Pakistan State Oil seems to have found its way out of last year's financial woes. The firm is due to announce its 1QFY10 financial results on October 23, where the broad consensus among analysts predicts a bright picture. PSO is expected to post earnings to tune of Rs 18-20/share - far above 1QFY09 loss of Rs 49/share.
One might wonder how a substantial decline in oil prices would lead to better earnings, when a sizeable reduction in revenue is almost certain. Well! Average oil price for 1QFY10 may be down 42 percent to $68.2/bbl, year-on-year, but the key to improved earnings lies not in revenue growth, but in inventory gains.
PSO sales volume has been exceedingly well, jumping 18 percent on year-on-year basis. Furnace oil (FO) continued to be the major contributor to sales, as the country's ever increasing dependence on thermal power generation surged the product's demand by 26 percent. The firm also managed to capture 88 percent market share of black oil - up from 80 percent in the same period last year.
The country's largest oil marketing and distribution company is expected to reap better gross margins in comparison to the last quarter as ex-refinery prices for FO & HSD have surged by 29 and 25 percent respectively. Although, sales revenue is going to be considerably lower despite higher sales volume, the gross margins would give the respite to the firm on the back of soaring inventory gains, which are expected to contribute in excess of 60 percent to net earnings.
Despite being 42 percent higher in FY09, oil prices proved to be a menace for the company in 1QFY09 as they were on a steep decline (off, 24 percent) during the quarter - whereas during the 1QFY10 oil prices have been growing steadily (up, 8 percent) ensuring inventory gains in the range of Rs 1.9 to 2.2 billion.
The firm's bottom line, however, would be hit by hefty financial charges; with receivables towering to Rs 100 billion during the quarter the firm was forced to arrange short-term financing to meet its working capital requirements. An estimated Rs 20 million per day was incurred by the company on account of financial charges which translates into Rs 1.8 billion for the quarter - almost double the amount incurred in the year ago period.
Going forward, PSO is poised for a profitable year given that global oil price forecasts are pointing to a journey up north, albeit with restricted movement. This would ensure that the firm's profit, unlike last year, will remain in the green zone. However, little contribution should be expected from inventory gains in the remaining quarters.
In a scenario, where oil prices will remain stable, the otherwise insignificant volumetric sales will have a major say in the firm's performance. With RPPs and IPPs likely to start producing 4000 MW during FY10 - PSO is all set to post record high revenues owing to higher furnace oil sales, which could go as high as 10 million tons in FY10. The recent fuel supply agreement with Pepco also ensures that PSO will remain the market leader in supplying FO to the power sector.
These strong fundamentals have driven the stock price by 57 percent since the start of this fiscal year - outperforming the index by a massive 64 percent. However, it should be kept in mind that the firm's profitability is highly dependent on global oil prices, owing to which, it is safer not to look beyond short to medium term.
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