Petroleum: ATTOCK PETROLEUM LIMITED – Analysis of Financial Statements Financial Year 2004 – Financial Year 2010

The 4th company to be granted marketing licence in Pakistan, Attock Petroleum Limited (APL) is the 4th largest Oil Marketing Company of Pakistan with a market share of 7% in FY09.

The 4th company to be granted marketing licence in Pakistan, Attock Petroleum Limited (APL) is the 4th largest Oil Marketing Company of Pakistan with a market share of 7% in FY09.

APL is part of the first fully integrated oil company of the sub-continent. APL’s sponsors include Pharaon Commercial Investment Group Limited (PCIGL) and Attock Group of Companies. Pharaon Group is engaged internationally in diversified entrepreneurial activities, including Hotels, Oil Exploration, Production and Refining, Manufacturing of Petroleum Products, Chemicals, Manufacturing and Trading of Cement, Real Estate etc on the other hand, the Attock Group of companies consist of The Attock Oil Company Limited (AOC), Pakistan Oilfields Limited (POL), Attock Refinery Limited (ARL), Attock Petroleum Limited (APL), Attock Information Technology Services (Pvt.) Limited (AITSL), Attock Cement Pakistan Limited (ACPL) etc thus, the strong backward and forward linkages give APL a strong competitive advantage.

APL generates the bulk of its sales revenue via sale of a variety of petroleum and lubricants products to consumers, including both, direct end-users and through distribution channels. These products include asphalt, furnace oil, light diesel oil, jute batching oil, solvent oil and mineral turpentine oil.

APL commsioned 37 pumps in FY’10, bringing the total number of operating pumps to 277 retail outlets in the country. The Company’s investment in these pumps stands at Rs 787 million. In terms of volumetric sales, APL accounts for 7.0% of total market share and has witnessed rapid volumetric growth in sales during FY10 of around 87% and 67% for Motor Spirit (MS) and High Speed Diesel (HSD) respectively, compared to industry average of 27% and -3% respectively.

In order to meet the mid country fuel demands, a terminal was built and commissioned at Machike in FY10. This terminal connects APL with MFM (Mehmoodkot-Faisalabad-Machike) pipeline and WOP (white oil pipeline). This terminal has a storage capacity of High Speed Diesel, Superior Kerosene Oil and Premier Motor Gasoline. This storage/dispatch facility has further increased APL’s market share and is a step towards company’s prosperous future. The other major achievement is in the sector of quality assurance unit, by setting up of quality control lab at Machike and mobilization of another quality control mobile unit for central Punjab.

Further, APL also entered into a Joint Venture with Askari CNG, which is currently operating 52 CNG outlets, to convert 20 of its existing CNG outlets into multi-fuel facility outlets. APL was awarded the contract of DGP-ARMY for supply of petroleum products throughout Pakistan for the year 2010-11, ie an institutional customer, thereby diversifying its customer base.

FINANCIAL PERFORMANCE (FY10)

‘Price Trend Analysis’ figures in this section are courtesy APL’s 2010 financial statements.

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 $75 per barrel in August/September 2010, internationally, world oil prices are expected to rise by about 8%, according to the current futures curve as shown. Sales are directly linked with the international oil prices, therefore, any increase or decrease will affect the industry’s performance accordingly.

The annual oil industry trade for Petroleum Oil Lubricant products increased by 8.4% from 19.130 in FY’09 million M. Tons to 20.742 million M. Tons in FY10. The increase in trade was mainly driven by increased consumption of Mogas and Furnace Oil. Increase in Furnace Oil consumption was due gas load shedding and ongoing robust demand from the power-generating sector. Demand for motor gasoline increased by over 27% over the preceding year mainly due to 50% increase in cars sales and 44% increase in motor cycles’ sales, gas shortage in winters, one day holiday of CNG per week and extraordinary increase in use of generators due to frequent power outages.

Consumption of black oil grew to 9.3 million tons – an increase of 14% over the preceding year. Black Oil demand picked up owing to supply constraints for natural gas. White oil sales grew by 4% mainly due to increase in sale of petrol and jet fuels. However, diesel under-performed mainly due to slower economic recovery and lower margins.

