Pakistan State Oil

Being the largest marketing company, Pakistan State Oil (PSX: PSO) has the largest market share in the OMC sector involved in the marketing and distribution of motor gasoline (Mogas), high-speed diesel (HSD), furnace oil (FO), jet fuel (JP-1), kerosene, CNG, LPG, petrochemicals, and lubricants. It also imports products like Mogas, HSD JP-1, and furnace oil based on demand. It has the largest distribution network in the country.

PSO’s shareholding and investments

The government of Pakistan holds the highest shareholding making up 22.47 percent shares of PSO, according to the latest pattern of shareholding; PSO has strategic investments in storage, refining, aviation, lubricants, and pipeline businesses. including 12 percent in Parco’s White Oil Pipeline Project; 63.6 percent in PRL as its subsidiary company; 49 percent in Asia Petroleum Limited; 62 percent investment in Joint Installation of Marketing Companies, and 50 percent in the new Islamabad airport fuel farm; 44 percent in Eastern Joint Hydrant (un-incorporated joint arrangement); and 22 percent in Pak Grease Manufacturing Company Limited as its associate company as per the company’s FY21 annual report.

PSO's financial and operational performance

The downstream oil and gas sector has seen a significant fluctuation in demand in the last few years due to COVID. Other factors steering demand for petroleum products have been the changes in the energy mix particularly shifting away from furnace oil towards coal and LNG, and then the comeback of furnace oil during COVID and post-COVID times due to the systemic issues in the refining system as well as the rise in demand from the power sector.

As the industry leader, PSO has been driving trends in the sector. In FY17 PSO witnessed a growth of 8 percent in comparison to a growth ranging from -9 percent to 4 percent in the previous six fiscal years. The rise in volumes along with higher prices and the RLNG business led to a 30 percent year-on-year surge in the PSO’s sales revenues and 77 percent growth in the bottom line.

Volumetric growth continued in FY18 in the retail segment, especially motor spirit and HSD. However, PSO’s furnace oil volumes declined by 29.6 percent year-on-year in FY18 as the energy mix shifted to RLNG and coal for the power sector. While the topline was up by 20 percent, profit after tax went down by 15.2 percent year-on-year primarily on account of a one-time reversal of deferred tax assets; falling other income, and higher exchange losses.

FY19 was a difficult year for the OMCs due to the economic slowdown amid rising competition. Margins also fell due to falling volumes by the sector especially the furnace oil, while the retail fuels like diesel volumes also witnessed a decline due to falling demand from both the industrial sector and the transport sector along with falling vehicle sales. Moreover, the high-interest rate environment along with exchange losses, peaking circular debt, and mounting receivables were key factors that dragged the sector's performance including that of PSO. And despite an overall decline of around 38 percent in volumetric sales, PSO’s revenues posted a modest increase due to a rebound in the company’s volumes in the last quarter of FY19. Profits slipped by 32 percent, which came from higher inventory losses as well as lower volumes, finance costs, and exchange losses. In FY19, PSO acquired a 52.67 percent stake in PRL, which lifted its consolidated earnings.

In FY20, PSO’s volumes in furnace oil reduced further due to the continuing impact of focus on RLNG. On the other hand, in the retail sector, PSO experienced an increase in petrol volumes against an overall decline in the industry due to PSO’s increased assortment amid low demand. Industry diesel volumes too were affected due to weak industrial activity, construction activity, and reduced road and rail movement. However, PSO managed to gain volumetric growth.

The decline in gross profit for PSO was mainly due to inventory losses besides the falling volumes on account of the sharp decrease in international oil prices during the year. However, an increase in finance costs due to a higher average policy rate adversely impacted the bottom line. The decline in gross profit and increase in finance cost was partially offset by lower exchange losses and higher interest income recovered from the power sector during the year.

