PSO – volumes driving earnings again!

After a stressful FY20 where petroleum product volumes sold by the oil marketing companies slithered due to lockdown restrictions, FY21 has seen a revival in sales volumes for the OMCs. What also adversely impacted the profitability of the oil marketing companies in FY20 was the significant inventory losses that came with the historic oil price crash. That too has reversed to some extent in FY21.

With economic recovery witnessed during the FY21 so far - as seen from the resumption of industrial and economic activity as well as growth in car sales- OMCs’ volumes have also seen a jump. Pakistan State Oil (PSX: PSO) has seen a significant growth in volumes of 21.6 percent year-on-year in 9MFY21 with a 260 basis points increase in overall market share to 46.3 percent. Growth in volumes for 3QFY21 was even more pronounced at 53 percent year-n-year with furnace oil take the lead in terms of growth. While improvement in PSO’s market share in 9MFY21 is being attributed to return of furnace oil into the sales mix, PSO has highlighted that the launch of Euro-5 petrol and diesel have also been a game changer.

Growth in volumes can be seen in 3QFY21’s topline that increased by 17 percent year-on-year. Volumes were up for 9MFY21 as well but were offset by the impact of lower petroleum product prices. Growth for PSO further came from inventory gains on motor gasoline and high-speed diesel as seen from over seven times increase in gross profits. 9MFY21 gross profits were also see increasing by over 85 percent year-on-year.

This trickled down to the bottomline that grew by over 6 times in 9MFY21 to Rs18 billion and posted a PAT of over Rs8 billion in 3QFY21 versus a LAT of Rs3.4 billion. the turnaround in earnings was also facilitated by no increase in operating expenses as well as a declining finance cost that came from overall lower interest rates. However, 3QFY21 saw a jump in quarter-on-quarter finance cost likely due to higher short-term borrowings that could have come from higher furnace oil sales.

The stability in oil prices as well as continued growth in volumes are key drivers of growth for OMCs. is key in topline growth. While the change in price mechanism for petroleum products to fortnightly will continue to reduce the size of inventory losses in case of oil price fluctuation, and the liquidity position will be better due to the likely clearance of circular debt, 4QFY21 might see a decline in volumetric sales once again as the third wave of covid-19 and the ensuing restrictions are peaking again.