Remaining depressed especially in 3QFY16, Pakistan State Oil (PSX: PSO) has come forth much better in its annual financial performance. In FY16, PSO posted an improvement of 48 percent year-on-year in its earnings. PSO has reported a notable decline in earnings in the third quarter of FY16 due to higher inventory losses, while the top line slowed down on account of lower margins on furnace oil and weaker petrol and diesel sales in the quarter.
In the annual performance however, PSO has been seen to benefit from continuous fall in financial charges amid low interest rate environment, and also the slowdown in circular debt build-up due to stabilizing 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 back in 3QFY16 with inventory gains for the final quarter.
Net margins also improved due to lower finance cost. And moving forward, PSO is likely to enter an optimistic phase with growing demand, and hence sales of retail fuels like petrol and diesel. Since these fuels are not linked to the circular debt, they have the ability to generate cash for the firm, which in fact has been reducing the firm's liquidity burden in FY16 and will continue to positively affect the cash position of the OMC in the coming year. Improvement in liquidity can be seen from lower penal income in FY16 and a 33 percent payout ratio versus 16 percent average 5-year historic payout ratio.
Improved volumetric flows are likely to lift PSO's top line in the next fiscal. Also the firm has a sweet spot for RLNG supply in its income, which is likely to grow further in future. Rising petrol consumption in particular, has raised questions over the existing port capacity to handle fuel imports, which has pushed the government to revive the refining capacities in the country, and PSO also has long term plans to build a refinery in south region.
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