Oil marketing companies have seen a drastic change in their sales over the last year with furnace oil taking a back seat and retail fuels growth picking up staggering pace along with LNG. Pakistan State Oil Company Limited (PSX: PSO), the largest OMC fuelling the nation for the past many years, has also seen a shrink in its black oil market while volumes have increased in the white oil market. The company is engaged in marketing and distribution of various POL products including Motor Gasoline (Mogas), High Speed Diesel (HSD), Furnace Oil (FO), Jet Fuel (JP-1), Kerosene, CNG, LPG, Petrochemicals and Lubricants. It also imports products based on the demand. These include Mogas, HSD, JP 1 and FO as and when required.
With 9 installations and 23 depots located across the country, PSO's storage capacity is the largest in the country and is approximately a million metric tons, representing 68 percent of the total storage capacity owned by all the OMCs.
PSO also has the largest distribution network in the country comprising of 3,754 outlets out of which 3,565 outlets serve the retail sector and 189 outlets serve its bulk customers. PSO also operates 26 company-owned and company-operated (Co-Co) sites serving the retail sector; and fuels more than 2,000 industrial units, business houses, power plants and airlines.
Pattern of shareholding and share price
PSO's shareholding is divided such that the Government of Pakistan holds around 22.47 percent; NBP Trustee Department has over 15 percent shareholding. A breakup of the shareholding at PSO is given in the table
The firm has strategic investments including 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.
The company's share price performance has been under pressure of late when compared to the benchmark index primarily due to the resurgence of the circular debt and the rising receivables besides the decline in October when the stock went ex-dividend.
Financial performance FY17
Being the year of retail fuels, FY17 was the year where PSO took the lead and became the first OMC to introduce the higher grade RON environment-friendly gasoline brands Altron Premium and Altron X High Performance. In FY17, PSO also introduced Action+ Diesel, a superior quality and environment friendly Euro-II compliant diesel. This was followed by other OMCs joining the giant in moving up the product ladder.
Amid new product lines introduction, PSO saw its sales volumes witness an increase of around 8 percent compared to a growth ranging between -9 percent to 4 percent in the previous six fiscal years. Increase in sales volumes along with higher prices led to 30 percent year-on-year surge in the firm's revenue. Its growth in top-line also came from the RLNG business, which was balanced by a decrease in furnace oil volumes.
Demand for petroleum products and monthly volumetric sales numbers from Oil Companies Advisory Council (OCAC) show that PSO has seen its motor gasoline and high speed diesel volumes grow, while furnace oil volumes have taken a breather. This has been due to the policy of cutting the furnace oil consumption and increasing LNG usage in the power sector. However now that the summer and peak season for power demand has begun, the government has lifted its ban on the import of furnace oil and has asked PSO to import FO for coming months.
Even amid changing oil dynamics and market share, PSO continues to lead the market with 54.8 percent market share. Market share of Black Oil that comprises of furnace oil rose to 73 percent from 70.5 percent in FY16, whereas the market share in White Oil (Mogas, HSD, SKO, and Jet Fuel) stood at 43.9 percent versus 46.8 percent. Its retail network expanded with the addition of more than 60 New Vision Retail Outlets, whereas PSO achieved 12.5 percent increase in FO sales to the power sector on a year-on-year basis. Its LNG business continued with 58 LNG vessels supplied during the year carrying 186,672,980 MMBTU. On an average, 400 MMCFD of RLNG was supplied to Sui Northern from Jul 2016 up to Jan 2017. It was further ramped up to 600 MMCFD from Feb 2017.
Rise in PSO's net revenues was the prime reason for the 77 percent increase in PSO's bottom-line for FY17. Other factors that lifted the bottom-line were a reduction in the finance cost. On the liquidity side, the company continues to face the circular debt issue. In FY17, cash to current liabilities deteriorated by 25 percent for PSO mainly due to increase in current liabilities on account of higher short term borrowings. The firm's inventory turnover ratio decreased by 7 percent in FY17 due to increase in stock in trade by 30 percent, which was partly offset by increase in sales by 21 percent. Debtors turnover ratio increased by 2 in FY17 due to more proportionate increase in sales as compared to trade debts, whereas creditors turnover ratio increased by 22 percent primarily due to increase in purchases. PSO's operating cycle witnessed an increase by 8 days mainly due to timely payments made by the firm to maximize product upliftment from local refineries.
