Pakistan State Oil (PSX: PSO) is the country's oil marketing giant involved in storage, distribution and marketing of various petroleum products. The OMC has motor gasoline, furnace, high speed diesel, kerosene, LPG, jet fuel, CNG, petrochemicals and lubricants in its portfolio of products.
PSO has the largest storage capacity of one million ton in the country, which is around 74 percent of the nation's total storage capacity. With the largest storage capacity, the OMC also has the hugest retail network that serve the automotive sector, and supplies fuel to the railways, aviation industry, armed forces, power projects and the agriculture sector.
FY15 highlights
During the year FY15, the key trends in the OMC segment were marked by an increase in petroleum consumption by almost five percent, year-on-year. The motor gasoline saw in increase of 22.5 percent year-on-year in FY15, while the growth in HSD was 7.5 percent, year-on-year. Industry consumption of furnace oil declined by around three percent year-on-year in FY15.
With an overall market share of over 56 percent, PSO continued to control the market with its share in the Black Oil and White Oil segments standing at 66.6 percent and 49.8 percent respectively. In FY15, PSO's sale volume of motor gasoline (petrol) grew by 18.5 percent year-on-year due to upsurge in demand of petrol on account of fall in prices of the same and shortage of CNG.
Moreover, high speed diesel (HSD) sales also saw an increase of 0.9 percent over similar period last year despite the stiff competition faced in the industry.
In terms of profitability, a major portion of FY15 was challenging for the oil marketing segment as the second and the third quarters were bruised by heavy inventory losses due to sliding oil price.
However, the fourth quarter came as a sigh of relief where the OMC segment and particularly PSO incurred inventory gains due to with respite in the oil price drop. PSO announced a 68 percent year-on-year decline in its earnings for FY15 primarily driven by the inventory losses, and partly due to increase in finance cost.
PSO in FY16 and 1QFY17
PSO came forth much better in its FY16 financial performance. The posted an improvement of 48 percent year-on-year in its earnings. The company ended FY16 with a market share of 55.9 percent that included a growth in the market share of Black Oil by four percent, and a decline of three percent in the market share of White Oil. Out of 13 million tons of petroleum products, the firm imported around 10 million - an increase of around six percent year-on-year. Growth in imports came from petrol and furnace oil.
The OMC's top line slipped south on account of lower oil prices, while its gross margins net margins improved significantly due to increased volumes and margins of white oil (revised in November 2014), coupled with reduction in operation and finance costs by 10 percent and 35 percent respectively. Finance cost reduced due to low interest rate environment coupled with maintains a mix of local and foreign currency borrowings throughout the financial year.
The firm's return on equity saw a significant increase from 8.43 percent in FY15 to 11.22 percent in FY16. This improvement came primarily from increased earnings, and reduction in finance cost by 35 percent.
PSO's positives in earnings were bogged down by decrease in other income (including share of profit of associates) mainly due to less receipt of interest from IPPs; increase in marketing and administrative expenses; and increase in taxation.
In 1QFY17, the oil marketing giant was able to post a 4.4 percent year-on-year increase in net sales, whereas its earning increased by around 35 percent year-on-year. In the first three months of FY17, PSO maintained its market leadership position with an overall market share (liquid fuels) of 56.5 percent. The increase in the firm's bottom line came from 35 percent growth year-on-year, witnessed in the liquid fuel sales (white oil and black oil). There was an increase of 2.9 percent in white oil sales and 31 percent year-on-year in furnace oil sales. Gaseous Fuels business has shown improvement with increase in sales volume of LPG by 134 percent and LNG by 107 percent year-on-year.
Moreover, an increase in inventory gains along with decrease in finance cost on account of decline in mark-up rates also contributed to increase in PAT. However, the said increase was partially offset by decrease in black oil margins due to reduced price of black oil and lower penal income from IPPs/PIA.
Outlook
While the OMC's profitability seems to be intact, the firm's no-dividend-announcement points towards some inherent risks on the horizon, as the settlement of circular debt and partial retirement of borrowings are both key to dividend payout. A key sign of piling receivables come from the fact that PSO after issuing warning to PIA for clearance of over Rs 15 billion dues for future jet fuel supply has expressed fears to maintain LNG supplies to SNGPL over payments.
On a positive note, the OMC seems to be investing into the retail segment what offers higher margins; the management in the latest AGM had apprised the shareholders about complying with the new standards and introducing higher RON grades petrol in the country. Just recently, PSO launched the superior quality fuel products namely Altron Premium and Altron X High Performance nation-wide.
PSO's share price has been keeping up with the benchmark index, outperforming at more instances. Company's share price is sensitive to some key factors like sales volumes, international oil prices, the circular debt finance cost and currency devaluation. Going forward, it will also be affected by some firm specific factors like the development in the LNG business, and any concrete development on diversification into new projects by the firm, which may lead to a positive impact on share price.
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