APL’s sales volume of both diesel and petrol increased on the back of developing retail fuelling strategies and expansion of its retail distribution network. Total industry annual trade of diesel declined by 3.9% whereas petrol (Mogas) increased by 27.0%. APL managed to increase its sales volume and market share of both diesel and petrol by establishing new pumps and firm marketing strategies. However, by distancing itself from the Furnace Oil market, in order to keep way from the circular debt menace, APL lost its market share by 280bps (from 7.32% in FY07 to 4.52% during FY10) in furnace oil (FO) segment. However benefits obtained were prevention of rising financial charges and increased concentration on retail network expansion.

The annual sales volume of diesel and petrol increased by 67% and 87% respectively, compared to industry average of 27% and -3% respectively. Consequently, APL’s market share increased from 3.5% to 6.2% for diesel and from 3.3% to 4.9% for petrol. Overall, APL recorded the highest volumetric sales at 1.5 million M. Tons for the year under review up by 7% over last year, thereby improving its market share from 6.6% to 7.0%.

INDUSTRY PERFORMANCE

PSO has been the market leader in fuel marketing and supply industry, having a market share of 68%. The 2009-2010 sales level of the three industries that make up the sector, APL, Shell and PSO, is shown. This sector comparison has been made on the basis of APL, Shell and PSO FY10 financial statements. However, since the fiscal year of APL and PSO terminates in June 2010 whereas the fiscal year for Shell terminates at December 2010, the analysis in this section is only indicative.

In FY10, net sales of PSO stand the highest at Rs 743 billion, followed by Shell at Rs 198 billion and APL at Rs 83 billion. Although being the smallest among the three major OMCs, sales APL grew by the greatest proportion. Over the period 2009-2010, PSO sales grew by 21.23% while APL sales showed a growth of 33.83% and Shell witnessed a growth of 26.62%.

The earnings growth in the sector shows that PSO witnessed the highest earnings growth of 235% versus 16.61% for APL and -36.96% for Shell. PSO had reported a net loss in FY09 due to the liquidity crisis, thus it profits grew phenomenally in FY10. Although APL witnessed the highest sales growth, the profitability growth of APL was the lowest, indicating inefficiency in management of costs.

The performance of the three companies with regard to gross profit margins shows that Shell is most efficient in converting sales to gross profits, as Shell has the highest gross profit margin of 6.14% versus 3.33% for PSO and 3.96% for APL. The reason is that Shell and APL do not have to pay an Inland Freight Equalization Margin.

STOCK PERFORMANCE

Analysis of stock returns volatility of weekly continuously-compounded returns over Jul09-Jun10, shows that the standard deviation is 6.58%. The future stock returns are expected to vary with a standard deviation of 6.58% and have been moderately volatile over Jul09-Mar11.

Beta analysis of the company over Jul09-Jun10 shows that the beta of APL stock is average at 0.81, as given by the slope of the trend line. This indicates the stable stock returns in accordance with the secure demand and profitability of the company. APL stock, as one of the three major OMC stocks, is almost completely reflective of KSE-100 performance, as the beta of 0.81 is close to market beta of 1.00.

APL is part of the first fully integrated oil company of the sub-continent. APL’s sponsors include Pharaon Commercial Investment Group Limited (PCIGL) and Attock Group of Companies. Pharaon Group is engaged internationally in diversified entrepreneurial activities, including Hotels, Oil Exploration, Production and Refining, Manufacturing of Petroleum Products, Chemicals, Manufacturing and Trading of Cement, Real Estate etc on the other hand, the Attock Group of companies consist of The Attock Oil Company Limited (AOC), Pakistan Oilfields Limited (POL), Attock Refinery Limited (ARL), Attock Petroleum Limited (APL), Attock Information Technology Services (Pvt.) Limited (AITSL), Attock Cement Pakistan Limited (ACPL) etc thus, the strong backward and forward linkages give APL a strong competitive advantage.

APL generates the bulk of its sales revenue via sale of a variety of petroleum and lubricants products to consumers, including both, direct end-users and through distribution channels. These products include asphalt, furnace oil, light diesel oil, jute batching oil, solvent oil and mineral turpentine oil.

APL commsioned 37 pumps in FY’10, bringing the total number of operating pumps to 277 retail outlets in the country. The Company’s investment in these pumps stands at Rs 787 million. In terms of volumetric sales, APL accounts for 7.0% of total market share and has witnessed rapid volumetric growth in sales during FY10 of around 87% and 67% for Motor Spirit (MS) and High Speed Diesel (HSD) respectively, compared to industry average of 27% and -3% respectively.