9MFY18 performance
The shuffle in sales mix continued in FY18, and PSO has been seen to suffer from the loss of furnace oil. 9MFY18 for PSO showed a 7 percent year-on-year decline in after tax profits. The decline in profits was mainly led by inventory losses versus inventory gains in 9MFY17. In the 3QFY18, the profits were up by 14 percent year-on-year. The firm's profit margins were up on the back of incremental volumes of white oil and higher margins with significant contribution from HSD.
Outlook
The OMC sector is experiencing increased competition. Though PSO retains market leadership position, it has seen its market share being eaten away by smaller new players. Its overall market share in FY17 at 55 percent was lower compared to 65 percent in FY11-12.
However, the firm plans to combat this with increased capital expenditure; it has a planned capex of around Rs 40-45 billion over the next three years to do this. The OMC also plans to secure its supply chain through backward integration by doubling the refining capacity of PRL.
However, the circular debt continues to haunt PSO and the receivables build-up shows no respite. PSO's receivables had crossed Rs 300 billion by the end of December 2017 and the rise in receivables can impact the firm's upcoming capex with regards to securing market share. If the government disburses another Rs 100 billion to address the circular debt, the company might see a slowdown in its receivable build-up.
Moreover, FO phase out is a good omen for the company as it will get rid of cash flow issues. PSO also has plans to convert its FO storage to HSD and MS storage to save itself from inventory losses going forward.
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PSO-Pattern of Shareholding as at June 30, 2017
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Categories of Shareholders' %
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Members-Board of Management, Chief Executive Officer and their spouse and minor children 0.01
Associated Companies, Undertakings and related parties
Government of Pakistan 22.47
GOP's Indirect Holding:-PSOCL Employee Empowerment Trust 3.04
NIT and ICP 0.09
Banks, Development Financial Institutions, Non-Banking Financial Institutions 4.94
Insurance Companies 8.47
Modarabas and Mutual Funds 16.25
Shareholders holding 10% or more:
NBP, Trustee Department 15.01
General Public:
Resident 13.9
Non-resident 0.38
Others:
Non-Resident Companies 7.2
Public Sector Companies & Corporations and Joint Stock Companies 6.98
Employee Trusts/Funds etc 1.26
100
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Source: Company accounts
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Pakistan State Oil (PSO)
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FY12 FY13 FY14 FY15 FY16 FY17
Profitability
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GP margin % 2.86 2.64 2.61 2.06 2.49 3.39
NP margin % 0.75 0.98 1.55 0.62 1.33 1.66
ROA % 2.6 4.48 5.86 2.03 3 4.64
ROE % 18.74 20.84 27.75 8.43 11.22 19.72
ROCE % 47.52 41.29 50.73 25.43 23.96 31.79
Turnover
Inventory turnover (x) 13.55 12.2 16.33 19.05 17.83 16.53
Debtor turnover (x) 5.5 16.9 8.04 6.16 5.08 5.16
Creditor turnover (x) 5.08 7.77 8.65 10.54 9.17 11.19
Total asset turnover (x) 3.93 4.11 4.31 3.12 2.65 2.98
Fixed asset turnover (x) 200.39 226.77 246.04 181.35 138.98 160.93
Investment
EPS (Diluted) Rs 33.34 46.52 80.31 25.53 37.81 67.08
Price earning (x) 4.47 6.3 4.84 15.11 9.93 5.77
Dividend yield % 3.18 2.18 2.31 2.59 3.33 6.97
Liquidity and leverage
Interest Cover ratio (x) 2.17 3.53 4.45 2.09 3.28 5.95
Current (x) 1.15 1.03 1.09 1.1 1.12 1.31
Quick Ratio (x) 0.85 0.54 0.79 0.87 0.91 1.07
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Source: Company accounts
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PAKISTAN STATE OIL
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Rs (mn) 9MFY18 YoY 3QFY18 YoY
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Net sales 744,639 18% 226,286 4%
Cost of products sold 715,727 19% 216,104 3%
Gross profit 28,912 7% 10,182 10%
Other Income 5,081 -37% 2,112 24%
Operating costs 10,139 6% 3,089 6%
Profit from operations 23,853 -6% 9,204 15%
Finance Cost 3,686 -15% 1,907 28%
Share of Profit of associate 266 -50% 56 -67%
Profit before tax 20,433 -6% 7,353 9%
Taxation 7,209 -4% 2,651 3%
Profit after tax 13,225 -7% 4,703 14%
Earnings per share (Rs) 40.56 14.42
Gross margin 3.88% down 41 bps 4.50% up 27 bps
Operating margin 3.20% down 84 bps 4.07% up 39 bps
Net margin 1.78% down 47 bps 2.08% up 18 bps
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Source: PSX
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