Being the largest marketing company, Pakistan State Oil (PSX: PSO) has the largest market share I the OMC sector involved in the marketing and distribution of motor gasoline (Mogas), high speed diesel (HSD), furnace oil (FO), jet fuel (JP-1), kerosene, CNG, LPG, petrochemicals and lubricants. It also imports products like Mogas, HSD JP-1 and furnace oil based on the demand. It has the largest distribution network in the country.

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; PSO has strategic investments in storage, refining, aviation, lubricants, and pipeline businesses. including 12 percent in Parco’s White Oil Pipeline Project; 63.6 percent in PRL as its subsidiary company; 49 percent in Asia Petroleum Limited; 62 percent investment in Joint Installation of Marketing Companies, and 50 percent in new Islamabad airport fuel farm; 44 percent in Eastern Joint Hydrant (un-incorporated joint arrangement); and 22 percent in Pak Grease Manufacturing Company Limited as its associate company as per the company’s FY21 annual report.

Historical financial performance

The downstream oil and gas sector has seen significant fluctuation in demand the last few years due to COVID. Other factors steering demand of petroleum products have been the changes in the energy mix particularly shifting away from the furnace oil towards coal and LNG; and then the comeback of furnace oil during COVID and post COVID times due to the systemic issues in the refining system as well as the rise in demand from the power sector.

As the industry leader, PSO has been driving trends in the sector. In FY17 PSO witnessed a growth of 8 percent in compared to a growth ranging from -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 bottomline.

Volumetric growth continued in FY18 in retail segment, especially motor spirit and HSD. However, PSO’s furnace oil volumes declined by 29.6 percent year-on-year in FY18 as energy mix shifted to RLNG and coal for the power sector. While topline was up by 20 percent, profit after tax went down by 15.2 percent year-on-year primarily on account of one-time reversal of deferred tax asset; falling other income and higher exchange losses.

FY19 was a difficult year for the OMCs due to economic slowdown amid rising competition. Margins also fell due to falling volumes by the sector especially the furnace oil, while the retail fuels like 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. And despite an overall decline of around 38 percent in volumetric sales, PSO’s revenues posted modest increase due to a rebound in the the company’s volumes in the last quarter of FY19. Profits slipped by 32 percent, which came from higher inventory losses as well as lower volumes, finance cost and exchange losses. In FY19, PSO acquired 52.67 percent stake in PRL, which lifted its consolidated earnings.

In FY20, PSO’s volumes in furnace oil reduced further due to the continuing impact of focus on RLNG. On the other hand, in the retail sector PSO experienced an increase in petrol volumes against an overall decline in the industry due to PSO’s increased assortment amid low demand. Industry diesel volumes too were affected due to weak industrial activity, construction activity, and reduced road and rail movement. However, PSO managed to gain volumetric growth.

Decline in gross profit for PSO was mainly due to inventory losses besides the falling volumes on account of sharp decrease in international oil prices during the year. However, increase in finance cost due to higher average policy rate adversely impacted the bottomline. Decline in gross profit and increase in finance cost was partially offset by lower exchange losses and higher interest income recovered from power sector during the year.

PSO in FY21

PSO reported record earnings for FY21 with a rebound in profitability that comes in contrast to a loss in FY20. PSO was able to reverse the trend of falling revenues with FY21 topline growing by 9 percent year-on-year due to volumetric growth and price increase. A key feature for FY21 was the return of furnace oil in the fuel mix as its demand and usage increased during the year. PSO’s overall volumes increased by 24 percent year-on-year with the three key products: petrol, diesel and furnace oil climbing by 21, 21, and 37 percent year-on-year.

This also resulted in the rise of market share for PSO from 44.3 percent in FY20 to 46.3 percent in FY21. The while oil segment touched the highest ever volumes despite the shrinking jet fuel industry where PSO’s market share rose again from 44 percent in FY20 to 45 percent in FY21. PSO’s market share in petrol increased from 38.7 percent in FY20 to 41.3 percent in FY21. Its diesel (HSD) market share increased by 140 basis points to 47.2 percent. Its market share for FO grew from 46 percent to almost 52 percent in FY21.

PSO’s volumetric sales growth is partially attributed to upgraded fuel quality; PSO introduced Euro 5 standard petrol, diesel and HOBC during the year. During the year, the company commenced it first EV charging facility in Islamabad and focused on infrastructure as well as technological development where it increased storage capacity, retail presence etc.

PSO’s earnings benefitted from increase in other income that comes from growth in late payment surcharge income; no noticeable rise in administrative and distribution costs; and a decline in finance cost due to weaker interest rates.

FY22 and Beyond

PSO continued to win at the volumetric front. During the first quarter of FY22, oil sales were above 5.8 million tons growing by 24 percent year-on-year and led by double-digit growth in furnace oil HSD and MS. PSO’s growth in volumes surpassed industry growth with a growth rate of 34 percent year-on-year.

Higher volumetric growth was drove PSO’s topline with FO contributing the most to the growth in volumes followed by HSD and MS, respectively. PSO’s topline was up by a massive 64 percent year-on-year and besides the volumetric incline, the jump in the OMC’s sales was also due to the surge in petroleum prices.

The OMC reported all-time high profits for a quarter in 1QFY22 where apart from the topline growth, inventory gains and jump in gross profits were also the factors driving earnings growth. It benefitted from inventory gains during the quarter due to the jump in retail product prices amid rising global crude oil prices. Despite the rise in other expenses and distribution and marketing expenses, PSO’s operating profits more than doubled with support from other income. Further support to the bottomline came from lower finance costs on account of lower short term borrowings.

PSO’s earnings surged by more than 2.3 times in 1QFY22 where much of the volumetric growth came from reviving consumption and demand of petroleum products, price increase as well as the company’s increased retail footprint and up gradation in fuel quality. And the same will continue to be the growth drivers for the coming quarters. However, where rising oil price is benefiting the OMC in terms of inventory gains, a long term increase in oil prices can impact the liquidity position of the company via high working capital requirement and circular debt build-up.