Shell Pakistan has a 100-year-old history in this part of the world, dating back to 1899 Asiatic Petroleum, the Far Eastern marketing arm of two companies: Shell Transport Company and Royal Dutch Petroleum Company began importing kerosene oil from Azerbaijan into the subcontinent.
When Pakistan came into being its name was changed to Burmah Shell Oil Distribution Company of Pakistan. In 1970, its 51% shares were transferred to Pakistani investors and its name was changed to Pakistan Burmah Shell (PBS) Limited. In February 1993, as economic liberalisation began and the Burmah divested from PBS, Shell Petroleum stepped into raise its stake to 51%.
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Year end: June 9mths'07 9mths'06 Chg. (Rs) Chg. (%)
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Net Revenue 84,420 86,486 (2,065) -2.4
Cost of products sold 80,555 79,900 655 0.8
Gross profit 3,866 6,585 (2,720) -41.3
Admin & marketing expenses 3,110 3,003 107 3.6
Distribution expenses 876 770 106 13.7
Other operating income 94 48 49 94.7
Operating (loss)/profit (42) 2,690 (2,733) -101.6
Financial charges 703 287 416 145.1
PBT (745) 2,404 (3,149) -131.0
PAT (220) 1,637 (1,856) -113.4
EPS (4.01) 29.87 (34) -113.4
Gross margin 4.6% 7.6%
Net margins -0.3% 1.9%
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Since then, Shell Petroleum Company successively increased its share, with the group now having a 76% stake in Shell Pakistan Ltd (SPL).
The company was announced loss after tax Rs 220m (EPS: Rs 4.01) in nine months 2007 as compared to profit after tax of Rs 1,637m (EPS: Rs 29.87) in nine months 2006, reflecting a significant decline of 113.4%. Although the company booked a profit after tax of Rs 149.4m (EPS: Rs 2.73) in 3rd quarter of 2007 as compared to Rs 444.7m (EPS: Rs 8.12) in the same period last year, the company faced unfavourable cumulative result due to loss incurred in the previous two quarters on the back of depressed international oil prices.
Net sales revenue of the company fell by 2.4% to Rs 84.4bn in nine months 2007 as compared to Rs 86.5bn in the same period last year due to 13.9% decline in sales of major product categories in nine months 2007 over nine months 2006.
Shell Pakistan is the second largest oil marketing company of Pakistan with a market share of 14%. The company witnessed a downfall in its performance due to the receding oil prices in the international market along with the accessibility of cheap substitutes that reduced the market share of the company in prominent categories. The sales trend has been erratic as well, which again can be attributed to the vacillating oil prices.
As evident from the graphs, its market share has declined in all of the categories. Although the furnace oil consumption posted a rising trend, the company was unable to capture significant sales in this category due to its limited distribution network as compared to PSO. As a result, the market share of Shell in this category dwindled to nominal 1%. Similarly, kerosene oil consumption also registered a decline in FY07 due to the shifting of the consumers to pipeline gas in rural areas thus leaving the company with a share of mere 11%. The company, however, was able to capture a share of 32% in JP, which can be attributed better supply arrangements with the partners. Thus the major contributing factor towards improved sales in FY07 came from this category.
Liquidity position of the company is not commendable as compared to other players of the industry. However, with the introduction of higher margin products, Shell has been able to enhance its performance level since FY05 owing to inauguration of White Oil Pipeline enabling better supply/transportation of oil across the country. As a result, oil stock increased significantly.
The 2nd half 2006 was the most challenging period that the whole industry faced. Short term loans increased manifold, hitting current liabilities and the current ratio of the company.
Shell always concentrates on shifting its portfolio towards high margin products. This strategy, therefore, has reaped enormous benefits for the company in terms of better sales, gross profit and net income. Rising prices of oil in the international market, also a contributory factor towards high profitability ratios that the company posted since FY03.
The 2nd half 2006, proved to be the most crucial year. The company recorded a net loss of Rs 369 million mainly because recession in the international oil prices. Moreover, reduced unit margins as a result of revision in government's pricing formula along with greater financial charges further impacted the profitability of the company. To date, the company has not been able to catch up with industry's profitability trend. Earnings for the full year are expected to be lower in the forthcoming years due to a squeeze in overall OMC margins following a revised oil pricing formula.
On account of large amount of short-term loans and consequently high interest expense, debt-to-asset ratio has been rising steadily while interest coverage strength (ie TIE ratio) has been diminishing.
With subsequent payment of interest and short-term loan, the debt paying ability of the company is expected to shrink further in future.
Shell does not rely on long-term loans as indicated by its much lower than average long-term debt to equity ratio.
Comparison with the industry reveals that the company has been relatively efficient as far as managing its assets is concerned. In line with the industry trend, operating cycle is extending which can be attributed to the unsold inventory (and low inventory turnover rate) owing to lower demand and higher prices of oil in the international market. However, the company is far more efficient in dealing with its debtors. Low level of debtors against high sales revenue is evident from its very low DSO.
Both sales/equity and total assets turnover ratios are somewhat erratic, thanks to the unpredictable oil prices, which kept the sales volume and the sales revenue wavering. Recently, both ratios have been on a lower side for the entire industry owing to a record slump in the oil prices trend.
