Fluctuations in international oil prices have rendered the performance of Oil Marketing Companies (OMCs) unpredictable in terms of productivity. While the crude oil has again receded to below $70 per barrel owing to slowdown in demand from US market, the future trend of the oil prices cannot be accurately predicted.
Profits are directly linked with the international oil prices, therefore, any up or down, will affect the industry's performance accordingly. The consumption pattern has also become unusual. Major transport-led categories recorded decline in oil consumption, while the furnace oil consumption increased considerably.
Pakistan State Oil came into existence in 1976 when the government merged PNO (Pakistan National Oil) and POCL (Premier Oil Company Limited) into SOCL (State Oil Company Limited) and named it as Pakistan State Oil Company Limited (PSO). It is the largest oil marketing company of Pakistan with a market share of approximately 68%. Continuous improvement, innovation, along with diversification has enabled PSO to enrich its market share. It has strategic investments in refining and distribution companies such as Asia Petroleum Limited, Pak Grease Manufacturing Company, Pakistan Refinery Limited and White Oil Pipeline Project, which give it a strong backing in terms of procuring inventory.
With an extensive storage capacity of 860,000 metric tons, the company has 3,700 retail outlets across the country while more to come in future. Apart from this, PSO also has 240 CNG stations in more than 30 cities and more in the pipeline since its policy formulation in 1995. It is the first OMC to commission a CNG facility at its retail outlet in January 1996. Along with CNG, PSO is also active in the LPG domain. PSO generates over 18,000 metric tons of LPG in sales volume/annum, supplying the product in all corners of the country with the brand name 'PakGas'.
HIGHLIGHTS (FY09)
Mentioned below, are the highlights of the FY09 for PSO:
* PSO sold 7 million barrels of furnace oil, which is the highest in the past 8 years
* Supply to the power sector despite the liquidity crunch and the circular debt
* Imported 3.4 million tons of High Speed Diesel and 5 million tons of furnace oil - constituting 90% of the country's POL imports
* Contributed Rs 161 million to the national exchequer in the form of corporate taxes, excise duties, sales tax, import duty, PDL and dividends.
* Contributions to various charities and assistance to the Swat IDPs.
FINANCIAL PERFORMANCE - 2003-09
An overview of the liquidity position of the company shows that the liquidity has dipped by 13.7% from 1.24 in FY08 to 1.07 in FY09. This problem with liquidity was proactively addressed by PSO as they introduced various strategies to ensure a better match between the current assets and current liabilities of the Company. Furthermore, PSO recovered Rs 167 billion from the power sector and another Rs 39 billion on account of the Petroleum Development Levy (PDL) from the GoP. The scenario is demonstrated in the chart below.
Moving forth, an assessment of the profitability shows that the company earned Rs 719 billion revenues in FY09 compared to Rs 583 billion in FY08. This increase can be accounted to the heavy reliance on PSO for provision of furnace oil. However, despite the higher sales the loss after tax stood at Rs 6.7 billion in FY09 vis-a-vis a profit of Rs 14 billion in FY08. It was due to this that the Gross Profit Margin crashed from 5.15 in FY08 to 0.42 in FY09. The impact on Net Profit Margin was more crucial by all standards as it plunged from 2.41 to -0.93 owing to heavy inventory losses and exorbitant financial charges.
Financial charges escalated by 356% between FY08 and FY09 as they rose from a previous Rs 1.6 million to Rs 6.3 million. The virtually four-fold increase in the financial charges during the period under observation was due to the severe circular debt that had accumulated. Return on Assets (ROA) and Return on Equity (ROE) both plummeted from 11.06 to -4.37 and from 45.39 to -32.10, respectively. The YoY decline in both the returns can be attributed to the loss after tax.
An assessment of the entire picture shows relatively stable results in the last two quarters of FY09 on the back of stabilization in the international oil prices around $60-$70 per barrel. Due to some semblance of stability, PSO posed an after tax profit of Rs 781 million in 3QFY09 followed by Rs 2,571 million in the last quarter of FY09. In addition to the heavy inventory losses and the steep financial charges recorded during the FY09, the devaluation of Pak rupee was another significant contributor to the fall in profitability. The 19% depreciation in the Pak rupee against the US dollar during FY09 aggravated the decline in the profitability of PSO as the company imports approximately 80% of the country's POL imports.
The total asset turnover rose from 4.59 to 4.60 whereas the sales to Equity ratio increased from 18.83 to 34.46. These increases can be attributed to a 23.3% YoY increase in the Gross Sales of PSO, which as mentioned earlier was the highest in the case of furnace oil in the past 8 years of the company records. Debt to Asset Ratio rose from 75.64 in FY08 to 86.42 in FY09. Debt to Equity Ratio and the long-term debt to equity ratios both rose with the debt to equity ratio growing by 104% as it rose from 310.5 to 635.10.
