Pakistan State Oil

Fuelling the nation for the past many years, Pakistan State Oil (KSE: PSO) is the largest oil marketing company (OMC) in Pakistan that is 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 vastest retail network that serve the automotive sector, and supplies fuel to the railways, aviation industry, armed forces, power projects and the agriculture sector.

As evident from the table, almost 23 percent of the company's shares are held by the government. And around 37 percent is distributed among banks, DFIs, insurance companies and mutual funds. PSO's strategic investments include 12 percent in Parco's White Oil Pipeline Project; 22.5 percent in PRL; 22 percent in Pak Grease Manufacturing Company Limited; 49 percent in Asia Petroleum Limited; and 62 percent investment in Joint Installation of Marketing Companies.

Operational Performance FY16

PSO's market share in FY16 was 55.9 percent (around 13 million MTs) that included a growth in market share of 4 percent in Black Oil products and a decline of 3 percent in market share of White Oil products. PSO sourced the total volume through local refineries and imports. This included the sourcing of 10 million tons imported through 182 vessels. During the year, the OMC sector witnessed growth in imports, which was primarily seen in motor gasoline and furnace oil.

During the year, PSO was also actively participating to introduce 92 Ron Motor Gasoline and Euro-II 500 ppm High Speed Diesel. It has introduced its premium retail fuels, which has spurred smaller players to follow the leader.

In FY16, PSO also executed Long Term Sales Purchase Agreement (SPA) with QatarGas in February, 2016 for import of LNG under G2G arrangement, and according to its Annual Report FY16 it is now receiving 2.25 million tons per annum of LNG from QatarGas, which will be ramped up to 3.75 million tons per annum. PSO also executed a 5-year Term Agreement with Gunvor for the supply of 0.75 million tons of LNG per annum. As per the Annual Report, these contracts will novate in third quarter 2017 to PLNG.

The OMC's gross margins have increased by 22 percent in FY16 as compared to last year due to decrease in gross sales by 19 percent due to price reduction. Net margins too have increased by 82 percent mainly due to decrease in finance cost and other expenses.

Financial Performance FY16

A major portion of FY15 has been a challenging one for the oil marketing segment in the country; the second and the third quarters of FY15 were bruised by heavy inventory losses in the sliding oil price scenario. Overall, the firm's revenues dropped by 23 percent year-on-year in FY15, but volumes continued to grow steadily on the back of demand for petroleum products amid declining POL prices. The company increased its sales volume in petrol by 18.5 percent year-on-year as a result of an upsurge in demand fall in petrol prices and shortage of CNG as fuel for vehicles. However, decrease in gross profit was by 36 percent year-on-year on account of huge inventory losses due to sharp decline in oil prices by 46 percent, year-on-year. The firm's bottom line for FY15 was affected by decline in other income and growth in the finance cost.

FY16 portrayed a strengthening earnings position. In FY16, PSO posted an improvement of 48 percent year-on-year in its earnings. PSO has reported a notable decline in earnings in the third quarter of FY16 due to higher inventory losses, while the top line slowed down on account of lower margins on furnace oil and weaker petrol and diesel sales in the quarter.

In the annual performance, however, PSO has been seen to benefit from continuous fall in financial charges amid low interest rate environment, and also the slowdown in circular debt build-up due to stabilising crude oil prices, and timely payment against supplies by the oil company. While the OMC's top line slipped south on account of weaker margins particularly of furnace oil, its gross margins and operating margins in FY16 improved significantly, showcasing reversal of inventory losses. Net margins also improved due to lower finance cost.

Financial Performance 1QFY17

In 1QFY17, the oil marketing giant was able to post a 4.4 percent year-on-year increase in net sales. Where PSO has been underperforming the industry with respect to growth in retail fuels like petrol and diesel due to increased competition, the OMC saw an increase in furnace oil volumes and increased retail margins that lifted the overall top line growth in 1QFY17.

Better inventory gains along with top line growth lifted the firm's gross profits. PSO has been seen to benefit from continuous fall in financial charges amid low interest rate environment; in 1QFY17, the firm saw its finance cost fall by 32 percent year-on-year. The firm's earning increased by around 35 percent year-on-year in 1QFY17.

Outlook

In 1QFY17, the company was able to restrict market share erosion at 56.5 percent relative to 56.8 percent in the same period last year primarily on account of low margin black oil, while the market share of high margin retail fuels (i.e. HSD and Mogas) was down by 5 percent approximately. In the analyst briefing for the recent quarter, the management reiterated its focus of curtailing continual erosion of its market share in the white oil segment, which might include discounts similar to those offered by smaller players along with new sites in demand centers. In the analyst briefing, the management highlighted a probable novation of LNG import contract from PSO by June 2017.

While the OMC's profitability seems to be intact, the firm's no-dividend-announcement in 1QFY17 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.