In order to meet the mid country fuel demands, a terminal was built and commissioned at Machike in FY10. This terminal connects APL with MFM (Mehmoodkot-Faisalabad-Machike) pipeline and WOP (white oil pipeline). This terminal has a storage capacity of High Speed Diesel, Superior Kerosene Oil and Premier Motor Gasoline. This storage/dispatch facility has further increased APL’s market share and is a step towards company’s prosperous future. The other major achievement is in the sector of quality assurance unit, by setting up of quality control lab at Machike and mobilization of another quality control mobile unit for central Punjab.

Further, APL also entered into a Joint Venture with Askari CNG, which is currently operating 52 CNG outlets, to convert 20 of its existing CNG outlets into multi-fuel facility outlets. APL was awarded the contract of DGP-ARMY for supply of petroleum products throughout Pakistan for the year 2010-11, ie an institutional customer, thereby diversifying its customer base.

FINANCIAL PERFORMANCE (FY10)

‘Price Trend Analysis’ figures in this section are courtesy APL’s 2010 financial statements.

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 $75 per barrel in August/September 2010, internationally, world oil prices are expected to rise by about 8%, according to the current futures curve as shown. Sales are directly linked with the international oil prices, therefore, any increase or decrease will affect the industry’s performance accordingly.

The annual oil industry trade for Petroleum Oil Lubricant products increased by 8.4% from 19.130 in FY’09 million M. Tons to 20.742 million M. Tons in FY10. The increase in trade was mainly driven by increased consumption of Mogas and Furnace Oil. Increase in Furnace Oil consumption was due gas load shedding and ongoing robust demand from the power-generating sector. Demand for motor gasoline increased by over 27% over the preceding year mainly due to 50% increase in cars sales and 44% increase in motor cycles’ sales, gas shortage in winters, one day holiday of CNG per week and extraordinary increase in use of generators due to frequent power outages.

Consumption of black oil grew to 9.3 million tons – an increase of 14% over the preceding year. Black Oil demand picked up owing to supply constraints for natural gas. White oil sales grew by 4% mainly due to increase in sale of petrol and jet fuels. However, diesel under-performed mainly due to slower economic recovery and lower margins.

APL’s sales volume of both diesel and petrol increased on the back of developing retail fuelling strategies and expansion of its retail distribution network. Total industry annual trade of diesel declined by 3.9% whereas petrol (Mogas) increased by 27.0%. APL managed to increase its sales volume and market share of both diesel and petrol by establishing new pumps and firm marketing strategies. However, by distancing itself from the Furnace Oil market, in order to keep way from the circular debt menace, APL lost its market share by 280bps (from 7.32% in FY07 to 4.52% during FY10) in furnace oil (FO) segment. However benefits obtained were prevention of rising financial charges and increased concentration on retail network expansion.

The annual sales volume of diesel and petrol increased by 67% and 87% respectively, compared to industry average of 27% and -3% respectively. Consequently, APL’s market share increased from 3.5% to 6.2% for diesel and from 3.3% to 4.9% for petrol. Overall, APL recorded the highest volumetric sales at 1.5 million M. Tons for the year under review up by 7% over last year, thereby improving its market share from 6.6% to 7.0%.

INDUSTRY PERFORMANCE

PSO has been the market leader in fuel marketing and supply industry, having a market share of 68%. The 2009-2010 sales level of the three industries that make up the sector, APL, Shell and PSO, is shown. This sector comparison has been made on the basis of APL, Shell and PSO FY10 financial statements. However, since the fiscal year of APL and PSO terminates in June 2010 whereas the fiscal year for Shell terminates at December 2010, the analysis in this section is only indicative.

In FY10, net sales of PSO stand the highest at Rs 743 billion, followed by Shell at Rs 198 billion and APL at Rs 83 billion. Although being the smallest among the three major OMCs, sales APL grew by the greatest proportion. Over the period 2009-2010, PSO sales grew by 21.23% while APL sales showed a growth of 33.83% and Shell witnessed a growth of 26.62%.

The earnings growth in the sector shows that PSO witnessed the highest earnings growth of 235% versus 16.61% for APL and -36.96% for Shell. PSO had reported a net loss in FY09 due to the liquidity crisis, thus it profits grew phenomenally in FY10. Although APL witnessed the highest sales growth, the profitability growth of APL was the lowest, indicating inefficiency in management of costs.

