Petroleum: SHELL PAKISTAN LIMITED - Analysis of Financial Statements June 2003 - June 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 into the 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 share, with the group now having a 76% stake in Shell Pakistan Ltd (SPL).
JAN-MAR 2009
The current quarter saw some stabilisation in oil prices to around $55 a barrel. However, the company continued to make inventory losses on account of unfavourable movements in the international prices of oil in the previous quarters. The company's performance in the quarter remained very similar to the industry with a 3.6% decline in the company's sales in the quarter ending March 2009 as compared to the same period last year (SPLY).
Attock Petroleum, which is the third largest company in the OMC sector after PSO and Shell, also had a decline in its sales by 8% in 3Q09 as compared to 3Q08. Only PSO which is the market leader in the oil marketing sector with a 72% market share managed a minor 1.8% growth in its sales in 3Q09 as compared to 3Q08.
The company's decline in its fuel sales combined with a 79% decline in its non-fuel retail sales resulted in a 25.6% decline in the company's gross profit. However, the company's decline in the gross profits was lower than its competitors PSO who had a 37.5% decline in their gross profits.
The company also had a 101% increase in its administrative and marketing expense which contributed to a 65% decline in its operating profits as compared to the SPLY. The energy sector also faces the problem of circular debt which is estimated to be around Rs 200 billion in the energy sector.
Shell still continues to finance sizeable receivables of over 5 billion rupees from government and other public sector entities which has resulted in a financing cost of around 185 million rupees and has resulted in an increase in the company's financing cost by 131.8% in 3Q09 as compared to 3Q08. The circular debt position is even worse in the other two major oil marketing companies with PSO having dues of over Rs 50 billion and Attock Petroleum having dues of Rs 6 billion that have not been cleared yet by the government.
The increase in financial charges by 131% resulted in a decline of 61% in the company's profit after tax and earning per share. This decline in profits was smaller than that of PSO which had 73.7% decline in its profit after tax showing the overall negative performance of the industry in this quarter. Only Attock Petroleum managed a decent performance during the quarter with an increase in profits after tax of 28.91%. Attock Petroleum also had the highest EPS in 3Q09 among the three major players in the market.
The company's liquidity position deteriorated as compared to June 2008 when the current ratio was 1.41. However, the company's current ratio was 0.85 in 3Q09 which is pretty much similar to that of 3Q08. This was due to a 26% decline in Shell's current assets and a 24% decline in the company's current liabilities. The decline in current liabilities was mainly due to a 68% decrease in the company's short-term loans.
The company's debt position also worsened in the quarter with the times interest earned (TIE) ratio declining from 6.29 in 3QFY08 to 0.93 in 3Q09. This was mainly due to a 131% increase in company's financial charges as compared to the SPLY. The TIE ratio also declined due to a 65.6% decline in the company's operating profits. The company's dues worth more than 5 billion rupees have yet to be cleared by the government.
However, the government has issued Term Finance Certificates worth Rs 80 billion in April this year in order to solve the problem of circular debt which continues to plague the energy sector. The government owes 84 billion rupees to different OMCs on account of price differential claims (PDC). The government also paid Rs 0.45 billion of its outstanding dues to shell in April 2009 and has made a commitment to pay further amount in July which would improve Shell's debt position in the near future.
The company's profitability also declined in this quarter as compared to the same period last year. The company's profitability declined mainly due to inventory losses and a decline in sales on account of lower demand. The company's margins declined from 7.36 in 3QFY08 to 5.68 in 3QFY09. The company's return on assets (ROA) and return on equity (ROE) also declined by 52% and 63.3%. There was also a 61.1% decline in the company's EPS.
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 the 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 as expected, 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 to be very profitable for the company. The company recorded 627 percent increase in its profits after taxation. Higher sales along with 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 the FY08 owing to the 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 of Shell is not commendable, as 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 the short-term loans taken by the company. Shell's current assets in the 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 FY06-07 to 52.3 days in FY07-08. 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 2007-08, 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 07-8 EPS stood at Rs 93.76 as compared to Rs 12.9 last year.
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 In the last quarter, the economy has shown signs of improvement with reduction in inflation and stabilisation of the exchange rate, this is a good sign for profitability of the OMCs. The government has also paid rupees 80 billion to the energy sector in order to resolve the problem of circular debt and has made a commitment to do more which is also bodes well for the profitability of the energy sector.The profitability of the industry players is correlated with the international oil prices.
Since, oil prices have been declining in the international market from the record high of $147/barrel in July to less than $55 in April 2009, due to lower demand witnessed in the Asian markets, it is expected that OMC sector's profit, along with Shell's, will decrease in the FY09. However the profitability of the company will depend on future economic conditions, GDP growth and inflation apart from the fluctuations in the international crude oil prices.
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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 98,422,690 117,262,519 115,045434 139,844,689
Cost of Goods Sold 72049466 72973109 89684584 107301 071 108664932 124694471
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 5,137094
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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 21 1 927 39 664 859
Total Current Liabilities 7,191,520 9,042,390 12,209,080 17,902,377 19,612,1 15 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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DebttoAsset(%) 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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PERSHARE Jun03 Jun'04 Jun05 Jun06 Jun07 Jun08
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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 16 203 23 230.75 173.00 248.00
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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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