Oil:- PAKISTAN STATE OIL - Analysis of Financial Statements June 2003 to June 2007
Marketing Companies (OMCs) unpredictable in terms of its productivity. While the profitability declined in HY07 owing to heavy inventory losses caused by decrease in crude oil prices, nothing can be envisaged about future.
Sales are directly linked with the international oil prices, therefore, any downturn or upturn will affect the industry's performance accordingly. The consumption pattern has also become unusual. Major transport-led categories recorded decline in oil consumption whereas the consumption of furnace oil increased considerably.
Pakistan State Oil was established in 1976 when the government merged PNO (Pakistan National Oil) and POCL (Premier Oil Company Limited) into SOCL (State Oil Company Limited) and named it as Pakistan State Oil Company Limited (PSO). It is the largest oil marketing company of Pakistan with a present market share of 68%.
Continuous improvement, innovation along with diversification has enabled PSO to enrich its market share. PSO has strategic investments in refining and distribution companies such as Asia Petroleum Limited, Pak Grease Manufacturing Company, Pakistan Refinery Limited and White Oil Pipeline Project, which gives it a strong backing in terms of procuring inventory. With an extensive storage capacity of 860,000 metric tons, the company has 3,700 retail outlets across the nation and further outlets soon to come.
Recent results - (1HFY08):
During the first half of FY08, international crude oil prices averaged over $78/bbl as against $61/bbl in 1HFY07. The trend of increase in crude price witnessed in the first quarter of FY08 continued during the second quarter, with OPEC basket price peaking at $92/bbl during the first half as compared to $73/bbl during the same period last year.
Despite intense competition PSO was able to sell over 6.2 million tons of POL products, translating into an all time high sales turnover of Rs 248 billion - an increase of 25% over the prior year. The all time high profit before tax of Rs 8.2 billion and profit after tax of Rs 5.5 billion was achieved owing to 13% higher sales volume as well as due to inventory gains during the period. It may be pertinent to observe that PSO has approximately 80% of the country's storage capacity and has recorded gain or loss on its stock depending upon international oil price movement. Last year the company had an inventory loss during the same period.
Throughout the first half the company continued to face liquidity problems due to ever-increasing receivables from the government resulting high financial cost. Despite the rising international prices, the government continued to provide subsidy on diesel, which touched highest ever level at Rs 17.14 per litre in December 2007. The high level of subsidy given through the OMCs has resulted in liquidity problems for PSO.
Following a 13% growth in sales volume PSO was able to enhance its overall market share to approximately 70% compared to 67.4% in the same period last year. The company outperformed its competitors by recording 14% increase in White Oil sales volume against industry growth of 10%, whereas Black Oil sales increased by 11% versus a single digit industry growth of 6%.
Consequently, the company improved its market share in motor gasoline from 46.3% to 49.8%, while high speed diesel market share increased to 62.7%. Similarly, Jet A-1 market share increased to 63.6% v/s 62.8% in the same period last year. In fuel oil, the company maintained its leadership with 82.7% market share.
The overall oil sector; E&P, Refineries, and OMCs posted double-digit growth in HY08. Rising international oil prices that improved the margins for refineries and booked inventory gains for the OMCs was the main reason behind this double-digit growth along with volumetric increases in sales.
Complete dependence on the international oil prices has given rise to erratic sales growth trend as illustrated by the 'sales trend' chart. The record sales growth of 39% in FY06 is attributable to the soaring oil prices after which a tremendous rise in demand for FO was witnessed in FY07 consequently increasing the sales revenue of the company.
With its current ratio hovering around 1.25, PSO has been efficient enough in paying off its short-term debt as compared to its competitors. Owing to nation-wide expansion of retail outlets and mounting imports, current ratio has declined recently as a result of accumulated payables. Until PSO pays off its liabilities, debt-paying ability is likely to dwindle gradually in future.
Escalating oil prices in the international market is rendering the industry inefficient in its asset management ability as well. In addition to volatile prices affecting its sales, PSO has to suffer huge inventory losses as well. Driven by high international oil prices, higher sales coupled with much higher inventory level gave rise to poor inventory turnover ratio along with a slightly prolonged operating cycle in FY07.
PSO however, has performed better than other players in terms of sales-to-equity ratio on account of high sales volume. Similarly, the asset turnover also showed a positive trend, owing to better marketing, improved distribution network and implementation of SAP ERP system. FY07 has been a favourable period for the company's performance as a result of steep rise in oil prices consequently enhancing the asset management ability of the company.
FY06-07 proved to be lacklustre for the OMC sector of Pakistan. Despite an increase in demand for furnace oil, the profitability of the companies posted a decline owing to high inventory losses (due to fluctuations in international oil prices), a surge in financial charges (due to higher interest rates), and amendments made by GoP in calculations of margins. The top line of PSO showed a growth of 16.6% owing to high sales as discussed previously. Likewise, a massive increase was also witnessed in COGS surging by almost 35% in FY07.
Lower demand for petroleum products in consequence of soaring oil prices and availability of cheap substitutes has been a grave concern for the company. However, increased furnace oil and high speed diesel (HSD) consumption proved to be a respite for PSO as sales volume kept gaining momentum till Jun06 consequently beefing up the profitability position.
The company suffered a setback when the government revised the pricing formula resulting in depressed margins. Further, the government's subsidy to the consumers in the wake of high oil prices proved to be an added burden on the company's financials. FY07 onward has been unfavourable so far because of enormously high oil prices in the international market, which adversely hit the sales and net income of the company by manifold. Regardless of this, the company has sustained its market leadership, which can be attributed to aggressive marketing, constant innovation and improvement, strong distribution network and backward linkages.
