Petroleum: SHELL PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2008
Shell Pakistan 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 to import kerosene oil from Azerbaijan to subcontinent.
After the partition, its name was changed to Burmah Shell Oil Distribution Company of Pakistan. In 1970, 51% shares of the company were transferred to Pakistani investors and its name changed to Pakistan Burmah Shell (PBS) Limited. In February 1993, as the economic liberalisation began and the Burmah divested from PBS, Shell Petroleum stepped into raise its stake to 51%. Since then, Shell Petroleum Company successively increased its shares and now having a 76% stake in Shell Pakistan Ltd (SPL).
RECENT RESULTS 1Q09
During the first quarter ending September 30, 2008, the company incurred a loss after tax of Rs 1,196 million as compared to a profit of Rs 533 million last year. This was primarily due to lower gross margins resulting from declining international oil prices and a corresponding write down of inventory to its net realisable value. This was coupled with high operating expenses on account of significant exchange losses of over Rs 800 million during the period.
Net revenue increased by 28%, while cost of goods increased by 73%, causing the gross profit margin to come down to 1.48% from 6.5% in the same period last year. The company incurred an operating loss of Rs 1.6 billion, which was further aggravated by high financial charges to result in a net loss of Rs 1.2bn resulting in a loss per share of Rs 17.46 as compared to a profit of Rs 7.78 for 1Q08.
FINANCIAL ANALYSIS FY03-FY08
Shell Pakistan is currently the second largest Oil Marketing Company of Pakistan with an existing market share of 13.7 percent. Towards the end of FY08, the company showed a growth of 6.9 percent in POL sales volume. This was mainly driven by rise in sales of kerosene and furnace oil.
As evident from the overall consumption graph, Shell's sales rose from 2.450 million tons in 2007 to 2.619 million tons in 2008. Overall furnace oil consumption grew at 1.6 percent. Shell, recorded 89.2 percent growth in furnace oil sales such that company's market share in furnace oil rose from 1.4 percent to 2.6 percent. Similarly, the company witnessed 21.2 percent growth in kerosene against 8.4 percent growth witnessed in kerosene's consumption company's market share in kerosene increased from 10.9 percent to 12.1 percent. Shell was able to fetch a growth of 12 percent in gasoline, as against 27.2 percent increase in industry consumption, whereas overall, the company's share in gasoline declined from 28.5 percent to 25.1 percent. Similarly, Shell's market share in Lubes increased from 42.4 percent to 45.2 percent. Thus the major contributing factor towards improved sales in FY07 came from Kerosene and furnace oil sales.
Sales trend has been particularly erratic. This is mainly due to volatile oil prices in the international markets. Total sales recorded a growth of 22 percent this year as compared to last year and stood at Rs 157.626 billion against Rs 130.129 billion last year.
During the year, the company posted a net profit of Rs 5.137 billion, an increase of 627 percent as compared to last year. This profitability is mainly driven by higher sales volume and mainly supported by the positive impact of increasing international oil prices.
Shell has always concentrated on shifting its portfolio towards high margin products. This strategy, therefore, has reaped enormous benefits in terms of better sales, gross profit and net income for the company. Higher oil prices in the world market were the main contributory factor towards high profitability ratios that the company has been posting since 2003.
FY07 proved to be the most crucial year. The company recorded depressed sales because of a recession in international oil prices. On the other hand, FY08 proved very profitable for the company. The company recorded 627 percent increase in its profits after taxation. Higher sales and higher international oil prices eventually resulted in higher profitability for the company. All the profitability ratios showed impressive performance. Although, the expenses have increased in FY08, a higher COGS was offset by higher sales revenue. Hence the gross profit and net profit margins which had declined steadily in FY07 increased from .54 to 3.25 percent in FY08.
Similarly, ROA and ROE, which had actually declined in FY07, improved in FY08 owing to an impressive performance shown by Shell's bottom line. As a result, Shell's ROA and ROE in the FY08 stood at 12.95 percent and 37.74 percent as compared to last year's 2.42 percent (ROA) and 7.47 percent (ROE).
Liquidity position is not commendable, as compared to the other players of the industry. However, with the introduction of higher margin products, Shell has been able to enhance its performance since FY05 owing to inauguration of White Oil Pipeline enabling it to better supply/transportation of oil across the country. As a result, the company's oil stock increased significantly.
FY07 however, disturbed the increasing trend of Shell's liquidity position and it was the most challenging period for the whole industry. Short-term loans and accrued liabilities increased significantly, depressing the current liabilities and the current ratio of the company. On the other hand, FY08 improved Shell's liquidity position. This is mainly due to sharp decline witnessed in short-term loans taken by the company. Shell's current assets in FY08 rose sharply by 53 percent. This is mainly due to 119 percent growth in stock-in-trade.
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. Because of high inventory levels reasons, Shell's inventory turnover rate declined sharply in FY07, which resulted in higher days to turnover inventory. 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 FY08. Eventually, Shell's operating cycle increased from 22.91 days in FY 06-07 to 52.3 days in FY 07-08.
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. Towards the year-end 07-08, both ratios have been on a lower side for the entire industry owing to a record slump in the oil prices trend. However, decreasing oil prices in the international market may affect the company other way round.
Up till Jun'07, on account of large amount of short-term loans and consequently high interest expenses, debt-to-asset ratio had been rising steadily while interest coverage strength had been diminishing. However, this trend changed last year and company's debt to equity ratio decline from 2.09 in FY06-07 to 1.91 in FY07-08. This is mainly due to 78 percent decline in short-term loans.
