Shell Pakistan is one of the oldest multinational companies in Pakistan and the history of the company in Indo-Pak subcontinent dates back to 1903 when Shell Transport and Trading Company and Royal Dutch Petroleum Company decided to merge and supply petroleum to Asia. The company came to be known as Burmah Shell Oil Storage and Distribution Company in 1928 in India with the merger of Royal Dutch Shell Plc and Burmah Oil Company.
Later in 1947, the company was named Burmah Shell Oil Distribution Company of Pakistan which became Pakistan Burmah Shell (PBS) Limited in 1970 when Pakistani investors gained 51 percent of the shareholding. In 1993, the Burmah Group divested from PBS and Shell Petroleum jumped in to raise its stake to 51 percent. Today, Shell Petroleum is a 76 percent majority stakeholder in Shell Pakistan Limited. The company is amongst the three oil marketing companies included in KSE100, the other two being PSO and Attock Petroleum Limited.
Business Activities & Highlight - 1HCY12 Shell Pakistan Limited operates in retail, aviation, lubricants and commercial fuels. Within the retail business, the company is the largest player in the foreign retail segment and provides fuel to over one million customers daily. With over 800 retail outlets, Shell Pakistan limited is the only petrol retailer in the country to offer premier fuel.
The company is a global leader in lubricants. The company has three major lubricant brands: Shell Helix, Shell Rimula and Shell Advance, which have gained prominence not only globally but also within the country. These lubricants are market leaders across passenger cars, bikes and heavy duty vehicles. The company also provides world-class domestic heating oils, commercial road transport, industrial and wholesale products to business customers. Shell Pakistan Limited is also one of the key suppliers of fuel to IPPs in Pakistan. The company has a significant representation in the aviation industry as well.
The poor economic conditions in the country, coupled with outstanding receivables from the government are the most significant challenges for Shell Pakistan Limited. The first half of CY12 was no different as the company's performance subsided owing mostly to the abovementioned factors.
As far as the industry dynamics are concerned, the company blames the regulated and fixed petrol and diesel margins that they are unable to absorb the rising operating cost and the cost to finance investments and government receivables.
Financial Performance Shell Pakistan Limited gets 99 percent of its revenues from the fuel sales and exports and gets the remaining from the non fuel retail. Net sales, which include revenue from both fuel and non fuel segments, showcased a slowdown in the growth during 1HCY12 with net sales declining by 11 percent YoY.
Shell Pakistan has continued to make significant investments in marketing activities in both the retail and lubricants businesses leading to significant growth in motor gasoline and consumer lubricants sales. However, the crunch in the top line during 1HCY12 could be attributed primarily to lower local fuel oil sales and somewhat to the ban on the export of petroleum products to Afghanistan along the Nato supply routes, during the beginning of the year.
Likewise, the bottom line during 1HCY12 also turned sour due to a multitude of reasons such as high inflation, increasing government receivables, volatile oil prices, security threats and growing cost of doing business. The gross profit incurred a major blow of 47 percent YoY during the period under review and gross margins moved from almost seven percent in 1HCY11 to 3.4 percent in 1HCY12. Even though the company was able to reduce overall costs by nine percent during 1HCY12 versus that of 1HCY11, the operating profits plunged in the wake of reduced sales revenues.
Adding to the agony, the net earnings were marred not only by the above mentioned reasons but also by the rising cost to finance the government receivables where a large part of them remained overdue. The profitability during 1HCY12 plunged to a loss of Rs 1.99 billion as against a profit of Rs 1.41 billion in the same period last year, and net margins turned negative.
Liquidity & Efficiency At a time when the oil prices are very unpredictable and the cost of doing business is galloping at a fast pace, the regulated margins on diesel and petrol in Pakistan remain the lowest in the region. This is a threatening situation for the operational efficiency of the company and hence the oil marketing segment.
Although Shell Pakistan Limited does not have any long term loans on its balance sheet as of 1HCY12, the financial soundness and short term solvency of the company attracts attention as the company has been trying to sort out its working capital issue through short term loans and financing.
On the brighter side, through the collection of old debts, the company was able to improve its operational cash flows. However, the challenge of delayed receivables remains the most significant problem for the company as the OMC is on one extreme of the value chain. As on June 30, receivables of Shell Pakistan stood at Rs 7.9 billion and Rs 2.6 billion in terms of tax refunds and fuel price subsidies respectively.
Outlook Shell Pakistan Limited has been facing dismal volumes underscored by lower fuel oil sales, especially locally. The margins on the regulated petroleum products like diesel and motor spirit stand around two percent of the selling price.
One challenge that the company and the OMC sector deters to is the impact of minimum tax on turnover. The minimum tax regime charges incomes tax to the company on selling price basis. In a rising price scenario, this practice increases the tax liability, and amid no foreseeable lift to the margins, the industry has been asking for some equality with other industries. Moving forward, the situation is clamouring for a recovery in the circular debt crisis, and attention towards the corporate taxation, and a quick resolution of delayed government receivables more than any thing else.
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SHELL PAKISTAN LIMITED
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mn (Rs) 1HCY10 1HCY11 1HCY12
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Net Sales 90,152 116,318 103,835
Gross Profit 5,730 7,559 3,999
Operating Profit 2,036 3,249 116
Net Profit 720 1,407 (1,988)
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Profitability
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Gross margin 6.4% 6.5% 3.9%
Operating margin 2.3% 2.8% 0.1%
Net margin 0.8% 1.2% -1.9%
ROA 2.0% 2.8% -4.6%
ROE 9.9% 16.1% -31.7%
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Liquidity and Efficiency
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Current ratio 0.79 0.91 0.86
Short term debt to equity 1.15 2.13 2.11
Total asset turnover 2.45 2.31 2.42
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Market
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EPS 10.52 16.44 -23.23
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Source: Company accounts
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