Oil Marketing Company: ATTOCK PETROLEUM LIMITED - Analysis of Financial Statements June 2004-June 2006

Being the 4th company which granted the marketing licence in Pakistan, Attock Petroleum Limited is the 3rd largest oil marketing company of Pakistan with a market share of 7%.
APL is part of the first fully integrated oil company of the sub-continent. APL's sponsors include Pharaon Commercial Investment Group Limited (PCIGL) and Attock Group of Companies. Pharaon Group is engaged internationally in diversified entrepreneurial activities, including hotels, oil exploration, production and refining, manufacturing of petroleum products, chemicals, manufacturing and trading of cement, real estate etc. On the other hand, the Attock Group consists of Attock Oil Company Limited (AOC), Pakistan Oilfields Limited (POL), Attock Refinery Limited (ARL), Attock Petroleum Limited (APL), Attock Information Technology Services (Pvt) Limited (AITSL), Attock Cement Pakistan Limited (ACPL) etc thus, the strong backward and forward linkages give APL a strong competitive advantage.
APL started its exports to Afghanistan in April 2003 and presently catering to the export of Naphtha to Middle East, Far East and South Asia.
Presently, products being exported include Premier Motor Gasoline, Superior Kerosene Oil, Jet Fuels, High Speed Diesel and Bitumen. APL commands a significant local market share in petroleum products including Furnace Oil, Light Diesel Oil, Solvent Oil, Mineral Turpentine Oil, Asphalt and Jute Batching Oil to meet the demands of the industrial consumers. The company has been able to maintain its upward thrust in export of petroleum products despite several strikes and hostile environment.
To strengthen the network of retail outlets, APL extended its operations up to Karachi and the rest of the Sindh. In this regard, 32 pumps were commissioned during the year all over Pakistan bringing the total number of operational petrol pumps to 177 as on June 30, 2007. Furthermore, 62 retail outlets are currently under construction, and an additional 137 are at different stages to securing the necessary licences.
In 2007, the OMCs witnessed volumetric growth of around 12% from last year mainly due to increase in demand of furnace fuel oil due to scarcity of hydel power and gas. On the contrary, there was a reduction in OMC's margins due to change in pricing formula of regulated products in 2006 affecting profitability of the whole industry. However, APL mitigated such negative impact through improved product mix leading to a rise in its revenues. The company also managed to retain the market share around 7% in 2007.
Government of Pakistan continued to subsidize the oil prices during the year on the backdrop of steeply rising international oil prices. Several countries, which had subsidized the critical fuels such as diesel and gasoline, were forced to either reduce or completely withdraw the fuel subsidies during the year. The subsidies had become too expensive in an environment of rapidly rising international oil prices. OMCs are carrying the burden of diesel subsidy through Price Differential Claim (PDC). The OMCs are facing liquidity problems due to piling up its working capital on account of PDC.
Nevertheless, APL is relatively less susceptible to volatile oil prices due to higher weightage of deregulated items in its product portfolio. With a diversified product mix and lower vulnerability to volatile oil prices, APL is expected to increase its market share to 15% by 2010.
FINANCIAL REVIEW 06-07: APL posted net sales revenue of Rs 44,131 million, showing an increase of Rs 3,291 million (8%) from the last year. This increase in sales has supported in achieving gross profit of Rs 2,045 million showing an increase of Rs 233 million and profit after tax of Rs 1,729 million reflecting a rise of Rs 336 million.
This improved performance is attributable to an increase in sales volume and improved product mix. Other operating income increased from Rs 323 million to Rs 406 million, mainly due to the increase in the commission and handling of export related services.
Income on bank deposits and investments increased by Rs 234 million representing higher yield through better fund management and increase in average bank balances. The tax charge and workers' profit participation fund have increased in line with increase in profitability. Consequently, earnings per share increased from Rs 34.82 to Rs 43.22 because of the aforementioned reasons.
The cash generated from operations during the year was Rs 2,097 million (2006: Rs 1,725 million) against which cash used in various capital projects and payment of dividend amounts to Rs 144 million and Rs 319 million respectively.
APL performed better than its peers in terms of its liquidity position. Expansion in storage capacity, strong backward integration with Attock Oil Company Limited (AOCL) along with backing from Attock Group enabled the company to keep its liabilities near to the ground. On this account, the company coped up reasonably well during oil price recession in 2H06. As evident from the graph, the company's current ratio is well above 1.
