Oil: PAKISTAN STATE OIL - Analysis of Financial Statements Financial Year 2004 - H 2001 2009

Fluctuation in international oil prices has rendered the performance of Oil Marketing Companies (OMCs) unpredictable in terms of productivity. While the crude oil has again receded to below the $50 per barrel owing to slowdown in demand from US market, the future of the trend in oil prices cannot be accurately predicted.
The performance is directly linked with the international oil prices, therefore, any up or down will affect the industrys performance accordingly. The consumption pattern has also become unusual. Major transport-led categories recorded decline in oil consumption, while the furnace oil consumption increased considerably.
Pakistan State Oil came into existence 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 market share of approximately 68%. Continuous improvement, innovation and diversification have enabled PSO to enrich its market share.
It 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 give 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 country while more to come in future.
Apart from this, PSO also has 240 CNG stations operational in more than 30 cities and plenty more in the pipeline since its policy formulation in 1995. It is the first Oil Marketing Company (OMC) to commission a CNG facility at its retail outlet in January 1996. Along with CNG, PSO is also active in the LPG domain. PSO generates over 18,000 metric tons of LPG in sales volume per annum, supplying the product in all corners of the country with the brand name PakGas.
RECENT RESULTS H109During the first half of FY09, the Opec basket price of crude oil experienced a very sharp decline and touched lowest level of US $33 per barrel in December 2008, resulting in significant inventory losses in this period.
During the review period, the industry sales were lower by 4% mainly due to higher retail price and slowdown of the economy. Despite this decline, the company improved its market share by 1.3% to 71.2% and sold 6.03 million tons of product in the review period. This translated into a turnover of Rs 392 billion versus Rs 248 billion in the same period last year.
Notwithstanding the top line growth, inventory loss to the tune of Rs 20 billion impacted the profitability of the company, resulting in a loss after tax of Rs 10 billion versus profit after tax of Rs 5.5 billion during the first half of FY08.
The loss after tax in Q2FY09 was Rs 1.6 billion as against Rs 8.4 billion in Q1FY09. In Q1FY09, the company had taken an NRV (net realizable value) adjustment for anticipated reduction in inventory value. In addition, the 1st quarter of FY09 also witnessed a Rs 3.26 billion exchange loss.
Gross loss was witnessed to the tune of Rs 7.7 billion while the operating costs have nearly doubled. Financial charges have become more than 5 folds in order to Rs 2.9 billion. Loss after tax was Rs 10.05 billion for the period under review, resulting a loss per share of Rs 58.59.
FINANCIAL ANALYSISThe overall market share of Pakistan Oil State at the end of FY08 stood at 67.9 percent which clearly depicts its market leadership in the OMC sector. Despite all odds from increasingly new players entering the industry, PSO enhanced its Mogas market share to 48.9 percent as compared to 46.2 percent last year. Mogas sales volume increased by 34 percent.
HSD sales, on the other hand, grew at 20 percent and stood at 5.3 million tons, clearly outperforming the industry growth of 26 percent. As a result, companys market share in HSD increased to 63.8 percent as compared to 60.4 percent last year. Against overall increase of 0.96 million tons of HSD during FY08, PSO captured almost 90 percent of the total increase. In white oil, PSO enhanced its market share appreciably from 59.2% in FY07 to 61.8%.
Similarly in black oil, PSOs share increased to 82.3%. PSOs increased white oil market share was possible due to continued aggressive marketing initiatives, including the expansion of the new vision retail network and enhanced contribution of its fuel cards, which substantially contributed the sales volume growth. During the year 2008, the company also sold 35,000 million tons of lubricants, which translated into a market share of 26.6 percent.
During the FY08, PSOs net revenue increased by an impressive 41.62 percent to achieve a market share of 68 percent. Total sales volume, on the other hand, stood at 13 million tons (6.4 MTs of black oil) as compared to 11.8 million tons last year. Total sales revenue or turnover stood at Rs 583.2 billion as compared to Rs 411.058 billion million last year. The main contributing factor was inventory gains along with an increase in sales.
PSO profitability ratios showed positive trends in FY08. Companys profit before taxation stood at Rs 21.4 billion and profits after tax stood at Rs 14.1 billion - highest ever earned by any company in Pakistan. PAT this year recorded 200 percent increase as compared to last years Rs 4.68 billion.
