Shell Pakistan enjoys a 100-year history in this part of the world, dating back to 1899, when Asiatic Petroleum, the Far Eastern marketing arm of two companies: Shell Transport Company and Royal Dutch Petroleum Company began to import kerosene oil from Azerbaijan to sub-continent.
After Partition, its name was changed to Burmah Shell Oil Distribution Company of Pakistan. In 1970, 51% shares of the company were transferred to Pakistani investors and its name changed to Pakistan Burmah Shell (PBS) Limited. In February 1993, as the economic liberalisation began and the Burmah divested from PBS, Shell Petroleum stepped into raise its stake to 51%. Since then, Shell Petroleum Company successively increased its share, with the group now having a 76% stake in Shell Pakistan Ltd (SPL).
Shell Pakistan Limited (SPL) is a Pakistan-based company engaged in the marketing of petroleum and compressed natural gas. It also blends and markets various kinds of lubricating oils. The company has investments in two non-trading subsidiaries, namely Shell Pakistan Provident Trust (Private) Limited and Shell Pakistan Pensions Trust (Private) Limited. The company introduced Shell Helix Ultra, Shell Helix CNG Super and restored its quick oil change service as Shell Helix Oil Change Plus.
Recent results (3Q10):
World crude oil prices have significantly decreased from $147 per barrel in July 2009 to below $75 per barrel on September 2010. However, the decline in world oil prices is not reflected to the decrease in the oil import bill due to 5% devaluation of Pak rupee. Recently, the crude prices touched $100 before backing off on Egypt unrest.
Industry overview:
The oil and marketing industry of Pakistan is of oligopolistic nature, with the three major players PSO, Shell and APL dominating around 88% of the market sales volume. PSO is the market leader, with a market share of 68% followed by Shell and APL having a market share of 14% and 6% respectively.
Financial performance:
During the period ended June 30, 2010, things were going normal in the oil and marketing sector of Pakistan. The fuel consumption in the country has increased from 19.2 million to 20.8 million tons due to increasing Mogas and fuel oil consumption in the country. Oil consumption has decreased significantly in the period between July and September due to massive devastation caused by super flood in the country. Sales of the industry were affected very badly due to slowdown of economic activities in the country. Distribution expenses have also increased significantly due to the loss of routes of transportation and other infrastructure facilities.
During the period under review, the sales of Shell remained 157.7 billion rupees compared to 128.9 billion rupees, signifying an increase of 22% over the period as compared to 11.5% industry increase in sales. International oil prices have decreased to $75 per barrel in August/September 2010 from $147 per barrel in last July. Despite this, the cost of goods sold by Shell, have increased from Rs 104.5 billion to Rs 131 billion signifying an increase of 25% over the period due to significant devaluation of Pak rupee. Pak rupee has devalued by around 5% during the period.
The gross profit margin of the overall industry has decreased over the period during to the rising competition among the existing market players and entry of a new MNC, Byco into the industry. Gross profit of the company still stood higher than average industry level. The gross profit of the Shell stood 5.9% compared to 4.8% industry average.
Despite the higher sales and above industry gross profit margin, the company accumulated a loss of Rs 11 million during the period, due to increased competition, distribution expenses and turnover tax imposed by the government. The distribution expenses of the company have increased significantly due to loss of infrastructural facilities during the super flood. Distribution expenses stood Rs 3.28 billion as compared to Rs 2.22 billion last year, showing an increase of 47.6%. The turnover tax imposed on oil and marketing sector by government has doubled from 0.5% to 1% leading to an effective tax rate of 140% of the taxable income of Shell.
The debt to asset ratio of the company has remained stagnant during the period, increasing from 0.8% to 0.82%, despite this; the company faced some of the serious liquidity problem during the period. A significant amount of cash is trapped with GoP. Government of Pakistan still owed 5 billion rupees to Shell.
To avoid the liquidity problem, the company acquired many short terms loans from the financial institutions. The short-term borrowings of the company have increased from 0.75 billion to 7 billion showing an increase of 833.3% during the period. The debt to equity ratio of the company has decreased from 4.07% to 4.87% while the times earned have decrease from 3.02 to 2.17 times. Both of these fluctuations occurred due to the loss suffered by the company during the period.
