Pakistan State Oil (PSX: PSO) is the country’s largest OMC and is engaged in marketing and distribution of all petroleum products: Motor Gasoline (Mogas), High Speed Diesel (HSD), Furnace Oil (FO), Jet Fuel (JP-1), Kerosene, CNG, LPG, Petrochemicals and Lubricants. It also imports products like Mogas, HSD JP-1 and FO based on the demand. With over 3500 plus outlets across Pakistan and the largest distribution network, the OMC serves both retail and bulk customers.
Shareholding and investments
Government of Pakistan holds the highest shareholding making up 22.47 percent shares of PSO, according to the latest pattern of shareholding; PSO has strategic investments in storage, refining, aviation, lubricants, and pipeline businesses. including 12 percent in Parco’s White Oil Pipeline Project; 63.6 percent in PRL as its subsidiary company; 49 percent in Asia Petroleum Limited; 62 percent investment in Joint Installation of Marketing Companies, and 50 percent in new Islamabad airport fuel farm; 44 percent in Eastern Joint Hydrant (un-incorporated joint arrangement); and 22 percent in Pak Grease Manufacturing Company Limited as its associate company as per the company’s FY20 annual report.
PSO in the recent past
The downstream oil and gas sector has seen significant up wing and downswing in terms volumetric sales in the last three years. COIVD-19 has been a recent factor in demand destruction that resulted in a down cycle in the volumetric sales by the OMC sector. Overall, over the last couple of years, there have been changes in the energy mix and OMCs’ revenues shifted away from the furnace oil towards coal and LNG. However, the FO has made a comeback during COVID and post COVID times due to the systemic issues in the refining system as well as the power sector.
Being the industry leader PSO has been driving trends in the sector. In FY17 PSO witnessed a growth in overall volumes by 8 percent on a year-on-year basis, compared to a growth ranging between -9 percent to 4 percent in the previous six fiscal years. Rise in volumes along with higher prices and the RLNG business led to 30 percent year-on-year surge in the PSO’s sales revenues and 77 percent growth in the bottom-line.
PSO’s volumetric growth continued in FY18 in white oil segment, especially motor spirit and HSD even though the retail segment faced stiff competition from new entrants, and substantial discounts offered by competitors and the influx of smuggled products like diesel from Iran. However, PSO’s furnace oil volumes declined by 29.6 percent year-on-year in FY18 as government’s priority changed to RLNG and coal for the power sector. PSO’s revenues increased by 20 percent, year-on-year, while profit after tax went down by 15.2 percent year-on-year primarily on account of one-time reversal of deferred tax asset; falling other income and higher exchange losses.
FY19 was a challenging year for the oil marketing segment due to the rising competition and economic contraction. While competition increased, margins also squeezed due to falling volumes by the sector. The decline continued for furnace oil, while the retail fuels especially diesel volumes also witnessed a decline due to falling demand from both the industrial sector, and the transport sector along with falling vehicle sales. Moreover, the high interest rate environment along with exchange losses, peaking circular debt and mounting receivables were key factors that dragged the sectors performance including that of PSO. And despite an overall decline of around 38 percent in volumetric sales, PSO’s revenues posted modest increase versus a decline by most of the other oil marketing companies. This was due to a rebound in the the company’s volumes in the last quarter of FY19. the company’s earnigns slipped by 32 percent, which came from higher inventory losses as well as lower volumes, finance cost and exchange losses. In FY19, PSO acquired 52.67 percent stake in PRL, which lifted its consolidated earnings.
In FY20, PSO’s volumes in furnace oil further reduced due to the continuing impact of policy of shifting power production plants to RLNG. On the other hand, in the retail sector PSO experienced an increase in motor gasoline volumes against an overall decline in the industry due to PSO’s increased assortment amid low demand. Industry diesel volumes too were affected due to weak industrial activity, construction activity, and reduced road and rail movement. However, PSO managed to gain volumetric growth.
Along with decline in revenue, decline in gross profit for PSO was mainly due to inventory losses on account of sharp decrease in international oil prices during the year. – on the other hand, increase in finance cost due to higher average policy rate of State Bank of Pakistan (SBP) in FY20 adversely impacted the bottomline. Decline in gross profit and increase in finance cost was partially offset by lower exchange losses and higher interest income recovered from power sector during the year. PSO in FY21 and beyond
After a stressful FY20 marked by weaker volumetric growth industry wide, FY21 has seen a revival in sales volumes for the OMCs. What also adversely impacted the profitability of the oil marketing companies in FY20 was the significant inventory losses that came with the historic oil price crash. That too reversed to some extent.
With economic revival in FY21 as seen from the resumption of industrial and economic activity as well as growth in car sales PSO saw a significant growth in volumes of 21.6 percent year-on-year in 9MFY21. Growth in volumes for 3QFY21 was even more pronounced with furnace oil coming back into the mix. Growth for PSO further came from inventory gains, and the turnaround in PSO profitability was also facilitated by no increase in operating expenses as well as a declining finance cost.
Going forward, what is key for PSO, and the OMC sector is the stability in oil prices as well as continued growth in volumes along with the change in price mechanism for petroleum products to fortnightly that will help reduce the size of inventory losses due to volatility in oil prices.