Similarly, contrary to its previous policy of not relying on long-term loans, the company obtained a loan amounting to Rs 2.5 billion from a commercial bank. The loan amount is payable in one bullet payment on September 27, 2010. The arrangement is secured by the Company's stock-in-trade, trade debts and other receivables. As a result of long-term borrowing, Shell's long-term debt to equity ratio increased from 1.47 percent in FY06-07 to 20 percent in FY07-08.
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 FH06-07 mainly attributable to escalating oil prices and lower demand for POL products, arising from a shift towards cheap substitutes. However, FY07-08 remained very positive for the company. Higher sales volume combined with very high international oil prices resulted in very high growth in EPS. Year-end 2007-08 EPS stood at Rs 93.76 as compared Rs 12.9 last year.
Dividend per share of the company declined in FY07 due to significant decline in petroleum demand, lower sales volumes and higher inventory losses owing to decrease in international oil prices. In FY07, the company declared a total dividend of Rs 50 per share (2006=Rs 16 per share), which actually equates to 53 percent of the net profits for the year. Increase in DPS has been due to impressive growth witnessed in company's bottom line.
FUTURE OUTLOOK
The profitability of the industry players is correlated with the international oil prices. Since the oil prices have been declining in the international market from the record high of $147/barrel in July to less than $40, due to lower demand all over the world, it is expected that OMC sector's profit, along with Shell's, will decrease in FY09. However, the recent increase in the OMC and dealer margin may improve the situation for Shell Pakistan.
On government's part, decreased international oil prices have scaled down the oil import bill by 102 million dollars in the first month of current fiscal year. Therefore, any further downturn will therefore have its own ramifications on the sector. Nevertheless, Shell's increasing reliance on high margin oil products will prove profitable for the company once the impact of inventory losses is over.
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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 Jun'08
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Total Revenue 77,822,817 79,180,350 98,422,690 117,262,519 115,045,434 139,844,689
Cost of Goods Sold 72,049,466 72,973,109 89,684,584 107,301,071 108,664,932 124,694,471
General & Administrative Expenses 3,794,361 3,806,007 3,454,308 3,807,932 1,716,707) 2,109,289
Selling and Distribution Expenses 1,155,458 989,263 3,366,555 2,950,422
Operating Profit (EBIT) 2,089,314 2,413,251 4,720,962 4,958,759 1,166,405 8,481,359
Financial Charges 51,480 73,817 330,941 398,009 878,098 970,267
Net Income Before Taxes 1,899,905 2,188,924 3,642,984 4,599,494 378,736 7,723,340
Net Income After Taxes 1,254,997 1,508,014 2,451,070 3,108,469 706,659 5,137,094
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Balance Sheet (Rs'000) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Stores & Spares 24,227 22,184 16,366 28,865 30,286 13,328
Stock in Trade 2,826,981 4,536,965 6,608,167 9,979,886 8,244,054 18,095,523
Cash & Bank Balances 1,075,698 566,636 752,112 981,197 814,530 872,414
Total Current Assets 6,311,376 7,912,631 12,983,152 20,316,721 20,041,859 32,811,966
Total Non Current Assets 6,827,081 7,431,497 7,597,964 7,855,161 9,498,295 9,444,560
Total Assets 13,138,457 15,344,128 20,581,116 28,171,882 29,211,927 39,664,859
Total Current Liabilities 7,191,520 9,042,390 12,209,080 17,902,377 19,612,115 23,307,811
Long Term Liabilities 95,119 169,209 68,963 155,398 139,041 2,745,410
Total Liabilities 7,286,639 9,211,599 12,278,043 18,057,775 19,751,156 26,053,221
Paid Up Capital 350,658 350,658 350,658 438,323 547,904 547,904
Total Equity 5,851,818 6,132,529 8,303,073 10,114,107 9,460,771 13,611,638
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LIQUIDITY RATIO Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Current Ratio 0.88 0.88 1.06 1.13 1.02 1.41
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ASSET MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Inventory Turnover(Days) 11.54 18.21 21.39 27.12 22.89 52.28
Day Sales Outstanding (Days) 0.02 0.02 0.02 0.02 0.02 0.02
Operating Cycle (Days) 11.56 18.24 21.41 27.14 22.91 52.30
Total Asset turnover 6.77 5.87 5.42 4.72 4.45 3.97
Sales/Equity 15.20 14.69 13.43 13.13 13.75 11.58
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DEBT MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Debt to Asset(%) 55.46 60.03 59.66 64.10 67.61 65.68
Debt/Equity (Times) 1.25 1.50 1.48 1.79 2.09 1.91
Times Interest Earned (Times) 40.58 32.69 14.27 12.46 1.28 8.74
Long Term Debt to Equity(%) 1.63 2.76 0.83 1.54 1.47 20
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PROFITABILITY (%) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Gross Profit Margin 6.49 6.89 7.84 7.50 4.90 9.61
Net Profit Margin 1.41 1.67 2.20 2.34 0.54 3.25
Return on Asset 9.55 9.83 11.91 11.03 2.42 12.95
Return on Common Equity 21.45 24.59 29.52 30.73 7.47 37.74
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PER SHARE Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Earning per share 35.79 43.01 55.92 70.92 12.90 93.76
Price earning ratio 11.26 9.16 10.30 8.21 31.54 4.71
Dividend per share 23.33 31.79 29.02 29.33 16.00 50.00
Book value 167 203 237 230.75 173.00 248.00
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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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