PSOs profits down but future still bright

Pakistan State Oil announced its full year 2009 earnings on Wednesday and unsurprisingly it was all painted in red. The state-owned firm PSO posted loss of Rs 39.05/share - in line with the consensus of Rs 41/share - thanks to huge inventory losses and massive battering of Pak rupee against the US dollar.
Burdened by circular debt, the cash starved company disappointed its shareholders by failing to announce any dividend in excess of Rs 5/share doled for the first half FY09. The companys stock prices, consequently, fell sharply to close 2 percent by the session close, in a market that ended nearly flat. The firms sales revenue portrayed a rosy picture mainly because of reasonable increase in furnace oil sales that constitutes a major portion of PSOs sales mix.
This coupled with higher product prices during FY09 helped offset the impact of falling diesel sales after its consumption declined by 11 percent due to slow economic activity. Despite the 7 percent hike in per liter margins on different fuel products, the companys gross margins were the first ones to spoil the party - down to virtually nothing as compared to a healthy 6 percent last year.
The reasons for this drop are twofold. PSO suffered huge inventory losses especially during 1HFY09 when oil prices nose-dived in international market, while rupees sharp depreciation (23 percent) against the US dollar during FY09 made matters even worse and dented its earnings.
On top of this, the ongoing circular debt crisis which got even worse during 2HFY09 forced the company to finance its working capital requirements through heavy short-term borrowings, which increased its financial charges by four and a half times. So what does the future hold for PSO? Is it the end of the world for the countrys leading oil marketing firm?
Thankfully not, as the otherwise controversial rental power plants and upcoming IPPs would be a trigger to PSOs performance going forward, enabling the firm to fire up its furnace oil sales by at least 2.1 million tons during FY10. Moreover, with oil prices expected to hover around the current rate, PSO will likely post stable earnings in the first quarter of FY10 as there would be no inventory losses.
The circular debt, however, remains an area of major concern and would be an important determinant in PSOs future dividend distribution. But if, as promised, the crisis is resolved as early as the end of this month, the firm would start paying out healthy dividends again where in all likelihood it would compensate for its lower payout in the first quarter FY10 mainly because its biggest shareholder - the government - needs money.

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PSO P&L

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RS (MN)                FY09         FY08        % CHG

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Sales               612,696      495,279          24%

Cost of Sales       609,685      465,255          31%

Gross profit          3,010       30,024         -90%

Gross margins (%)      0.5%         6.1%         -92%

Other income            777          314         148%

Finance cost          6,232        1,368         356%

PAT                 (6,699)       14,054           --

EPS (Rs)            (39.05)        81.94           --

DPS (Rs)               5.00        23.50         -79%

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