Oil and Marketing Company: SHELL PAKISTAN LIMITED - Analysis of Financial Statements June 2003-June 2007
Overview of industry: Skyrocketing crude oil prices in the global market that touched an all-time high of $92 per barrel in October 2007 due to rising US-Iran tension, posing a great concern to the economy of oil-dependent countries like Pakistan in near future.
The direction of a country's economy depends on the movement of oil prices whether they go up or down. If oil prices move up persistently, then it will have a negative on the country's progress. Oil is the lubricant of economic expansion.
A high oil price just makes it more expensive for companies to operate. Thus OMCs have a crucial role to play in the economy, the performance of which is linked to the international oil prices' trend.
Crude oil has always been one of the country's major imports. During the first two months of the current fiscal year, the import bill for crude oil by 6.53 percent to reach $1.344 billion on a year-on-year basis but analysts believe that it will increase by 20-22 percent further if the current high oil price scenario continues. Consequently, increased prices of petroleum products ie high-speed diesel and motor sprit (MS) or gasoline/petrol in the retail market, has resulted in high inflationary pressures.
OVERVIEW OF COMPANY: Shell Pakistan Limited enjoys a 100-year history in this part of the world, dating back to 1899 when Asiatic Petroleum, the Far Eastern marketing arm of two companies: Shell Transport Company and Royal Dutch Petroleum Company began importing kerosene oil from Azerbaijan into the subcontinent. After the independence of Pakistan, the name was changed to the Burmah Shell Oil Distribution Company of Pakistan.
In 1970, 51% of the shareholding was transferred to Pakistani investors and the name changed to Pakistan Burmah Shell (PBS) Limited. In February of 1993, as economic liberalization began and the Burmah divested from PBS, Shell Petroleum stepped into raise its stake to 51%. Since then, Shell Petroleum Company successively increased its share, with the Group now having a 76% stake in Shell Pakistan Ltd.
Shell Pakistan is the second largest oil marketing company of Pakistan with a present market share of 14%. Lately, the company witnessed a downfall in performance owing to receding oil prices in the international market along with the accessibility of cheap substitutes that dwindled the market share of the company in prominent categories.
The sales trend has been erratic as well, which again can be attributed to the vacillating oil prices. Recently it has been declining at a very fast rate and is mainly because of the rising oil prices setting new trends for the entire oil and marketing companies.
As evident from the market share graphs, the company market share has declined in almost all of the categories. Although the furnace oil consumption posted a rising trend, Shell was unable to capture significant sales in this category and can be attributed to its limited distribution network as compared to that of PSO.
As a result, the market share of Shell in FO category dwindled to nominal 1%. Similarly, kerosene oil consumption registered a decline in FY07 mainly on account of shifting of consumers to pipeline gas in rural areas thus leaving the company with a share of mere 11%.
Shell, however was able to capture a share of 32% in JP, which can be attributed better supply arrangements with the partners. Thus the major contributing factor towards improved sales in FY07 came from this category.
LIQUIDITY: Liquidity position of Shell is not commendable as other players of the industry. However, with the introduction of higher margin products, the company has been able to enhance its performance level since FY05 owing to inauguration of White Oil Pipeline enabling better supply/transportation of oil across the country. As a result, oil stock increased significantly.
FH07 however, disturbed the increasing trend of company's liquidity position and was the most challenging period for the whole industry. Short-term loans and accrued liabilities increased by a very large amount, depressing the current liabilities and therefore the current ratio of the company.
PROFITABILITY: Shell has always concentrated on shifting its portfolio towards high margin products. This strategy, therefore, has reaped enormous benefits for the company in terms of better sales, gross profit and net income. Higher prices of oil in the international market are also a contributory factor towards high profitability ratios that the company posted since FY03.
FH07 as expected proved to be the most crucial year. The company recorded depressed sales because of a recession in international oil prices. Moreover, reduced unit margins as a result of revision in government's pricing formula along with greater financial charges further eroded the profitability of the company.
To date, Shell has not been able to catch up with industry's profitability trend. This trend is expected to continue his trend is expect earnings for the full year are expected to be lower in the forthcoming years due to a squeeze in overall OMC margins following a revised oil pricing formula.
Although expenses have decreased for Shell, higher COGS and lower sales revenue offset this cost-advantage for the company. Hence, gross profit and net profit margins have declined steadily over the period FY07. ROA and ROE have also declined owing to the same reason.
DEBT RATIOS: On account of large amount of short-term loans and consequently high interest expense, debt-to-asset ratio has been rising steadily while interest coverage strength has been diminishing. With subsequent payment of interest and short-term loan, the debt paying ability of the company is expected to shrink further in future. However, Shell does not rely on long-term loans as indicated by its much lower than average long-term debt to equity ratio.
ASSET MANAGEMENT: Comparison with the industry reveals that Shell has been relatively efficient as far as managing its assets is concerned. In line with the industry trend, operating cycle is extending which can be attributed to the unsold inventory (and low inventory turnover rate) owing to lower demand and higher prices of oil in the international market.
