Fuelling the nation for the past many years, Pakistan State Oil Company Limited (PSX: PSO) is engaged in procurement, storage and marketing of petroleum and related products. The company also blends and markets various kinds of lubricating oils.
PSO products and services include retail fuels, gaseous fuels, alternate fuels, lubricants, cards, non-fuel retail, aviation and marine, consumer business and product prices. Its petroleum products include Motor Gasoline (Mogas), High Speed Diesel (HSD), Furnace Oil (FO), Jet Fuel (JP-1), Kerosene, Compressed Natural Gas (CNG), Liquefied Petroleum Gas (LPG), Petrochemicals and Lubricants. The company has a network of over 3,500 plus retail outlets.
PSO's strategic investments include 12 percent in Parco's White Oil Pipeline Project; 22.5 percent in PRL; 22 percent in Pak Grease Manufacturing Company Limited; 49 percent in Asia Petroleum Limited; and 62 percent investment in Joint Installation of Marketing Companies. The company's shareholding is divided such that the government holds around 22.47 percent of PSO's shareholding; around 37 percent is distributed among banks, DFIs, insurance companies and mutual funds; please refer to the table for a complete break-up.
PSO Share price performance has been under pressure of late when compared to the benchmark index primarily due to the resurgence of the circular debt and the rising receivables.
FY16 Operations The firm's market share in FY16 was 55.9 percent (around 13 million MTs) that included a growth in market share of around four percent in black oil products, and a decline of 3 percent in market share of white oil products. During the year, the OMC sector witnessed growth in imports, which was primarily seen in motor gasoline and furnace oil. This included the sourcing of 10 million tons imported through 182 vessels. During the year, PSO moved on to introduce 92 Ron Motor Gasoline and Euro-II High Speed Diesel. Its initiative has spurred smaller players to follow the leader.
In FY16, PSO also executed long term Sales Purchase Agreement (SPA) with QatarGas for import of LNG under G2G arrangement, and according to its Annual Report FY16 it is now receiving 2.25 million tons per annum of LNG from QatarGas, which will be ramped up to 3.75 million tons per annum. PSO also executed a 5-year Term Agreement with Gunvor for the supply of 0.75 million tons of LNG per annum. As per the Annual Report, these contracts will novate in third quarter 2017 to PLNG.
Financial Performance FY16
FY15 had been a challenging year for the OMC segment, bruised by heavy inventory losses in the sliding oil price scenario. Also, earnings in FY15 were marred by decline in other income and growth in the finance cost. FY16 portrayed a strengthening earnings position. PSO posted an improvement of 48 percent year-on-year in its earnings. The firm benefited from fall in financial charges amid low interest rate environment, and also the slowdown in circular debt buildup due to stabilising crude oil prices, and timely payment against supplies by the oil company.
While the OMC's top line slipped south on account of weaker margins particularly of furnace oil, its gross margins and operating margins in FY16 improved significantly, showcasing reversal of inventory losses. Net margins also improved due to lower finance cost. The GP ratio for FY16 increased by 22 percent due to decrease in gross sales owing to price reduction. NP margin and EBITDA ratios also increased mainly due to decrease in finance cost and other expenses. The return on shareholders' equity and return on total assets increased due to increase in net profit; however, return on capital employed decreased by 6 percent mainly due to higher capital employed.
1HFY17 snapshot 1HFY17 was bitter sweet for PSO. The firm's earnings took a leap forward; however, no dividend announcement left a shareholder unhappy as the stock price nose-dived. In short PSO's earnings were up, and dividends were down in 1HFY17.
The OMC's top line was up by 16.2 percent in 1HFY17 due to improved volumes overall (ie both white oil and black oil segments). In FY16, PSO's top line was down due to lower volumetric growth and lower margins of furnace oil. However, FY17 has brought improvement to the oil marketing giant's market share. In 1QFY17, the firm was able to post a 4.4 percent year-on-year increase in net sales, and over 29 percent year-on-year improvement in 2QFY17; and where retail fuel volumes remained suppressed in 1QFY17, the beginning of second quarter onwards has seen improvement in retail volumes for the firm.
