Shell Pakistan Limited (PSX: SHEL) announced its financial performance for the first half of 2019 earlier last week with a plunge in earnings from a profit of Rs1.6 billion in 1HCY18 to a loss of Rs1.45 billion. This loss is even more than what the company incurred in CY18. However, where the company earned a profit in 1HCY18, the overall profits for CY18 also stood at negative Rs1.1 billion.
Falling profitability for Shell Pakistan has largely to do with the macroeconomic situation in the country. Sharp currency depreciation in 2018 and 2019 so far has squeezed the oil marketing company's earnings, where the volatility in international crude oil prices and changing fuel mix in the country have added their share to the earning attrition
The OMC has been able to sustain as well as improve its market share and volumetric sales in the ongoing year. Shell's topline can be seen increasing 13 and 15 percent in 1HCY19 and 2QCY19. However, the volatility is crude oil prices have kept cost of sales higher for the company. In 1HCY19, cost of sales for SHEL increase disproportionally because of inventory losses, which has resulted in lower gross margins.
Moreover, a 71 percent year-on-year growth in other expenses in 1HCY19, and over twice increase in the same in 2QCY19 dragged earnings down, which was primarily due to increased exchange losses from currency depreciation. Recall that currency depreciation wreaked havoc on the bottomline in 2018 as earnings were dragged down by staggering increase in exchange losses (part of the other expenses). The final blow to the earnings came from the increase in finance costs that typically consists of bank charges and markup on short term borrowings. While oil price volatility has remained a risk for the downstream oil and gas sector, the changing fuel mix as a result of phasing out of furnace oil, and preference for RLNG has changed the sector dynamics. The OMCs players are focusing more on retail fuels and the same is true in terms of capital expenditure and expansion. Big players have also been facing increased competition from smaller new players.