In the last few years, the oil marketing companies have seen a significant change in their revenue mix, primarily due to shifting stance on furnace oil. Where rising furnace oil volumes have been seen shrinking, retail fuels like diesel and petrol growth that took off in FY13 has also slowed down. At the same time, LNG has been replacing FO in the power sector. In the same vein, Pakistan State Oil (PSX: PSO), the largest player in the industry has too seen its black oil market shrinking, and white oil market growth consolidating.
PSO 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. The leader of the downstream oil and gas sector also imports products like Mogas, HSD JP-1 and FO based on the demand.
With 3500 plus outlets across Pakistan, PSO has the largest distribution network through which it serves both retail and bulk customers. More than half of this retail and over 160 consumer business outlets have been upgraded with the state-of-the-art modern-day facilities in accordance with the company's New Vision Retail Initiative. It also has the largest storage capacity in the country, which is approximately a million metric tons, representing 68 percent of the total storage capacity owned by all the OMCs.
Shareholding and strategic investments
Government of Pakistan holds the highest shareholding making up 22.47 percent shares of PSO; NBP Trustee Department has 14.88 percent shareholding. A breakup of the shareholding at PSO is shown in the table. The firm has strategic investments including 12 percent in Parco's White Oil Pipeline Project; 53 percent in PRL, which was increased in FY19 from the previous 22.5 percent; 22 percent in Pak Grease Manufacturing Company Limited; 49 percent in Asia Petroleum Limited; 62 percent investment in Joint Installation of Marketing Companies, and 50 percent in new Islamabad airport fuel farm as per the company's latest annual report.
Recent past at PSO
PSO witnessed a growth of 8 percent in FY17 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 firm's sales revenues. Rise in PSO's net revenues led to 77 percent increase in its bottom-line for FY17. Other factor that lifted the bottom-line was the reduction in the finance cost.
FY18 continued to see growth 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, its black oil segment saw a significant slide primarily owing to industry dynamics. i.e. government's strategy of switching priority (merit order) of existing power plants to RLNG/natural gas from FO. PSO's fuel oil volume declined by 29.6 percent year-on-year in FY18.
In FY18, PSO's gross revenues increased by 19 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; decrease in other income by 32.7 percent year-on-year; and increase in other expenses by over 40 percent due to higher exchange losses on account of significant currency depreciation. Bottom-line decrease was also reduced somewhat because of a decline in finance cost in FY18.
PSO in FY19
FY19 has been a challenging year for the oil marketing segment due to the rising competition and economic contraction. The OMC industry has around 31 OMCs operating in addition 38 OMC licenses that OGRA has issued. While competition has increased, margins have also squeezed due to falling liquid fuel volumes by the sector by around 22 percent. The decline continued for black oil like furnace oil due to curtailment drive in the country, 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 tough interest rate environment due to the monetary tightening along with exchange losses, rising circular debt and mounting receivables were key factors that dragged the sectors performance including that of PSO.
Overall, the OMC giant posted a year-on-year increase of 9 percent in its net revenues. On the volumetric front, despite an overall decline of around 38 percent year-on-year in volumetric sales by the OMC, 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 company's volumes in the last quarter of FY19.
PSO's unconsolidated earnings declined by 32 percent in FY19, which came from higher inventory losses as well as lower volumes. Plus lower other income and higher other expenses and finance cost weighed heavy on its profitability due to exchange losses from around 32 percent currency depreciation during FY19 as well as higher interest expense on borrowings. Increase in finance cost can also be seen in deteriorating interest cover. The firm's deteriorating financial health is also visible from increasing financial leverage and debt to equity ratio as average borrowing levels for the firm have risen. And rising interest rate has increased its weighted average cost of debt as well.
While there has been no growth in other income for PSO in FY19 in its unconsolidated financials, its consolidated accounts show that other income grew staggeringly by over two times, which could be due to gains on the acquisition and consolidation of PRL after PSO acquired 52.67 percent stake in the refinery during the year.
Though the company announced a cash dividend of Rs5 per share in addition to interim dividend of Rs5 already paid, it also announced a bonus issue of one for every five held or at 20 percent.
Outlook
There has been some rebound in volumes for PSO in 1QFY20 as it regained some lost market share. This was not only due to increase in retail volumes but also furnace oil volumes largely due to increased demand in the summer months. The increase is estimated at 9-10 percent in volumetric sales during the three months, which lifted PSO's revenues in 1QFY20.
Despite the growth in the OMC's top-line, the gross profits were flattish due to lower inventory gains. PSO's earnings dropped by 16 percent year-on-year which came despite the 63 percent year-on-year growth in other income constituting mostly of penal income on late payment; and 63 percent lower other expenses amid exchange gains in 1QFY20 versus exchange losses in the previous quarters. Distribution expenses and finance cost both weighed heavy on the OMC giant's earnings along with growth in finance cost.