However, the company is far more efficient in dealing with its debtors. Low level of debtors against high sales revenue is evident from its very low DSO continuing its trend in FY07.
Both sales/equity and total assets turnover ratios are somewhat erratic, thanks to the unpredictable oil prices, which kept the sales volume and thus sales revenue wavering. Recently, both ratios have been on a lower side for the entire industry owing to a record slump in the oil prices trend.
MARKET VALUE: The company has been able to post high earnings per share than other industry players. However, it recorded a sharp decline of 81.8% in FH07 mainly attributable to escalating oil prices and lower demand for POL products, arising from a shift towards cheap substitutes.
DPS of the company suffered major setback as well owing to a significant drop in petroleum demand, low sales volume and high inventory losses owing to decrease in international oil prices. Moreover, modification in pricing formula undermined the unit margins along with higher financial charges reducing the earnings of the company further. Consequently the company has to compromise on cash flows resulting in lower dividends per share. Until recently, the net worth of the company has also recorded a positive trend and excels the industry average trend. The trend is expected to continue until the oil prices return to a stable level.
FUTURE OUTLOOK: The international oil prices have already taken a huge U-turn as it increased drastically hitting a record level of above 90%. Hence, the future of the oil marketing companies is unpredictable, mainly on the mercy of fickle oil prices owing to changing international political scenario.
Any further upturn or downturn will therefore have its own ramifications. Nevertheless, diversification into new products can prove to be profitable for the company.
The FY07-08 budget which announced reduction in CED on motor gasoline and JP-1 by Rs 0.88 per/liter and Rs 0.06/litre respectively, didn't have a sound impact on the industry, as their volumes are relatively much lower and on MoGas, the government did not pass the benefit to the consumers and simply shifted the lost amount from CED into PDL.
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SHELL PAKISTAN-KEY FINANCIAL DATA
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Income Statement (Rs '000) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Total Revenue 77,822,817 79,180,350 98,422,690 117,262,519 115,045,434
Cost of Goods Sold 72,049,466 72,973,109 89,684,584 107,301,071 108,664,932
General & Administrative Expenses 3,794,361 3,806,007 3,454,308 3,807,932 2,036,574
Selling and Distribution Expenses 1,155,458 989,263 3,366,555
Operating Profit (EBIT) 2,089,314 2,413,251 4,720,962 4,958,759 1,166,405
Financial Charges 51,480 73,817 330,941 398,009 909,919
Net Income Before Taxes 1,899,905 2,188,924 3,642,984 4,599,494 378,736
Net Income After Taxes 1,254,997 1,508,014 2,451,070 3,108,469 706,659
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Balance Sheet (Rs '000) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Stores & Spares 24,227 22,184 16,366 28,865 30,286
Stock in Trade 2,826,981 4,536,965 6,608,167 9,979,886 8,244,054
Cash & Bank Balances 1,075,698 566,636 752,112 981,197 814,530
Total Current Assets 6,311,376 7,912,631 12,983,152 20,316,721 20,041,859
Total Non Current Assets 6,827,081 7,431,497 7,597,964 7,855,161 9,170,068
Total Assets 13,138,457 15,344,128 20,581,116 28,171,882 29,211,927
Total Current Liabilities 7,191,520 9,042,390 12,209,080 17,902,377 19,612,115
Long Term Liabilities 95,119 169,209 68,963 155,398 139,041
Total Liabilities 7,286,639 9,211,599 12,278,043 18,057,775 19,751,156
Paid Up Capital 350,658 350,658 350,658 438,323 547,904
Total Equity 5,851,818 6,132,529 8,303,073 10,114,107 9,460,771
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LIQUIDITY RATIO Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Current Ratio 0.88 0.88 1.06 1.13 1.02
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ASSET MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Inventory Turnover(Days) 11.54 18.21 21.39 27.12 22.89
Day Sales Outstanding (Days) 0.02 0.02 0.02 0.02 0.02
Operating Cycle (Days) 11.56 18.24 21.41 27.14 22.91
Total Asset turnover 6.77 5.87 5.42 4.72 4.45
Sales/Equity 15.20 14.69 13.43 13.13 13.75
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DEBT MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Debt to Asset (%) 55.46 60.03 59.66 64.10 67.61
Debt/Equity (Times) 1.25 1.50 1.48 1.79 2.09
Times Interest Earned (Times) 40.58 32.69 14.27 12.46 1.28
Long Term Debt to Equity (%) 1.63 2.76 0.83 1.54 1.47
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PROFITABILITY (%) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Gross Profit Margin 6.49 6.89 7.84 7.50 4.90
Net Profit Margin 1.41 1.67 2.20 2.34 0.54
Return on Asset 9.55 9.83 11.91 11.03 2.42
Return on Common Equity 21.45 24.59 29.52 30.73 7.47
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PER SHARE Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Earning per share 35.79 43.01 55.92 70.92 12.90
Price earning ratio 11.26 9.16 10.30 8.21 31.54
Dividend per share 23.33 31.79 29.02 29.33 -
Book value 167 175 189 230.75 215.84
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process.
[The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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