark-up on delayed payments from IPPs.
PSO's bottom line was also affected by the growth in the finance cost. 15 percent increase in finance cost on increased borrowings also dented the PSO's profits for FY15. The company's Board of Directors also announced a final cash dividend of Rs 4 per share in addition to an interim cash dividend of Rs 6 per share already paid for FY15.
Liquidity Circular debt continued to effect the PSO's liquidity situation and is significantly affecting its ability to make product purchases during the year. The firm's director's report highlights that the credit facility and the sales incentives given in the market, the closure and non-uplifting, despite fuel supply agreements of certain IPPs, partially affected the volume of PSO.
Cash flows from operating activities have improved in FY15 mainly due to significant decrease in stock in trade balances owing to dip in oil prices, which ultimately resulted in improvement in cash flows from operations.
PSO 1QFY16 While FY51 was bogged down by inventory losses, PSO's 1QFY6 was a surprise as improvement in earnings were attributed to muted inventory losses; though the oil prices continued to come down, inventory losses on HSD during the quarter were mitigated by gains on furnace oil and petrol. However, the earnings still remained lower in 1QFY16 versus previous period.
Outlook Though the challenge of circular debt and mounting receivables remain, PSO is expected to sustain its profitable position due to the future market dynamics prevailing in the oil industry and diversification into LNG business line, During financial year 2015, PSO made a contribution of Rs 274 billion to the national exchequer.
The key upside for PSO is the reduced stress in the firm's balance sheet. Even during 1QFY16, the firm saw a decline in its finance cost, which is the first sign of improving cash position and declining receivables at the OMC. Drop in oil prices have been positive for the OMC as well as it has stemmed the accretion of circular debt to some extent.
Also, the call for setting and organising of the firm's Board of Director also hints at improving corporate governance issues at PSO, which has bogged down the firm's potential for many years.

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Pakistan State Oil (PSO)

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                                 FY12      FY13     FY14     FY15

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Profitability

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GP margin               %        2.86      2.64     2.61     2.12

NP margin               %        0.75      0.98     1.55     0.62

ROA                     %         2.6      4.48     5.86     2.03

ROE                     %       18.74     20.84    27.75     8.43

ROCE                    %       47.52     41.29    50.73    25.43

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Turnover

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Inventory turnover     (x)      13.55      12.2    16.33    19.05

Debtor turnover        (x)        5.5      16.9     8.04     6.16

Creditor turnover      (x)       5.08      7.77     8.65    10.08

Total asset turnover   (x)       3.93      4.11     4.31     3.12

Fixed asset turnover   (x)     200.39    226.77   246.04   181.35

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Investment

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EPS (Diluted)          Rs       33.34     46.52    80.31    25.53

Price earning          (x)       4.47       6.3     4.84    15.11

Dividend yield          %        3.18      2.18     2.31     2.59

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Liquidity and leverage

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Interest Cover ratio   (x)       2.17      3.53     4.45     2.09

Current                (x)       1.15      1.03     1.09      1.1

Quick Ratio            (x)       0.85      0.54     0.79     0.87

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