Oil: PAKISTAN STATE OIL – Analysis of Financial Statements June 2003 – 2001 Q 2010

OVERVIEW (January 04 2010): Fluctuation in international oil prices has 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 owning to slowdown in demand from US market, the future of the trend in oil prices cannot be accurately predicted.

==================================================== COMPANY: PAKISTAN STATE OIL ==================================================== TICKER: PSO SHARES OUTSTANDING: 171.52 MILLION 3 MONTHS (JUL-SEPT09) AVERAGE PRICE: PRS. 297.32 MARKET CAPITALIZATION: PRS.49.7 BILLION ====================================================

Sales 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 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 – 2001 Q 2010

PSO has started FY10 on a positive note after going through a lean patch during FY09. The first half of FY09 saw a significant decline in the company’s profitability mainly on account of a free fall in the international oil process resulting in inventory losses to the company. In contrast, the first quarter of FY10 saw oil prices moving across a narrower band ranging between dollar 60 per barrel to dollar 73 per barrel. The company’s sales revenue touched Rs 201 billion compared to Rs 222 billion in the corresponding period last year, the decline mainly due to a reduction in retail prices of POL products across the country. The company was able to post improved quarterly after tax earnings of Rs 1.9 billion as compared to a loss of Rs 8.4 billion during the period last year. Here it is worth mentioning that on account of circular debt, the company had to borrow from banks thereby incurring financial charges of Rs 1.6 billion which dented the company’s profitability during the period under review.

During the first quarter FY10, PSO’s management made persistent efforts for recovering its receivables in the circular debt, which crossed Rs 100 billion during the reported period. As a result of all these efforts, the highest possible level, Power Holding (Pvt.) Limited, an entity of Government of Pakistan, issued Term Finance Certificates on September 18, 2009 amounting to Rs 82.4 billion out of which PSO received Rs 41.3 billion, thereby enabling PSO to make partials payments from them, the receivables are again growing on a daily basis.

In the period under review, PSO posted a growth of 30.4% in the Black Oil segment against the backdrop of the increasing demand of furnace oil by the power sector, which was fulfilled by PSO. In addition, a positive volumetric growth of 26.5% and 3.8% was registered in Mogas and JP1 respectively. However, in HSD, the company experienced negative growth of 13.5% as industry figures also show a downward trend during the reported period. PSO maintained its leadership in the white and black oil market segments with market shares of 55.3% and 89.4% respectively. Overall, the market share of PSO stood at 72.1% at the end of the quarter.

During the quarter, PSO signed a Fuel Supply Agreement (FSA) with Northern Power Generation Company Limited (NPGCL), a subsidiary company of the Pakistan Electric Power Company (Private) Limited (PEPCO), for fulfilling furnace oil and HSD requirements of all the power stations of NPGCL. In the backdrop of the current energy crisis, this is a significant achievement, which will help PSO in establishing consistency and smoothness in operation and correspondingly allow PEPCO to manage the demand and supply of the energy requirements of the country.

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 scenario is demonstrated in the chart below.

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

Asset Management ratios for 1QFY10 were as follow:

================================ ASSET MANAGEMENT 1QFY10 ================================ Inventory Turnover 3.36 Days Sales Outstanding 29.29 Operating Cycle 32.64 Total Asset Turnover 1.27 Sales/Equity 8.75 ================================

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 these 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 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 FY2009. 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 1QFY10, PSO incurred financial charges of Rs 1,572 million – about 47% higher when compared to 1QFY09. 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 turn around 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 the FY09, the devaluation in rupee value was another significant contributor to the fall in profitability. A 19% depreciation of rupee against the dollar during the FY09 exaggerated the dent in the profitability of 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 whereas the Day Sales Outstanding almost doubled from 20.93 days in FY08 to 40.3 days in FY09. Inventory losses in the 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 the FY08 as against inventory gains of Rs 11billion 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 accounts of Company’s 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 – 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.

The Debt Management ratios of PSO for 1QFY10 are as follows:

============================================== DEBT MANAGEMENT FY09 1QFY10 ============================================== 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 ==============================================

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.

====================================== PRsmn 1QFY09 1QFY10 % ====================================== 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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