PSO reported record earnings for FY21 with a rebound in profitability that comes in contrast to a loss in FY20. PSO was able to reverse the trend of falling revenues with the FY21 topline growing by 9 percent year-on-year due to volumetric growth and price increase. A key feature for FY21 was the return of furnace oil in the fuel mix as its demand and usage increased during the year. PSO’s overall volumes increased by 24 percent year-on-year with the three key products: petrol, diesel, and furnace oil climbing by 21, 21, and 37 percent year-on-year.

This also resulted in the rise of market share for PSO from 44.3 percent in FY20 to 46.3 percent in FY21. The while oil segment touched the highest-ever volumes despite the shrinking jet fuel industry where PSO’s market share rose again from 44 percent in FY20 to 45 percent in FY21. PSO’s market share in petrol increased from 38.7 percent in FY20 to 41.3 percent in FY21. Its diesel (HSD) market share increased by 140 basis points to 47.2 percent. Its market share for FO grew from 46 percent to almost 52 percent in FY21.

PSO’s volumetric sales growth is partially attributed to upgraded fuel quality; PSO introduced Euro 5 standard petrol, diesel, and HOBC during the year. During the year, the company commenced its first EV charging facility in Islamabad and focused on infrastructure as well as technological development where it increased storage capacity, retail presence, etc.

PSO’s earnings benefitted from an increase in other income that comes from growth in late payment surcharge income; no noticeable rise in administrative and distribution costs; and a decline in finance costs due to weaker interest rates.

In FY22, the oil marketing companies saw robust sales of petroleum products, especially during the first nine months. Higher volumes as well as higher petroleum product prices were the key factors behind PSO’s revenue growth in FY22. The financial performance of Pakistan State Oil Limited for FY22 shows that the largest oil marketing company saw a whopping increase in its profitability, which stemmed a heavy topline. The volumes for PSO’s products MS, HSD, and FO grew by 15 percent, 26 percent, and 62 percent, respectively – year-on-year. Noticeable growth in volumes also helped PSO grow its market share in all three products.

PSO’s gross profit growth was whopping primarily due to significant inventory gains on the back of increasing oil prices. Other income increased by 32 percent year-on-year owed to higher interest received on delayed payments. On the expenses side, the distribution and marketing expenses remained lower. However, staggering growth in other expenses (approximately three times) was most likely due to exchange losses. Finance cost declined in FY22 due to a lower late payment surcharge.

PSO’s operating profits grew by more than 183 percent year-on-year in FY22 with support from other income as well as the top line and gross profit growth. PSO’s bottom line surged by almost three times in FY22 where much of the growth came from volumetric growth and inventory gains, reviving consumption and demand of petroleum products, price increase, higher other income as well as the company’s increased retail footprint and market share.

PSO in 1QFY23

The OMCs saw robust sales of petroleum products in most of FY22. Higher volumes as well as higher Pakistan State Oil also saw its volumetric sales during 1QFY23 fall by around 22 percent year-on-year. Product-wise, the decline in volumes for furnace oil, diesel, and petrol stood at 22, 24, and 28 percent year-on-year, respectively for 1QFY23.

Despite the decline in volumes, PSO’s revenue growth in 1QFY22 stood at 88 percent year-on-year, which was due to rising petroleum product prices. The company’s market share increased by 1.3 percent in white oil and 1.6 percent in black oil, reaching 48.8 percent and 65.6 percent respectively. However, the gross profit declined by 70 percent year-on-year, and gross margins also fell significantly, which was due to significant inventory losses incurred during the quarter.

PSO’s operating profits fell by 53 percent year-on-year in 1QFY23 despite the growth in other income that came from higher interest rates. PSO’s bottom line further came under pressure from an eight times increase in finance cost on account of ballooning short-term borrowings. The company’s notice to the shareholders also includes the concern raised by the board over mounting trade receivables, specifically due to the significant increase compared to June 30, 2022. Overall, the company’s profits for 1QFY23 fell by 90 percent year-on-year.