As a result, earnings per share rose by 200 percent and stood at Rs 81.94 as compared to Rs 27.24 in 2007. Higher profitability translated into higher gross profit margins and net profit margins. Gross profit margin rose to 6.06 as compared to 3.51 in 2007. Similarly, net profit margin grew from 1.34 to 2.84 in 2008.
ROA and ROE also showed impressive performance mainly because of higher profitability. ROA for the FY08 stood at 11.06 as compared to 6.28 in FY07. Total assets, on the other hand showed 70 percent growth in FY08. Growth in total assets was mainly stimulated by 85.3 percent in current assets of the company in FY08. Within the current assets, trade debts and stock-in trade grew at 149 percent and 111 percent, respectively.
PSOs record earnings during FY08 were also supported by inventory gains made especially during the second half of FY08 due to ever-increasing oil prices. Currently, oil prices have dipped below $70 per barrel, which may result in inventory losses for the company in the current accounting period. PSOs current ratio shows that companys liquidity position improved in FY08 and stood at 1.24 (FY07=1.22).
However, despite being profitable, PSO actually faced severe liquidity crises in FY08 mainly due to very high receivables from GoP. This eventually increased the companys financing cost which recorded 18.1 percent growth in FY08 as compared to last year. Actually, GoP had been providing subsidies on rising international prices to consumers in Pakistan.
Subsidy accumulation on account of Price Differential Claim (PDC) reached record level of Rs 43 billion in April 2008. This created severe liquidity problems for the company until Rs 20 billion reimbursement was provided to PSO on June 30, 2008. Not just GoP, other large consumers like HUBCO, PEPCO and PIA further worsened the liquidity situation by defaulting on their payments during the year.
PSO, however, has performed better than other players in terms of sales-to-equity ratio on account of high sales volume. Sales to equity declined marginally in FY08 because equity grew at 47.88 percent as compared to 41.6 percent growth in net sales. Similarly, asset turnover has also shown a declining trend, owing to 70 percent growth rate witnessed in total assets as compared to 41.6 percent growth in net sales.
The total operating cycle in terms of days has also increased mainly due to longer DSO and inventory turnover. This is clearly reflecting that companys cash is tied up longer in its core operations which is also creating cash flow problems for the oil giant. FY08 proved beneficial for the OMC sector of Pakistan. The profitability of the companies posted impressive trends mainly due to higher international oil prices and substantial inventory gains.
The company suffered a setback when the government revised the pricing formula resulting in depressed margins. Further, the governments subsidy to the consumers in the wake of high oil prices proved to be an added burden on the companys financials, especially in the wake of non-payment of price differential claims.
FY08 proved favourable 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. 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. Up-till 2007, the interest cover ratio had been declining lately as a result of high interest expense. However, TIE ratio declined in FY08 in line with the industry trend, mainly because of very high growth in operating profits as compared to growth in financial costs incurred by the company.
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, which actually declined in FY08 because of higher growth in equity, 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 FY08, a downside price risk always lies ahead. Likewise, the companys ability to pay dividends, its market price and PE ratio are all linked to wavering prices in one way or the other.
Recently, the EPS has shown tremendous performance as it grew by 200 percent. EPS in the FY08 stood at Rs 81.71 as compared to Rs 27.34 of FY07. Based on an impressive performance, the company announced a dividend of Rs 12.5 per share. Combined with the earlier interim dividends of Rs 11 per share, the total dividend for the year stood at Rs 23.5 per share. This actually translated into total payout of Rs 4 billion to the shareholders.
FUTURE OUTLOOK Effective February 2009, the margins for OMCs were revised from 3.5% to 4% with lower and upper limit of $45-$80 per barrel average price of Arabian Light Crude oil on gasoline, kerosene and light diesel oil. For diesel, the margin is fixed at Rs 1.35/litre. Lower demand in the industry is expected in the times to come because of slowdown in the economy - 2.5% growth anticipated for the economy.
The inter-corporate debt, on its way to solution may lessen the liquidity concerns that the company had previously. It would also help in decline of financial charges being borne on account of meeting working capital requirements.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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