Going forward, while the macroeconomic headwinds are expected to remain in place, PSO's fortunes could take a leap with no hefty exchange losses in the offing, optimistic chances of the second tranche of circular debt clearance that would ease liquidity; and the revised OMC margins. Besides the circular debt, rising receivables and stagnant demand for liquid fuel, the company faces an additional pressure to upgrade to a higher fuel quality as per the latest direction of the government to reduce the environmental impact. The company has also engaged Saudi Aramco under a Government-to-Government arrangement for development of a state of the art refinery and a petrochemical complex.
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PSO-Pattern of Shareholding as at June 30, 2019
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Categories of Shareholders' %
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Members-Board of Management, Chief Executive Officer and their spouse and min 0
Associated Companies, Undertakings and related parties
Government of Pakistan 22.47
OOP's Indirect Holding:-PSGCL Employee EmpowermentTrust 3.04
NIT and ICP 0.09
Banks, Development Financial Institutions, Non-Banking Financial Institutions 5.49
Insurance Companies 9.22
Modarabas and Mutual Funds 15.13
Shareholders holding 10%or more:
NBP, Trustee Department 14.88
General Public:
Resident 14.37
Non-resident 0.48
Others:
Non-Resident Companies 6.29
Public Sector Companies &. Corporations and Joint Stock Companies 7.18
Employee Trusts 1 Funds etc. 1.36
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100
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Source: Company accounts
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PSO Financial Ratios
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FY14 FY15 FY16 FY17 FY18 FY19
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Profitability Ratios
Gross Profit ratio % 3.10 2.51 3.32 4.23 3.73 3.12
Net Profit ratio % 1.84 0.76 1.52 2.08 1.45 0.92
Return on Shareholders' Equity % 27.75 8.43 11.22 17.72 14.00 8.88
Operating Leverage ratio % 736.93 198.03 (6.54) 170.92 (40.07) (213.49)
Activity/Turnover Ratios
Inventory turnover ratio (X) 11.96 12.30 11.99 14.36 13.84 13.06
Debtor turnover ratio (X) 11.19 6.26 5.05 5.61 5.73 5.77
Creditor turnover ratio (x) 8.80 8.20 8.50 11.64 10.75 10.15
Total asset turnover ratio (X) 4.31 3.12 2.65 2.98 3.33 3.27
Fixedl asset turnover ratio (x) 246.13 181.35 138.98 160.93 183.24 172.07
Operating Cycle No. 23 43 59 59 56 55.00
Investments/Market Ratios
Earning per share (Basic & Diluted) Rs 55.8 17.7 26.3 46.6 39.5 37.1
Price earning ratio (P/E) (x) 7.0 21.8 14.3 8.3 8.1 6.3
Dividend yield (including bonus) % 2.3 2.6 3.3 7.0 5.3 7.1
Dividend cover ratio (including bonus) (x) 8.9 2.6 3.0 2.5 2.8 2.3
Capital Structure Ratios
Interest Cover ratio (X) 4.45 2.09 3.28 5.95 6.30 2.96
Financial Leverage ratio (X) 117 124 115 127 81 90
D/E Ration (as per MV) (X) 87.39 97.39 103.04 124.00 86.58 161.20
Weighted Average Cost of Debt % 11.08 9.68 5.02 4.66 4.10 8.58
Liquidity Ratios
Cash to Current Liabilities (X) 0.03 (0.16) (0.12) (0.15) (0.03) (0.06)
Cash Flow from Operations to Sales (X) (0.04) (0.03) (0.00) (0.03) 0.002 (0.01)
Current Ratio (X) 1.09 1.10 1.12 1.31 1.32 1.32
Quick Ratio (X) 0.79 0.87 0.91 1.07 1.03 1.01
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Source: Company accounts
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Pakistan State Oil
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Rs(mn} 1QFY20 1QFY19 YoY
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Net sales 329,783 280,719 17%
Cost of products sold 319,076 269,812 18%
Gross profit 10,706 10,906 -2%
Other Income 1,584 970 63%
Distribution & marketing 2,565 2,068 24%
Administrative expense 725 721 1%
Other expense 289 792 -63%
Profit from operations 8,712 8,296 5%
Finance Cost 2,640 1,826 45%
Share of ProfitZ(loss) of assoc 145 120 21%
Profit aftertax 3528 4,181 -16%
Earnings per share [Rs) 9.02 10.69 -16%
Gross margin 3.25% 3.89%
Operating margin 2.64% 2.96%
Net margin 1.07% 1.49%
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Source: FSX
Copyright Business Recorder, 2019
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