The gloom in the oil marketing sector is visible; volumes sold by the oil marketing companies (OMCs) are contracting and a recovery is not in sight. Profitability of the OMCs is declining due to weak petroleum demand as well as the currency depreciation, more so for companies replying largely on imports.
Shell Pakistan Limited’s (PSX: SHEL) financial performance in recent times is a representation of that. Apart from weaker macroeconomic outlook and currency depreciation in 2018 and 2019, profitability at SHEL has also been affected by the volatility in international crude oil prices The multinational oil company has seen a further deterioration in its losses in CY19 – falling from Rs1.10 billion to Rs1.49 billion in 2019.
Despite a reduction in volumes, Shell Pakistan’s revenue grew by 8 percent year-on-year in CY19, which is likely from increase in product prices and some volume recovery in summer months of 2019. However, the gross margins fell due to volatility in the oil prices. The OMC’s operating losses of 2018 turned to operating profits in 2019 as costs remained restricted. Though currency depreciation has reportedly been one of the factors restricting growth in earnings, Shell’s other expenses that mostly included exchange losses in 2018 declined by 45 percent year-on-year.
However, finance cost increased by more than 4 times for Shell Pakistan in 2019, which largely constitutes markup on short term borrowings. Growth in finance cost ate away the gains made in operating profits, and loss for the year (after tax) increase by 35 percent year-on-year.