Pakistan State Oil

Pakistan State Oil (PSX: PSO) is the largest oil marketing company (OMC) in the country, commanding the highest market share in the sector. The company plays a pivotal role in the marketing and distribution of various petroleum products, including motor gasoline (Mogas), high-speed diesel (HSD), furnace oil (FO), jet fuel (JP-1), kerosene, compressed natural gas (CNG), liquefied petroleum gas (LPG), petrochemicals, and lubricants. Additionally, PSO imports key products such as Mogas, HSD, JP-1, and furnace oil to meet market demand, supported by the most extensive distribution network in the country.

To stay ahead in a dynamic energy landscape, PSO has strategically diversified its investments, targeting emerging opportunities while mitigating potential risks. These investments encompass infrastructure development, renewable energy projects, exploration and production ventures, and advancements in technology. This forward-looking approach positions PSO as a key player not only in the traditional energy sector but also in the evolving realm of sustainable and innovative energy solutions.

Historical financial performance

The downstream oil and gas sector experienced significant fluctuations in demand over recent years, largely due to the impacts of COVID-19 and shifts in the energy mix, particularly moving away from furnace oil to coal and RLNG. As the industry leader, PSO has consistently driven sector trends. In FY17, the company achieved 8 percent growth compared to -9 to 4 percent in the preceding six years, supported by higher volumes, prices, and the RLNG business, resulting in a 30 percent increase in sales revenue and a 77 percent surge in profits.

Volumetric growth continued in FY18, particularly in motor spirit and HSD, though furnace oil volumes dropped by 29.6 percent due to the energy transition. While topline increased by 20 percent, profits declined by 15.2 percent due to a one-time deferred tax reversal, lower other income, and higher exchange losses.

FY19 proved challenging for OMCs amid an economic slowdown, rising competition, falling margins, and declining sector volumes, especially for furnace oil and diesel. High interest rates, exchange losses, mounting circular debt, and receivables further pressured performance. Despite a 38 percent decline in overall sales volumes, PSO’s revenues rose modestly in the last quarter due to a rebound in volumes. However, profits fell 32 percent, weighed down by inventory losses, lower volumes, and finance costs. A key highlight of FY19 was PSO’s acquisition of a 52.67 percent stake in PRL, boosting consolidated earnings.

In FY20, furnace oil volumes continued to decline due to RLNG’s growing dominance, but PSO managed growth in petrol volumes despite industry-wide demand contraction. Diesel volumes were hit by weak industrial and construction activity and reduced transportation movement. Gross profit declined due to inventory losses from falling international oil prices, while higher finance costs further impacted profitability. This was partially offset by lower exchange losses and higher interest income from power sector recoveries.

FY21 marked a strong rebound for PSO, reversing its previous year’s losses with record earnings. Revenues grew by 9 percent, supported by volumetric growth and higher prices. Furnace oil reentered the energy mix, driving a 24 percent rise in overall volumes, with petrol, diesel, and furnace oil increasing by 21, 21, and 37 percent, respectively. Improved fuel quality, including the introduction of Euro 5 standard products, supported sales. Higher other income from late payment surcharges and lower finance costs due to declining interest rates also contributed to profitability.

PSO delivered exceptional growth in FY22, driven by a robust topline and significant inventory gains from rising oil prices. Product volumes for MS, HSD, and FO grew by 15, 26, and 62 percent, respectively, helping PSO expand its market share. Gross profit growth was substantial, bolstered by increased other income from delayed payment interest, which rose by 32 percent. Operating profits soared by 183 percent, and bottom-line earnings nearly tripled, fueled by volumetric growth, inventory gains, higher prices, and an expanded retail footprint, cementing PSO’s dominance in the market.

PSO’s topline growth was visible in FY23. Revenues were seen increasing by 38 percent year-on-year. This rise in revenues on a year-on-year basis in FY23 however, was solely due to higher selling prices of petroleum products because the volumetric sales of key petroleum products like motor spirit, diesel, and furnace oil declined by 17 percent, 25 percent, and 64 percent year-on-year, respectively. While the oil marketing companies had seen robust sales of petroleum products in most of FY22, the petroleum sales were the weakest in the last 5 years in FY23 due to the economic downturn, political turmoil, and flash floods.

PSO’s gross profit also took a hit in FY23 due to inventory losses amid weaker sales. The gross margin for the OMC settled at 2.21 percent in FY23 - down by more than 400 basis points year-on-year. Despite significantly lower reversals of provisions on financial assets and lower other expenses, the company’s operating margins fell due to weaker gross profits.