The performance of the three companies with regard to gross profit margins shows that Shell is most efficient in converting sales to gross profits, as Shell has the highest gross profit margin of 6.14% versus 3.33% for PSO and 3.96% for APL. The reason is that Shell and APL do not have to pay an Inland Freight Equalization Margin.

STOCK PERFORMANCE

Analysis of stock returns volatility of weekly continuously-compounded returns over Jul09-Jun10, shows that the standard deviation is 6.58%. The future stock returns are expected to vary with a standard deviation of 6.58% and have been moderately volatile over Jul09-Mar11.

Beta analysis of the company over Jul09-Jun10 shows that the beta of APL stock is average at 0.81, as given by the slope of the trend line. This indicates the stable stock returns in accordance with the secure demand and profitability of the company. APL stock, as one of the three major OMC stocks, is almost completely reflective of KSE-100 performance, as the beta of 0.81 is close to market beta of 1.00.

Gross sales increased by 34.18% from Rs 70.72 billion in FY09 to Rs 94.90 billion in FY10, in line with the growth and expansion strategy of the company. This trend was reflected in net sales, which increased by 33.83%. However, this was offset by an increase of 34.93% in the cost of goods sold, from Rs 58.57 billion in FY09 to Rs 79.03 billion in FY10. This occurred due to the revision of OMC margins on Motor Spirit (MS), Kerosene (SKO) and Light Diesel Oil (LDO), in order to stabilize prices and reduce inflation in the country. Thus the OMCs bore part of the international oil price hike.

As a result, the gross profit increased by 14.20% from Rs 3.29 billion in FY09 to Rs 3.76 billion in FY10. Administrative and marketing expenses increased by a negligible 0.79%, thus allowing a 16.47% increase in operating profit from Rs 2.82 billion in FY09 to Rs 3.28 billion in FY10.

After accounting for an increase of 55.09% in other operating income, 15.54% in income on investments, 59.70% in share of associates’ profits, and 97.53% in workers’ fund, EBIT recorded an increase of 19.88% from Rs 4.31 billion in FY09 to Rs 5.17 billion in FY10. However, a 10-time (1003.29%) increase in finance cost caused the income before tax to witness only a 13.22% increase. Breakup of the finance cost shows that there has been a Rs 293 million increase in financial charges due to late payment charges.

Thus net profit increased by 16.61% from Rs 3.08 billion in FY09 to Rs 3.60 billion in FY10. An identical percentage increase was witnessed in the earning per share, which increased from Rs 53.51 per share in FY09 to Rs 62.40 per share in FY10.

FINANCIAL PERFORMANCE (FY04-10)

Sales of APL increased by 33.83% in FY10, its highest volumetric sales of 1.5 million M. Tons. APL’s sales growth was the highest among the three major oil marketing companies. This was due to focus of the company’s strategy on marketing and expansion of its retail outlets, as described earlier.

The gross profit margin decreased slightly from 4.66 in FY09 to 4.54 in FY10. This decrease in profitability occurred due to fixation of OMC margins, in a scenario of highly volatile international oil prices. Coupled with a higher finance cost, the net profit witnessed a negligible decline from 4.36 to 4.34 over FY09-10.

Return on assets decreased from 16.87 in FY09 to 16.76 in FY10, due to a 17.36% increase in total assets, as compared to a 16.61% in net income. The increase in assets occurred mainly in the category of stock and spares, and stock-in-trade. The return on equity witnessed a greater decline from 43.52 to 38.91 over FY09-10, due to a higher 30.42% increase in equity. Overall, the company enjoys a good profitability position and is expected to perform better in better, as the new retail outlets become firmly established and the investment into marketing pays off.

Inventory turnover increased from 0.73 days in FY09 to 4.32 days in FY10, due to larger amount of stored inventory as new retail outlets were established. Day sales outstanding decreased from 39.88 to 33.06 over FY09-10. Trade debts recorded a 2.98% decrease in FY10, which indicates the excellent liquidity position of the company and strong receivables management practices. It also implies that the liquidity position of APL is much stronger than its competitors’, especially PSO’s, in light of the circular debt issue.