Increased gross margins were accompanied by 20 percent rise in other income, which came from income on mark-up. At the same time, lower finance cost by 21 percent year-on-year aided the bottom line that jumped up by almost 50 percent in 1HFY17, and 62 percent in 2QFY17 alone. Overall, margins improved in 1HFY17 highlighting the impact of demand growth.
Outlook The form has been able to restrict market share erosion on account of high margin retail fuels (ie HSD and Mogas). In the analyst briefing for first quarter of FY17, the management reiterated its focus of curtailing continual erosion of its market share in the white oil segment, which might include discounts similar to those offered by smaller players along with new sites in demand centers. In the analyst briefing, the management highlighted a probable novation of LNG import contract from PSO by June 2017.
While the OMC's profitability seems to be intact, the firm's no-dividend-announcement in 1QFY17 points towards some inherent risks on the horizon, as the settlement of circular debt and partial retirement of borrowings are both key to dividend payout.
On a positive note, the OMC is investing in the retail segment; after introducing LNG in 2015 and RON 92/95 petrol in November 2016, PSO has received the country's first 55,000 tonnes low sulphur diesel from Kuwait, which is Euro II complaint diesel.
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PAKISTAN STATE OIL (PSO)
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Rs (mn) 1HFY17 1HFY16 YoY 2QFY17 2QFY16 YoY
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Net sales 411.337 353.953 16.2% 217.836 168.685 29.1%
Cost of products sold 393.528 340.074 15.7% 209.649 162.144 29.3%
Gross profit 17.809 13.879 28.3% 8.186 6.541 25.2%
Other Income 6.316 5.260 20.1% 4.407 2.542 73.4%
Operating costs 6.684 5.930 12.7% 3.086 2.811 9.8%
Profit from operations 17.441 13.209 32.0% 9.506 6.272 51.6%
Finance Cost 2.846 3.601 -21.0% 1.567 1,715 -8.6%
Share of Profit of associates 366 389 -5.8% 236 321 -26.4%
Profit after taxation 10.015 6.726 48.9% 5.639 3.473 62.4%
Earnings per share (Rs) 36.86 24.76 48.9% 20.75 12.78 62.4%
Gross margin 4.3% 3.9% 3.8% 3.9%
Operating margin 4.2% 3.7% 4.4% 3.7%
Net margin 2.4% 1.9% 2.6% 2.1%
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Source: PSX
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PSO Shareholding Pattern as of June 2016 %
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Associated Companies, Undertakings and related parties
Government of Pakistan 22.47
GOP's Indirect Holding:-PSOCL Emp. Empowerment Trust 3.04
NIT ICP Other
National Investment Trust 0.05
NBP Trustee Department 15.01
Investment Corporation of Pakistan 0.5
CDC-Trustee National Investment Trust 0.04
CEO, Directors and their Spouse, Minor children
MD PSO 0
Public Sector Companies Corporations
Banks, DFIs NBFIs, Insurance Companies, Modarbas, Mutual Funds etc. 36.94
Individuals 13.71
Others 8.24
TOTAL 100
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Source: Company accounts
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Pakistan State Oil (PSO)
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FY12 FY13 FY14 FY15 FY16
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Profitability
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GP margin % 2.86 2.64 2.61 2.06 2.52
NP margin % 0.75 0.98 1.55 0.62 1.13
ROA % 2.6 4.48 5.86 2.03 3
ROE % 18.74 20.84 27.75 8.43 11.22
ROCE % 47.52 41.29 50.73 25.43 23.96
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Turnover
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Inventory turnover (x) 13.55 12.2 16.33 19.05 17.83
Debtor turnover (x) 5.5 16.9 8.04 6.16 5.08
Creditor turnover (x) 5.08 7.77 8.65 10.54 9.17
Total asset turnover (x) 3.93 4.11 4.31 3.12 2.65
Fixed asset turnover (x) 200.39 226.77 246.04 181.35 138.98
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Investment
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EPS (Diluted) Rs. 33.34 46.52 80.31 25.53 37.81
Price earning (x) 4.47 6.3 4.84 15.11 9.93
Dividend yield % 3.18 2.18 2.31 2.59 3.33
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Liquidity and leverage
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Interest Cover ratio (x) 2.17 3.53 4.45 2.09 3.28
Current (x) 1.15 1.03 1.09 1.1 1.12
Quick Ratio (x) 0.85 0.54 0.79 0.87 0.91
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