The beta of the Shell Pakistan remained 0.84 during the period showing that the stock price of the company has moved in the same direction as of KSE-100 index but with little smaller magnitude. Shell stock return has a significant positive correlation with the market return means that any up or down in the market index will most probably be reflected in the prices of the stock of the company.
Financial analysis (FY08-F09)
Shell Pakistan is currently the second largest Oil Marketing Company of Pakistan with an existing market share of 13.7 percent. During the period, the company earned a profit after tax of Rs 2.56 billion. In the same period last year, the company had incurred a loss of Rs 1.73 billion.
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Indicators 2009 2008
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Profit/ (Loss) before taxation (mn) 3910 (3049)
Profit/ (Loss) after taxation (mn) 2563 (1726)
New capital Expenditure (mn) 1325 1024
Shareholder's Equity (mn) 8271 6256
Earning/ (Loss) per Share 37.42 (25.20)
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Shell Pakistan has managed to bring down its liabilities considerably. However, despite this significant achievement, government receivables continue to be a major challenge and the company still has bills of approximately Rs 4.5 billion, comprising price differential claims and sales tax/Petroleum Development Levy (PDL) refunds. These are being followed up vigorously with concerned government authorities.
Sales surged in the financial year 2009 with total revenues increasing from Rs 84,900,771 by the end of December 2008 to Rs 156,000,098 by the end of December 2009.
During FY09, the company posted a net profit of Rs 2.562 billion and this profitability is mainly driven by higher sales volume and mainly supported by the positive impact of increasing international oil prices. The company's gross profit margin increased from -9% in December 08 to 3% in December 09. Net Profit Margin increased from -6% in December 08 to 2% in December 09. Return on assets increased from -13% in December 08 to 12% in December 09. Return on equity increased from -83% in December 08 to 31% in December 09.
All four profitability ratios are indicative of the fact that Shell Pakistan has vastly improved its earnings and is also making efforts to cut back on its expenditures.
Shell has always concentrated on shifting its portfolio towards high margin products. This strategy, therefore, has reaped enormous benefits in terms of better sales, gross profit and net income for the company. Higher oil prices in the world market were the main contributory factor towards high profitability ratios that the company has been posting since 2003.
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Comparison of Key Figures with the Industry (As at 31st December 2009)
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Shell PSO APL
(Year ended (Year ended (Half year ended
31st Dec'09) 31st Dec'09) 31st Dec'09)
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Increase in Sales (%) 84.28 23.33 12.86
Increase in Gross Profit (%) 5.38 -89.97 -3.52
Increase in profit before tax (%) 134.56 -153.13 -2.87
Increase in profit after tax (%) 149.63 -147.67 1.43
Increase in EPS (%) 149.62 -147.66 1.80
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Liquidity position of Shell is not commendable, as other players of the industry. However, with the introduction of higher margin products, Shell has been able to enhance its performance since FY05 owing to inauguration of White Oil Pipeline enabling it to better supply/transportation of oil across the country. As a result, the company's oil stock increased significantly.
FY07 however, disturbed the increasing trend of Shell's liquidity position and it was the most challenging period for the whole industry. Short-term loans and accrued liabilities increased significantly, depressing the current liabilities and the current ratio of the company. On the other hand FY08 improved Shell's liquidity position. This is mainly due to sharp decline witnessed in the short-term loans taken by the company.
During the FY09, the company's current assets decreased from Rs 12.725 billion in December 08 to Rs 12.290 billion in December 09. However, the company's current liabilities decreased from Rs 30.333 billion to Rs 25.169 billion. Hence, the company has managed to keep its current ratio steady in the FY09.
Comparison with the industry reveals that Shell 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.
In the FY09, Shell experienced marked improvements on overall cash flow with tighter cost control and better credit management. Shell's stockholdings significantly reduced and business grew on more profitable segments. Shell is continuing to leverage their association with the wider Shell Group through the Technical Service agreements to enhance their profitability and performance.