The net effect was a decrease in operating cycle, from 40.62 days in FY09 to 37.38 days in FY10. Total asset turnover increased from 3.66 to 3.86 over FY09-10, showing that the company has managed to generate a high sales level to justify investment in its expansion policies. However, sales/equity declined from 9.99 in FY09 to 8.96 in FY10, due to a greater increase in equity, compared to sales.

The current ratio improved from 1.50 in FY09 to 1.63 in FY10, showing that the company is readily able to meet its short-term liability through an ample inventory of current assets. The increase in current assets was mainly due to an increase in stock-in-trade, which increased three times (601.93% increase).

The debt to asset ratio decreased from 61.24 in FY09 to 56.98 in FY10. This was due to an 8.97% increase in total liabilities, as compared to a 17.36% increase in total assets. This is a good indication, as it shows that the company has been able to achieve growth without greatly increasing its short-term or long-term liabilities. The debt to equity ratio declined from 1.58 in FY09 to 1.32 in FY10, due to a greater 30.42% increase in total equity. This increase was driven by a build-up of revenue reserves, which again indicates the strong financial position of the company.

The book value per share increased from Rs 122.96 per share in FY09 to Rs 160.36 per share in FY10 due to strengthening equity position of the company, as described above. The market price also increased from Rs 318.51 per share in FY09 to Rs 341.17 per share in FY10, showing that the growing strength of the company was reflected in market sentiments about the company. Underpinned by the sound financials, the earning per share increased from Rs 53.51 per share in FY09 to Rs 62.40 in FY10.

However, the price earnings ratio fell slightly from 5.95 to 5.47 over FY09-10, which demonstrates that the growing strength of APL was not fully reflected in the market prices of APL stock. However, this could be due to overall low performance of the stock market. The dividend per share decreased from Rs 25 per share in FY09 to Rs 10 per share in FY10, as the company’s focus was on thorough marketing and expansionary activities, decreasing the dividend payout.

FUTURE OUTLOOK

In alignment with their aim of continuing growth and strengthening shareholder value, APL’s future outlook as of 2010 is condensed in the following points:

— Setting up of Storage Facility at Port Qasim Karachi, for import of High Speed Diesel and exports of Naphtha, at a total cost of Rs 22.5 million.

— Development of Company Financed Retail Outlets targeting high trade areas and highways, thereby further strengthening its presence and market share.

— Setting up of Lubricant blending plant and increasing focus on marketing of Gasoline Engine Oils and Industrial Lubricants.

— Development of Storage Depots locally at Mahmood Kot Multan, Machike and Tarujaba NWFP and Afghanistan to improve supply to retail outlets.

— Expansion of consumer base in other petroleum products locally and in Afghanistan.

— Increasing Storage Capacity of existing bulk oil terminal at Rawalpindi Bulk Oil Terminal (RBT) and Machike Bulk Oil Terminal (MBT), at a cost of Rs 322 million.

— Expansion of retail outlet network in Sindh, Upper Punjab and Afghanistan.

During FY10 oil consumption showed some improvements from the extremely low base in FY’09 when oil demand slumped, due to the global financial crisis. However, the recovery in oil demand in FY’10 remained relatively modest. The pace of economic growth, in short to medium term, is projected to be slow indicating that oil demand growth will remain moderate.

Energy scarcity in the country coupled with higher demand for energy consumption puts pressure on country’s energy resources. It is expected that future energy demand in the country will continue to grow owing to expected natural gas constraints specifically for power generation sector. This will eventually intensify reliance on the imported oil and oil based products. However, international sources of oil are subject to great volatility due to economic environment, operational issues, natural catastrophes, political upheavals and measures by OPEC cartel.

Further, GoP has a vital role in controlling the prices of oil and oil-based products in the country through implementation, regulation and adjustment of levies, duties, taxes and subsidies. Fixation of oil prices and OMC margins in FY’10 add to the uncertainty in profitability associated with oil sector companies.

Rising international crude oil prices amid fixed absolute margins for the OMCs will increase working capital requirements and reduce return on working capital for them. Circular debt continues to haunt the industry and especially PSO among the OMCs. Any rise in working capital requirements for the oil giant will worsen the situation and increase overall inter-corporate debt in the energy chain. Being a non-government entity, APL’s stance as of yet has been to distance itself from the public sector power generation companies in order to avoid the circular debt menace, which resulted in lost market share. Nonetheless, as circular debt issue eases off, APL can benefit by regaining its market share in the segment, thus brightening up growth and profitability prospects of the company.

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