PSO: earnings continue to slide

Pakistan State Oil (PSX:PSO) announced its financial performance for 9MFY19 earlier this week, which was not very different from its 1HFY19 performance. Earnings for the oil marketing giant came down by 55 percent year-on-year in 9MFY19.

While the revenues increased by 10 percent, year-on-year for PSO in 9MFY19, the volumetric sales for the firm have come under fire; volumetric sales of not only black oil, but also white oil saw a decline during the period under review. This is an industry wide trend where PSO is the market leader; black oil includes furnace oil, which has seen significant contraction since it is being replaced by RLNG in the power sector, and recently a complete ban on the import of the fuel has taken volumes to minimal. On the other hand, white oil sales include those of retail products. Here, the diesel volume have suffered due to illicit trade and smuggling via porous borders.

Besides weak volumetric sales, the company has been suffering from heavy inventor losses, especially in 2QFY19 that adversely affected the company’s gross profits and hence gross margins. And while operating costs remained stable, the finance cost increased significantly in the rising interest rate environment. Plus, PSO has seen its short term borrowings rise despite the circular debt clearance by the government in March 2019. Also, the depreciating currency has resulted in exchange losses for the company, which also lifted the fiancé costs.

The OMC has been focusing on the retail side and its RLNG business. However, the liquidity crunch due to the circular debt continues to overshadow its operations. It was hoped that the Rs200 billion payments for the circular debt would ease liquidity for the firm, but the rise in interest rates and inflation has taken away any gains.

PSO has not been importing furnace oil since December 2018, as the government put a ban on the import of the petroleum product. However, recently the government has been considering a one-time import of furnace oil ahead of peak summer season. PSO has reportedly issued the first HSFO import tender for 2019, which will likely increase volumes in the coming quarter.