The company has been able to post high earnings per share than other industry players. However, it recorded negative earnings in 2H06 due to escalating oil prices and slack demand for POL products, which make up the major earnings source for the company.
EPS of the company suffered a major setback in 2H06 due to a significant drop in petroleum demand, low sales volume and high inventory losses as well as decline in international oil prices. Moreover, modification in pricing formula undermined the unit margins along with higher financial charges reducing the earnings of the company further. Consequently the company has to compromise on cash flows resulting in lower dividends per share. Until recently, the net worth of the company has also recorded a positive trend and excels the industry average trend.
The future of the Oil Marketing Companies is unpredictable, mainly on the mercy of fickle oil prices owing to changing international political scenario. Any upturn or downturn will therefore have its own ramifications. Nevertheless, diversification into new products and aggressive marketing can prove to be profitable for the company.
In the FY07-08 budget, CED on motor gasoline and JP-1 was reduced by Rs 0.88 per/liter and Rs 0.06/litre respectively. This, however, will have a very negligible impact on the industry, as their volumes are relatively much lower and on MoGas, the government did not pass the benefit to the consumers and simply shifted the lost amount from CED into PDL.
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Mkt Share (%) PSO Shell APL
FY'07 FY'06 FY'07 FY'06 FY'07 FY'06
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High Speed Diesel 60.6% 59.0% 22.2% 23.4% 2.0% 2.7%
Furnace Oil 80.8% 78.3% 1.4% 3.3% 7.8% 11.0%
Gasoline 46.6% 45.5% 28.5% 30.7% 1.5% 1.5%
Kerosene 70.9% 63.5% 10.9% 13.6% 7.6% 5.3%
LDO 39.6% 48.7% 1.0% 2.2% 44.1% 33.0%
Lubes 30.0% 32.2% 42.4% 41.2% 0.5% 0.6%
JP - 1 (incl. exports) 52.1% 51.2% 32.7% 33.1% 8.5% 8.5%
Total 66.4% 61.6% 13.4% 16.8% 6.5% 7.3%
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SHELL PAKISTAN-KEY FINANCIAL DATA
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Income Statement (Rs '000) Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
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Total Revenue 77,822,817 79,180,350 98,422,690 117,262,519 57,897,395
Cost of Goods Sold 72,049,466 72,973,109 89,684,584 107,301,071 55,670,875
General & Administrative Expenses 3,794,361 3,806,007 3,454,308 3,807,932 2,018,974
Selling and Distribution Expenses 1,155,458 989,263 562,539
Operating Profit (EBIT) 2,089,314 2,413,251 4,720,962 4,958,759 -263,003
Financial Charges 51,480 73,817 330,941 398,009 498,762
Net Income Before Taxes 1,899,905 2,188,924 3,642,984 4,599,494 -761,765
Net Income After Taxes 1,254,997 1,508,014 2,451,070 3,108,469 -369,321
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Balance Sheet (Rs '000) Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
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Stores & Spares 24,227 22,184 16,366 28,865 27,953
Stock in Trade 2,826,981 4,536,965 6,608,167 9,979,886 8,165,744
Cash & Bank Balances 1,075,698 566,636 752,112 981,197 1,223,065
Total Current Assets 6,311,376 7,912,631 12,983,152 20,316,721 19,761,585
Total Non Current Assets 6,827,081 7,431,497 7,597,964 7,855,161 8,306,953
Total Assets 13,138,457 15,344,128 20,581,116 28,171,882 28,068,538
Total Current Liabilities 7,191,520 9,042,390 12,209,080 17,902,377 19,128,537
Long Term Liabilities 95,119 169,209 68,963 155,398 159,526
Total Liabilities 7,286,639 9,211,599 12,278,043 18,057,775 19,288,063
Paid Up Capital 350,658 350,658 350,658 438,323 547,904
Total Equity 5,851,818 6,132,529 8,303,073 10,114,107 8,780,475
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LIQUIDITY RATIO Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
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Current Ratio 0.88 0.88 1.06 1.13 1.03
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ASSET MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
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Inventory Turnover (Days) 11.54 18.21 21.39 27.12 45.10
Day Sales Outstanding (Days) 0.02 0.02 0.02 0.02 0.03
Operating Cycle (Days) 11.56 18.24 21.41 27.14 45.13
Total Asset turnover 6.77 5.87 5.42 4.72 2.33
Sales/Equity 15.20 14.69 13.43 13.13 7.45
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DEBT MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
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Debt to Asset (%) 55.46 60.03 59.66 64.10 68.72
Debt/Equity (Times) 1.25 1.50 1.48 1.79 2.20
Times Interest Earned (Times) 40.58 32.69 14.27 12.46 -0.53
Long Term Debt to Equity (%) 1.63 2.76 0.83 1.54 1.82
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PROFITABILITY (%) Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
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Gross Profit Margin 6.49 6.89 7.84 7.50 3.40
Net Profit Margin 1.41 1.67 2.20 2.34 -0.56
Return on Asset 9.55 9.83 11.91 11.03 -1.32
Return on Common Equity 21.45 24.59 29.52 30.73 -4.21
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PER SHARE Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
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Earning per share 35.79 43.01 55.92 70.92 -6.74
Price earning ratio 11.26 9.16 10.30 8.21 -73.31
Dividend per share 23.33 31.79 29.02 29.33 21.68
Book value 167 175 189 230.75 200.32
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