PSO also witnessed a decline in other income of about 46 percent year-on-year during FY23, given the lower interest received on delayed payments. Another bulkiness on the OMC’s bottom line was the finance cost that surged by 8 times in FY23, along with a share of loss from associates in FY23 versus profit in FY22. The OMC reported an unconsolidated profit of Rs12 billion in FY23 versus Rs184 billion in FY22 – a decline of 93 percent.

PSO’s topline growth stood at 7 percent year-on-year in 1QFY24. The growth in PSO’s revenues is due to higher selling prices of petroleum products as well as a jump in motor gasoline and high-speed diesel volumes by 7 percent and 8 percent, year-on-year respectively, due to low base impact from last year. Meanwhile, furnace oil volumes dwindled by 87 percent year-on-year during the quarter.

The company’s gross profit was seen growing by 9 times, while the gross margins were up from less than one percent in 1QFY23 to 6.35 percent in 1QFY24. The rise in gross margins was due to massive inventory gains due to substantial and continued hikes in fuel prices.

PSO witnessed a decline in other income of about 48 percent year-on-year during 1QFY24, likely due to lower interest received on delayed payments. Finance costs were also seen increasing by more than double due to higher short-term borrowings. However, PSO’s bottom line was able to absorb the higher costs and post hefty earnings for the quarter, which is a complete turnaround from the previous quarter, when the company posted a loss (4QFY23).

PSO’s topline growth in FY23 increased by 38 percent year-on-year, driven solely by higher petroleum product prices, as volumetric sales of motor spirit, diesel, and furnace oil dropped by 17 percent, 25 percent, and 64 percent, respectively. The steep decline in sales volumes reflected the economic downturn, political instability, and flash floods, making FY23 the weakest year for petroleum sales in five years, following robust sales in FY22.

The company’s gross profit in FY23 declined due to inventory losses amid weaker sales, with gross margins falling to 2.21 percent, down over 400 basis points year-on-year. Despite lower reversals of financial provisions and reduced other expenses, weaker gross profits dragged down operating margins. Other income fell by 46 percent year-on-year due to lower interest on delayed payments, while finance costs surged eightfold. PSO also reported a share of loss from associates, contributing to a 93 percent drop in unconsolidated profit to Rs12 billion, compared to Rs184 billion in FY22.

PSO in FY24 and beyond

PSO demonstrated remarkable financial and operational performance in FY24, marked by a 180 percent year-on-year surge in earnings, despite some challenges in the preceding quarter.

PSO’s revenue grew by 5 percent year-on-year, reaching Rs3.6 trillion, driven by higher average selling prices for petroleum products, including Motor Spirit (MS) and High-Speed Diesel (HSD). This topline growth was achieved despite a 9 percent decline in sales volumes, with HSD and MS volumes decreasing by 8 percent and 1 percent, respectively, and furnace oil (FO) sales plummeting by 76 percent year-on-year. Consequently, the company’s market share edged down slightly, from 50 percent in FY23 to 49.3 percent in FY24.

Gross profit rose by 30 percent year-on-year, although gross margins remained relatively modest at 2.72 percent, reflecting inventory losses from fuel price volatility. A significant boost to profitability came from other income, which soared by 74 percent year-on-year, largely due to interest on delayed payments, particularly in 4QFY24, where other income increased fivefold. However, finance costs rose by 30 percent year-on-year, driven by higher short-term borrowings.

Looking ahead, PSO’s ability to sustain its profitability hinges on addressing circular debt issues and achieving a more balanced RLNG business.

In 1QFY25, the company faced significant headwinds from declining fuel prices, reduced volumes, and squeezed margins. Net profit dropped 82 percent year-on-year to Rs3.9 billion. Revenues contracted by 14 percent year-on-year due to reduced petroleum prices and a 15 percent decline in total sales volumes, with MS and HSD volumes falling by 15 percent and 19 percent, respectively. This was partly due to weakened domestic demand and the seasonal end of the Kharif sowing period.

Gross margins for 1QFY25 stood at 3.3 percent, down from 6.4 percent in the same period last year, as inventory losses persisted, albeit at a lower level than the previous quarter. Finance costs stabilized at Rs10 billion year-on-year, supported by improved liquidity from reduced receivables from Sui Northern Gas Pipelines Limited (SNGPL) and easing circular debt pressures. However, high taxation and reduced other income further constrained profitability.

PSO’s forward-looking strategy includes diversifying into renewable energy, alternative fuels, and EV infrastructure, alongside expanding storage and pipeline capacity. Additionally, its potential focus on fintech and non-banking financial companies (NBFCs) reflects a proactive effort to mitigate risks associated with declining traditional fuel consumption. Success in these initiatives will depend on effective management of inventory and finance costs, as well as resilience against fuel price volatility and margin pressures.