Owing to credit purchases from local refineries, imports and borrowing from banks, PSO is indebted to large amount of money consequently hitting its debt-to-asset ratio.
Interest cover ratio (TIE) has been declining lately as a result of high interest expense. However, TIE ratio is reasonably above the industry average indicating company's better interest coverage strength. On account of considerable leverage capacity, PSO can further expand its retail network. It can also form strong backward linkages through acquisition of refinery and can further improve upon its infrastructure capabilities. Although long-term debt to Equity ratio is greater than industry, PSO is still better off since it has no long-term loans.
Complete dependence upon international prices has left the company on the mercy of changing political scenario. While high oil prices have fetched higher earnings for the company in FY05-FY06, a downside price risk always lies ahead. Likewise, the company's ability to pay dividends, its market price and PE ratio are all linked to wavering prices in one way or the other.
Future Ooutlook:
PDC (Price Differential Claim) shall continue to be a problem, in wake of rising oil prices and government's fiscal deficit. However, the government has increased the domestic diesel and MOGAS prices; this will result in a lessening of the burden upon the OMCs. However, the full difference cannot be passed on the consumers as it will add to the misery of the masses in an already high food inflation and scarcity situation. The rising oil prices have taken a breather in the recent days. But the impact of the rising oil prices will be evident in the full year results as handsome inventory gains.
The furnace oil demand is expected to show an increase on the back of high demand from the thermal power plants, in wake of low production from the hydel power plants and increasing demand of energy in the country.
MOGAS sales have also gone up due to curbing of smuggling of Iranian oil. This development is expected to result in higher sales of MOGAS for the industry as a whole. Diesel sales are expected to maintain a steady growth on back of demand from power generation sector plus the transport sector.
So, all in all, the OMC sector is expected to remain strong because of strong demand factors. PSO stands to gain the most due to its vast network and innovative marketing in non-fuel areas like ATMs, car wash etc.
However, the circular debt problem along with the PDC, which has resulted in billions of rupees outstanding for all OMCs and specially PSO will persist. Although financing is being arranged from a consortium, it is to be seen whether it will be adequate to meet the needs of the company.
International oil prices have remained high due to the weakening dollar, disruptions in the supplies, and reluctance on part of the OPEC members to increase production. Despite the weakening of the prices, they are not expected to cross the $100 benchmark.
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PAKISTAN STATE OIL-KEY FINANCIAL DATA
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Income Statement (Rs '00) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Total Revenue 172,445,775 161,517,391 212,503,650 298,250,039 349,706,326
Cost of Goods Sold -163,490,577 -152,346,860 -198,757,319 -281,042,813 -337,446,896
General & Administrative Expenses -1,982,184 -2,021,962 -2,358,109 -2,492,633 -6,012,814
Operating Profit (EBIT) 6,484,107 6,452,056 9,340,340 11,499,315 7,949,786
Financial Charges -274,784 -189,073 -370,699 -884,153 -1,158,112
Net Income Before Taxes 6,209,323 6,262,983 9,191,449 11,654,101 7,121,980
Net Income After Taxes 4,030,323 4,211,861 5,655,873 7,524,701 4,689,798
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Balance Sheet (Rs '000) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Stores & Spares 104,201 190,756 130,559 125,030 127,891
Stock in Trade 8,310,889 14,970,641 20,583,301 28,168,633 29,562,055
Cash & Bank Balances 1,228,220 1,583,146 1,921,936 1,898,894 1,522,276
Total Current Assets 22,446,841 31,634,830 40,737,008 58,118,888 62,513,273
Total Non Current Assets 9,891,153 10,773,688 11,341,468 12,049,636 12,224,042
Total Assets 32,337,994 42,408,518 52,078,476 70,168,524 74,737,315
Total Current Liabilities 17,916,255 25,326,307 32,766,847 47,056,578 51,385,727
Long Term Liabilities 1,358,337 1,636,257 1,998,858 2,298,887 2,412,371
Total Liabilities 19,274,592 26,962,564 34,765,705 49,355,465 53,798,098
Paid Up Capital 1,715,190 1,715,190 1,715,190 1,715,190 1,715,190
Total Equity 13,063,402 15,445,954 17,312,771 20,813,059 20,939,217
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LIQUIDITY RATIO Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Current Ratio 1.25 1.25 1.24 1.24 1.22
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ASSET MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Inventory Turnover(Days) 14.68 27.97 29.38 28.89 30.56
Day Sales Outstanding (Days) 6.63 10.96 9.63 12.09 14.00
Operating Cycle (Days) 21.31 38.94 39.02 40.99 44.56
Total Asset turnover 6.38 4.60 4.87 5.02 4.68
Sales/Equity 15.80 12.63 14.66 16.94 16.70
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DEBT MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Debt to Asset(%) 59.60 63.58 66.76 70.34 71.98
Debt/Equity (Times) 147.55 174.56 200.81 237.14 2.57
Times Interest Earned (Times) 23.60 34.12 25.20 13.01 6.86
Long Term Debt to Equity(%) 10.40 10.59 11.55 11.05 58.38
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PROFITABILITY (%) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Gross Profit Margin 4.34 4.70 5.42 4.88 3.51
Net Profit Margin 1.95 2.16 2.23 2.13 1.34
Return on Asset 12.46 9.93 10.86 10.72 6.28
Return on Common Equity 30.85 27.27 32.67 36.15 22.40
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PER SHARE Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
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Earning per share 23.50 24.56 32.98 43.87 27.34
Price earning ratio 10.34 10.95 11.70 8.05 -
Dividend per share 13.93 16.76 21.03 25.52 21.00
Book value 1 121.35 122.08
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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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