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.
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COMPANY: PAKISTAN STATE OIL
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TICKER: PSO
SHARES OUTSTANDING: 171.52 MILLION
3 MONTHS (JUL-DEC 09) AVERAGE PRICE: PRS.306.8
MARKET CAPITALIZATION: PRS. 53.8 BILLION
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Apart from this, PSO also has 240 CNG stations operational in more than 30 cities and plenty more in the pipeline since its policy formulation in 1995. It is the first Oil Marketing Company (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'.
FINANCIAL PERFORMANCE IN 1H10
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Results Snapshot 1HFY10 1HFY09 Change
Rs. Million (%)
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Sales 350,211 334,662 4.65%
Cost of Products Sold 336,962 342,387 -1.58%
Gross Profit/(Loss) 13,519 (7,724) -
Operating Costs 5,056 6,802 -25.67%
Finance Cost 3,876 2,926 32.47%
Profit before tax 7,883 (16,034) -
Profit after tax 5,084 (10,049) -
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During 1H10 oil prices remained relatively stable maintaining an average of $71 per barrel. In comparison, a steep decline in oil prices was witnessed in international oil prices in 1H09, which had eroded the company's profitability considerably.
During the period 2Q10, the company recorded a revenue of Rs. 414 billion as compared to Rs. 392 billion in the corresponding period last year, an increase of 5.61%. Net income (post-tax) stood at Rs 3.18 billion as compared to Rs. 1.67 billion loss during the same period last year. In 1H10 company posted an after tax earnings of Rs. 5.08 billion as compared to Rs. 10.0 billion loss in 1H09.
Higher than expected other income on the back of interest income received from IPPs on its overdue receivables during 2Q10 was the key reason behind above-expected earnings.
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ASSET MANAGEMENT 1QFY10
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Inventory Turnover 3.36
Days Sales Outstanding 29.29
Operating Cycle 32.64
Total Asset Turnover 1.27
Sales/Equity 8.75
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Decent inventory gains amid higher ex-refinery prices and improved product handling also remained the contributors to this healthy bottom-line performance during 1H10.
The circular debt crisis continued to remain a serious problem for PSO. As on December 31, 2009, PSO's receivables stood at Rs. 83.9 billion. The company is currently in the process of recovering this amount from power utilities to ensure availability of products in the country and to reduce the impact of financial cost, which witnessed an increase of 32.5% from the last half year 2009. The company is incurring huge bank charges on bank loans, which it had to take up to combat the circular debt.
FINANCIAL PERFORMANCE 2003-1Q10
Liquidity: 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. In the short-term however, the current liabilities were covered by short-term borrowings. 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. These short and long-term measures were taken to streamline the liquidity stature of the company.
The strategies bore fruitful results as evident from the improvement in liquidity from 1.07 in FY09 to 1.08 in 1Q10, albeit, a small change only. The major increase in the current assets during the quarter was the 46.6% rise in stock in trade and this may have arisen due to the upward climb of international oil prices. Total current liabilities increased by a minimal 1.47% during the quarter.
ASSET MANAGEMENT
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 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 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 a step taken to meet the liquidity crunch caused by the severe circular debt that had accumulated.
PROFITABILITY
Net revenue of the first quarter FY10 stood at Rs 200 billion, 9.84% decline from the corresponding first quarter of FY09. However due to 17.06% lesser cost of sales from the same quarter, the company turned around the loss and posted a gross profit of Rs 6 billion in the quarter under review. The company reported a remarkable reduction in the operating expenses: only 33% of the operating expenses incurred in first quarter of FY09.
Higher financial charges in the wake of increased borrowing continue to mar the bottom-line performance of the company. In 1Q10, PSO incurred financial charges of Rs 1,572 million - about 47% higher when compared to 1Q09. The increased bank borrowing at Rs21.85bn, as on Sep 30, 2009, is solely attributable to the prevailing circular debt issue due to which the receivables of the company crossed Rs100bn during the quarter. The removal of power subsidy in the form of enhanced power tariff is also likely to help the company in reducing the rising debt level thus improving its liquidity position.
Overall the performance of PSO displayed a turnaround as profit margin stood at 0.95% with a post-tax-profit of Rs 1.9 billion.
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 in FY09. The YoY decline in both the returns can be attributed to the loss after tax.
PSO showed relatively stable results in the last two quarters of FY09 on the back of stabilisation 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 3Q09 followed by Rs 2571 million in the last quarter of FY09.
Return on Assets and Return on Equity stood at 1.21 and 8.30 in 1Q10.
In addition to the heavy inventory losses and the steep financial charges recorded during FY09, the devaluation of the rupee was another significant factor to the fall in profitability. About 19% depreciation in the rupee value against the dollar during FY09 exaggerated the dent in the profitability of the PSO as the company imports approximately 80% of the country's POL imports.
Asset management presented a missed picture with ratios moving in both directions. Inventory turnover rose from 12.7 to 13.96, while the Day Sales Outstanding almost doubled from 20.93 days in FY08 to 40.3 days in FY09. Inventory losses in 1Q09 due to the sharp decline in oil prices, by as much as 50%, led to the devaluation of the inventory held in store. Due to dwindling prices, PSO registered heavy losses of Rs. 18.9 billion in FY08 as against inventory gains of Rs 11 billion in FY08. Therefore, the international swing in oil prices caused heavy inventory losses, which had an adverse bearing on the profitability and asset management of PSO for FY09.
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.
Decent inventory gains amid higher ex-refinery prices and improved product handling were reasons for improved performance and contributed positively to the bottom line of the company during the quarter. Receivables from the government on account of price differentials increased by 15.86% in the quarter under review, posing a risk to the already cumbersome issue of circular debt.
The debt to asset ratio rose from 75.64 in FY08 to 86.42 in FY09. The 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 account of companies 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 amounting to Rs. 64 billion. However, this cycle of circular debt led to excessive short-term borrowing and piling of financial charges, 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.
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DEBT MANAGEMENT FY09 1QFY10
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Debt to Asset Ratio(%) 86.42 85.43
Debt to Equity Ratio 635.1 586.5
Times Interest Earned -0.89 2.63
Long-term Debt to Equity (%) 12.11 11.64
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In the quarter under review, it is seen that the debt to asset ratio declined, albeit by only 1 percent. Debt to Equity has also registered a decline, as the company strengthened its equity by 10.9%. Times interest earned shows an improved position of the company's ability to pay off its debt, mainly on the back of the post tax profit posted in the quarter.
MARKET PERFORMANCE
The recent fall in equity values at KSE-100 index has brought the scrip at quite lucrative levels. The Pakistan State Oil's board of management has declared a cash dividend of Rs 3 per share for its shareholders for the first quarter ended September 30.
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PSO- First Quarter Result FY10
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PRs mn 1QFY09 1QFY10 %
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Sales 188,980 169,268 -10%
Costs 196,384 162,875 -17%
GP (7,404) 6,394 NA
Op Exp 1,551 1,601 3%
Op Profit (8,955) 4,793 -154%
Oth Inc 654 595 -9%
Oth Chg 3,230 1,088 -66%
EBIT (11,531) 4,300 NA
Fin Chg 1,072 1,573 47%
PBT (12,603) 2,727 NA
Tax (4,220) 821 NA
PAT (8,383) 1,906 NA
EPS PRs (48.88) 11.11 -
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Source: First Capital Research
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