This spike in the debt to equity ratio was due to severe accumulation of circular debt on accounts like Hubco, Kapco, Pepco and PIA, who defaulted on their payments and created acute liquidity problems. Receivables from these companies amounted to Rs 79 billion and in an attempt to service its obligations to refineries, PSO has to resort to short-term borrowing of Rs 64 billion. However, this cycle of circular debt led to excessive short-term borrowing and piling of financial charges are the factors, which tarnished the profitability of the company. The Time Interest Earned (TIE) ratio crashed from 16.4 to -0.89 due to the hike in financial charges on account of short-term borrowings to meet due financial obligations.
Lastly, there has been a 78% YoY decline in the dividend per share. Due to the circular debt and the cumulative loss by the fourth quarter, the DPS fell from Rs 23.5 in FY08 to Rs 5 per share in FY09. There was no interim dividend in the fourth quarter of 2009. Total dividend amount paid out during FY09 amounted to Rs 858 million, which was a considerable drop from FY08 subsequent to net loss for the year. Likewise, Earnings Per Share (EPS) also experienced an enormous fall from the previous Rs 81.94 per share to -Rs 39.05 in FY09. Consequently, the Price Earnings Ratio fell from 4.92 in FY08 to -5.47 in FY09.
Book Value Per Share and Market Value both fell by large amounts due to the overall diminishing profitability experienced by PSO in FY09 largely due to the performance of the economy and the contribution of circular debt coupled with currency depreciation. Book value fell from Rs 180.5 to Rs 120.6 whereas the Market Value declined by 47% from Rs 430 in FY08 to Rs 213.65 in FY09.
FUTURE PROJECTS
The following are the projects in the pipeline that are soon to be launched by PSO to provide a wider range of services to its stakeholders:
* Provision of E10 Gasoline to customers in the major cities of Pakistan near future. E10 has 10% Ethanol content mixed with 90% Petrol as an initiative to gradually shift towards alternative energy sources and provide a cheaper means of fuel for customers. Furthermore, it will help to reduce the import bill in the long run, which is a crucial need.
* Initiated Research and Development in bio fuels in association and consultation with various bodies at the national level to try and venture into this new field as an attempt to save foreign exchange in the times to come.
* Implementation of Business Process Re-engineering in order to create a paperless environment. This initiative incorporates the following measures that have been undertaken:
1. Electronic Approval Systems
2. Procurement Process Automation
3. Automation of Budget Appropriation
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Financial Ratios
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Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09
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LIQUIDITY
Current Ratio 1.25 1.25 1.24 1.24 1.22 1.24 1.07
ASSET MANAGEMENT
Inventory Turnover 19.70 13.10 11.20 11.50 11.70 12.70 13.96
Days Sales Outstanding 6.63 10.96 9.63 12.09 11.91 20.93 40.30
Operating Cycle 26.33 24.06 20.83 23.59 23.61 33.63 54.26
Total Asset Turnover 6.38 4.60 4.87 5.02 5.50 4.59 4.69
Sales/Equity 15.80 12.63 14.66 16.94 19.63 18.83 34.46
DEBT MANAGEMENT
Debt to Asset Ratio(%) 59.60 63.58 66.76 70.34 71.98 75.64 86.42
Debt to Equity Ratio 147.55 174.56 200.81 237.14 256.93 310.50 635.10
Times Interest Earned 23.60 34.12 25.20 13.01 6.86 16.41 -0.89
Long-term Debt to Equity
(%) 10.40 10.59 11.55 11.05 11.52 7.78 12.11
PROFITABILITY (%)
Gross Profit Margin 4.34 4.70 5.42 4.88 2.98 5.15 0.42
Net Profit Margin on Sales 1.95 2.16 2.23 2.13 1.14 2.41 -0.93
Return on Assets 12.46 9.93 10.86 10.72 6.28 11.06 -4.37
Return on Equity 30.85 27.27 32.67 36.15 22.40 45.39 -32.10
MARKET VALUE
Earnings Per share 23.50 24.56 32.98 43.87 27.30 81.94 (39.05)
Price/Earnings 10.34 10.95 11.70 8.05 11.56 4.92 -5.47
Dividend per share 13.93 16.76 26.00 34.00 21.00 23.50 5.00
Book Value 76.16 90.05 100.94 121.35 122.08 180.53 121.68
Average Market Price 243 269 386 353 315.53 403 213.65
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