In FY09, inventory turnover increased from 10 days in FY08 to 12 days by the end of FY09. Similarly, the operating cycle increased from 10 days in FY08 to 12 days by the end of FY09, following the trend of the inventory turnover.
Total asset turnover increased from 2 times in FY08 to 7 times in FY09. Sales to Equity Ratio increased from 14 times in FY08 to 19 times in FY09. The increase in both these asset management ratios can be attributed to the surge in sales in FY09.
Up-till Jun 07, on account of large amount of short-term loans and consequently high interest expenses, debt-to-asset ratio had been rising steadily while interest coverage strength had been diminishing. This trend changed in FY08 and the company's debt to equity ratio declined mainly due to a 78 percent decline in short-term loans. In FY09, the debt-to-asset ratio increased from 84% in FY08 to 114% in FY09. Interestingly, this was not due to an increase in liabilities, which actually fell from Rs 33.016 billion in FY08 to Rs 25.283 billion in FY09. The decrease in the D/A Ratio was primarily due to a decrease in total assets, which fell from Rs 39.272 billion in FY08 to Rs 22.262 billion in FY09. Long-term loans and advances, long-term deposits and prepayments, long-term debtors, stores and spares and cash and bank balances all decreased during the FY09.
As a result of long-term borrowing, Shell's long-term debt to equity ratio increased from 1.47 percent in FY06-07 to 20 percent in FY07-08. In FY09, the debt to equity ratio fell from 5 times in FY08 to 3 times by the end of FY09. TIE Ratio increased from -8 times in the FY08 to 3 times in the FY09, which shows that the company showed a marked improvement in its debt management capabilities. Long term debt to equity ratio shot up in the FY09, from 43% in the FY08 to 306% in the FY09.
The company has been able to post high earnings per share than other industry players. However, it recorded a sharp decline of 81.8% in FH06-07 mainly attributable to escalating oil prices and lower demand for POL products, arising from a shift towards cheap substitutes. However, FY07-08 was very positive for the company. Higher sales volume combined with very high international oil prices resulted in very high growth in EPS. In the FY09, EPS increased from -Rs 75 in the FY08 to Rs 37 in the FY09.
By the end of FY09, the dividend per share stood at Rs 33. This increase in DPS has been due to impressive growth witnessed in company's bottom line.
Oil Marketing Companies
Pakistan's average crude oil production during July-March 2009-10 was 65,246 barrels per day as against 66.531 barrels per day during the corresponding period of last year, showing a decrease of 1.9%.
The Ministry of Petroleum and Natural Resources has planned to make the oil refineries and oil marketing companies richer by placing an upper cap on import price for locally produced petrol sale price while deregulating its ex-refinery price at the cost of consumers in new oil pricing mechanism.
The ministry has accepted that ex-refinery price of petrol would increase in the range of Rs 3-4 per liter in respect of refineries including NRL, PRL, and ARL. OMCs are already seeking price differential claims (PDCs) from the ministry of petroleum since imports are more expensive than refinery price.
Future outlook
The economy has shown signs of improvement with reduction in inflation and stabilisation of the exchange rate. The government has also paid Rs 80 billion to the energy sector in order to resolve the problem of circular debt and has made a commitment to do more, which is also a positive sign for the profitability of the energy sector. The profitability of the industry players is correlated with the international oil prices.
Since, oil prices have declined in the international market from the record high of $147/barrel in July 2008 to less than $75 in June 2010, due to lower demand witnessed in the Asian markets. The profitability of the company will depend on future economic conditions, GDP growth and inflation apart from the fluctuations in the international crude oil prices.
