Pakistan State Oil

The downstream oil and gas sector has been facing the challenge of falling consumption and sales much before COVID-19 started rearing its head. Part of this has to do with change in the energy mix that has affected both refineries and oil marketing companies; their revenues have shifted away from the furnace oil that once made the single largest contribution. LNG has been replacing FO in the power sector and retail fuels like diesel and petrol growth that took off in FY13 has also slowed down. In the same vein, Pakistan State Oil (PSX: PSO), the largest player in the industry has too seen its black oil market shrinking, and white oil market growth consolidating.

PSO is the country’s largest OMC and is engaged in marketing and distribution of all petroleum products: Motor Gasoline (Mogas), High Speed Diesel (HSD), Furnace Oil (FO), Jet Fuel (JP-1), Kerosene, CNG, LPG, Petrochemicals and Lubricants. The leader of the downstream oil and gas sector also imports products like Mogas, HSD JP-1 and FO based on the demand.

With 3500 plus outlets across Pakistan, PSO also has the largest distribution network through which it serves both retail and bulk customers. It also has the largest storage capacity in the country, which is approximately a million metric tons, representing 68 percent of the total storage capacity owned by all the OMCs.

Shareholding and investments

Government of Pakistan holds the highest shareholding making up 22.47 percent shares of PSO, according to the latest pattern of shareholding; NBP Trustee Department has 14.88 percent shareholding. The firm has strategic investments including 12 percent in Parco’s White Oil Pipeline Project; 53 percent in PRL, which was increased in FY19 from the previous 22.5 percent; 22 percent in Pak Grease Manufacturing Company Limited; 49 percent in Asia Petroleum Limited; 62 percent investment in Joint Installation of Marketing Companies, and 50 percent in new Islamabad airport fuel farm as per the company’s FY19 annual report.

PSO’s recent financial performance

FY17 was a better year for PSO as it witnessed a growth of 8 percent on a year-on-year basis, compared to a growth ranging between -9 percent to 4 percent in the previous six fiscal years. Rise in volumes along with higher prices and the RLNG business led to 30 percent year-on-year surge in the PSO’s sales revenues and 77 percent growth in the bottom-line. Other factor that lifted the bottomline was the reduction in the finance cost.

PSO’s volumetric growth continued in FY18 in white oil segment, especially motor spirit and HSD even though the retail segment faced stiff competition from new entrants, and substantial discounts offered by competitors and the influx of smuggled products like diesel from Iran. However, PSO’s fuel oil volume declined by 29.6 percent year-on-year in FY18. owing to industry dynamics. i.e. government’s strategy of switching priority (merit order) of existing power plants to RLNG/natural gas from furnace oil. The company’s net revenues increased by 20 percent, year-on-year, while profit after tax went down by 15.2 percent year-on-year primarily on account of one-time reversal of deferred tax asset; decrease in other income by 32.7 percent year-on-year; and increase in other expenses by over 40 percent due to higher exchange losses on account of significant currency depreciation.

FY19 was a challenging year for the oil marketing segment due to the rising competition and economic contraction. While competition increased, margins also squeezed due to falling liquid fuel volumes by the sector. The decline continued for furnace oil due to curtailment drive in the country, while the retail fuels especially 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 sectors performance including that of PSO.

PSO posted a year-on-year increase of 9 percent in its net revenues in FY19. Despite an overall decline of around 38 percent year-on-year in volumetric sales, PSO’s revenues posted modest increase versus a decline by most of the other oil marketing companies. This was due to a rebound in the the company’s volumes in the last quarter of FY19. the company’s earnigns slipped by 32 percent, which came from higher inventory losses as well as lower volumes. Plus lower other income and higher other expenses  and finance cost weighed heavy on its proftability due to exchange losses from currency depreciation and high interst expense on borrowings.

PSO’s consolidated accounts for FY19 showed that other income grew staggeringly by over two times likely because of gains on the acquisition and consolidation of PRL after PSO acquired 52.67 percent stake in the refinery during the year.

PSO in 9MFY20

9MFY20 for theOMC sector was wounded by the coronavirus outbreak and the resulting lockdown as consumption of petroleum products took a road downhill. However, as perr the company’s quarterly report PSO was able to regain lost market share with an increase of 2.4 percent in motor gasoline to stand at 38.8 percent, and 5.8 percent in diesel to stand at 43.4 percent in 9MFY20. Its overall market share in white oil stood at 42.9 percent versus 39.2 pecent in 9MFY19.

However, the company’s profitability was marred by crashing oil prices in March 2020, stagnant demand due to slowing economy as well as the COVID-19 outbreak and the resultant lockdown. Earnings for 9MFY20 declined by almost half , while the 3QFY20 witnessed loss after tax or Rs3.4 bilion versus profit of Rs1.67 billion in 9MFY19. Significant inventory losses was a key factor due to prices crash in the crude oil market ,which also resulted in price decline for the petroleum products like motor spirit and high speed diesel. Higher operating costs and high finance cost in 3QFY20 also ate away the margins.  Growth in finance cost is a constant battle for PSO due to mounting circular debt and resulting increase in short term borrowings, while exchange losses also impacted earnings in the latest quarter. Loss incurred in 3QFY20 affected the overall profitability of PSO.

Outlook

COVID-19 has destroyed demand for petroelum products. PSO was already facing liquidity crunch which has worsened after the pandemic.However, the company can pin hopes to two recent events: one, the lockdown has been eased, which will bring back some demand in the last quarter of FY20; second, the govenrment has finally issued Sukuk II, which would bring some respite to the company’s liquidity miseries.

Earlier in April, the ECC also approved the immediate release of Rs29.7 billion in respect of exchange loss recievable by PSO on foreign currency loans taken. It also instructed immediate release of Rs60 billion by Power Division in favour of PSO. All these factors along with decline in interest rates are hoped to lift FY20 earning for PSO.