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Prices of Oil Prices
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Products JP-1 JP-4 JP-8 Premium HOBC Light
Motor Diesel
Gas Oil
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May 2010 58.46 55.54 61.24 75.08 89.19 65.76
June 2010 55.36 52.63 58.21 69.04 82.04 62.61
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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 Jun'07 Jun'08 Dec'08 Dec'09
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Total Revenue 77,822,817 79,180,350 98,422,690 117,262,519 115,045,434 139,844,689 84,900,772 156,000,098
Cost of Goods Sold 72,049,466 72,973,109 89,684,584 107,301,071 108,664,932 124,694,471 87,849,668 142,097,916
General & Administrative Expenses 3,794,361 3,806,007 3,454,308 3,807,932 1,716,707) 2,109,289 1,663,376 3,846,205
Selling and Distribution Expenses 1,155,458 989,263 3,366,555 2,950,422 1,842,433 3,376,253
Operating Profit (EBIT) 2,089,314 2,413,251 4,720,962 4,958,759 1,166,405 8,481,359 -7,450,046 4,886,635
Financial Charges 51,480 73,817 330,941 398,009 878,098 970,267 976,838 1,401,211
Net Income Before Taxes 1,899,905 2,188,924 3,642,984 4,599,494 378,736 7,723,340 -8,420,354 3,910,009
Net Income After Taxes 1,254,997 1,508,014 2,451,070 3,108,469 706,659 5,137,094 -5,164,467 2,562,948
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Balance Sheet (Rs '000) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Dec'08 Dec'09
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Stores & Spares 24,227 22,184 16,366 28,865 30,286 13,328 17,992 15,719
Stock in Trade 2,826,981 4,536,965 6,608,167 9,979,886 8,244,054 18,095,523 9,004,305 13,076,718
Cash & Bank Balances 1,075,698 566,636 752,112 981,197 814,530 872,414 6,549,868 869,623
Total Current Assets 6,311,376 7,912,631 12,983,152 20,316,721 20,041,859 32,811,966 26,546,737 21,363,250
Total Non Current Assets 6,827,081 7,431,497 7,597,964 7,855,161 9,498,295 9,444,560 12,725,393 12,290,482
Total Assets 13,138,457 15,344,128 20,581,116 28,171,882 29,211,927 39,664,859 39,272,130 22,262,733
Total Current Liabilities 7,191,520 9,042,390 12,209,080 17,902,377 19,612,115 23,307,811 30,333,233 25,169,302
Long Term Liabilities 95,119 169,209 68,963 155,398 139,041 2,745,410 2,683,339 213,828
Total Liabilities 7,286,639 9,211,599 12,278,043 18,057,775 19,751,156 26,053,221 33,016,572 25,283,130
Paid Up Capital 350,658 350,658 350,658 438,323 547,904 547,904 684,880 684,880
Total Equity 5,851,818 6,132,529 8,303,073 10,114,107 9,460,771 13,611,638 6,255,558 8,270,603
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LIQUIDITY RATIO Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Dec'08 Dec'09
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Current Ratio 1 1 1 1 1 1 1 1
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ASSET MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Dec'08 Dec'09
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Inventory Turnover(Days) 12 18 21 27 23 52 10 12
Day Sales Outstanding (Days) 0 0 0 0 0 0 0 0
Operating Cycle (Days) 12 18 21 27 23 52 10 12
Total Asset turnover 7 6 5 5 4 4 2 7
Sales/Equity 15 15 13 13 14 12 14 19
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DEBT MANAGEMENT Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Dec'08 Dec'09
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Debt to Asset(%) 55 60 60 64 68 66 84 114
Debt/Equity (Times) 1 2 1 2 2 2 5 3
Times Interest Earned (Times) 41 33 14 12 1 9 -8 3
Long Term Debt to Equity(%) 2 3 1 2 1 20 43 306
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PROFITABILITY (%) Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Dec'08 Dec'09
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Gross Profit Margin 6 7 8 7 5 10 -9 3
Net Profit Margin 1 2 2 2 1 3 -6 2
Return on Asset 10 10 12 11 2 13 -13 12
Return on Common Equity 21 25 30 31 7 38 -83 31
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PER SHARE Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Dec'08 Dec'09
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Earning per share 36 43 56 71 13 94 -75 37
Price earning ratio 11 9 10 8 32 5 -4 -12
Dividend per share 23 32 29 29 16 50 0 33
Book value 167 203 237 231 173 248 91 121
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