However, the declining quick ratio trend is demonstration of the fact that APL has accumulated large amount of inventory, owing to high sales price, which has significantly diverted the interests of the consumers towards cheaper substitutes, not at all a healthy sign for the overall performance of the company in the long run.
Piling up of inventory owing to expansion in storage terminals, enhancement of infrastructure, retail outlets and petrol pumps all contributed towards higher inventory turnover ratio and consequently prolonged operating cycle.
Further expansion and up-gradation plans might pose a serious threat to the company in terms of assets efficiency owing to decreased consumption of POL products. It will not be out of place to mention the ongoing efforts of the company towards marketing and product diversification, which enabled the company to surpass other players of the industry. High amount of trade debt has resulted in high DSO, which means that APL is not proficient enough in converting its credit sales into cash sales.
While record sales/equity ratio was declared in FY06 on the back of higher sales volume in all major categories along with an increase in petroleum prices, APL is presently facing a totally opposite scenario.
In consequent of significantly low sales volume owing to higher prices, up-till now APL has not been able to fare well either in terms of stable sales price or sales volume. The argument holds true for the erratic TATO trend as well. Hence, all ratios of asset management under consideration have turned out to be against the company.
Profitability trend of APL is not in line with the industry trend. Owing to company's entrance in the southern market and continuing strong international oil prices, the company was able to outshine other players of the industry in terms of net profit margin. In addition to this, zero interest expense on account of zero borrowings or loans contributed towards higher net income and thus higher net profit margin in FY06. The growth momentum in sales was both volumetric and price-led.
However, the profit margins increased marginally in FY'06 on the back of lower vulnerability to decline in international oil prices, better product mix and exports. On the other hand, ROE has declined by a far greater extent, owing to greater reliance on equity financing and higher Retained earnings, which are subsequently ploughed back into the company for future operations. ROA on the other hand has declined only marginally but still signifies its asset utilization strength as compared to that of its peers.
APL is the only company in the sector with zero leverage. Moreover, its non-current liabilities do not include any loan or borrowing. In short, APL is not a debt-financed company; instead it relies on equity financing. This is evident from the company's declining long-term debt to equity ratio.
Moreover, due to its increasing current liabilities, debt-to-asset ratio has been increasing until a recent downturn. However, the trend in debt to asset ratio is still on a lower side as compared to that of other players.
The EPS has witnessed an increasing trend until second half of FY06. This can be attributed to lower net income in absolute terms due to lower sales volume. Consequently, the DPS also decreased marginally. The book value per share however is increasing with shows that company has an increasingly high net worth for it shareholders. Despite the seemingly positive trends, APL needs to catch up with the growing industry trend in order to strengthen its market position.
OUTLOOK: The management of Attock Petroleum Limited is presently seeking to bolster its current market position by expanding its business horizons to new geographical areas by setting up new storage terminals besides enhancing the existing storage facility. Further, the company is actively pursuing the setting up of quality retail outlets throughout the country.
Although the structural shift towards cheaper sources of energy has already set in; product diversification, better marketing strategies, strong backward and forward linkages combined with the company's ability to export some of its products is expected to alleviate the impact of local change in consumption patterns.
TO DOMINATE THE DOWN STREAM PETROLEUM SECTOR FOLLOWING PROJECTS ARE PLANNED/UNDER CONSIDERATION:
-- In order to meet the fuel demands a terminal is under construction at Machike likely to be commissioned by mid 2008 at a total cost of Rs 300 million. The terminal will have a storage facility of HSD, PMG & SKO.
-- Another terminal at Port Qasim is in designing phase. Material procurement is in process and terminal is expected to be commissioned by end of 2009. This will help the Company to import/export petroleum products at its ease and also to meet the demand of southern region of the country.
-- Also, the company is actively considering installing storage terminals at other strategic locations of the country like Mehmood Kot (Multan) and Tarru jabba (Peshawar).
-- Followed by significant enhancement of HSD storage at Rawalpindi Bulk Oil Terminal in the last two years, enhancement of storage of other products has been planned in the ensuing year. Further, building of road network inside terminal and gantry expansion are also being carried out to ensure safe movement of POL products and handling the additional volume to meet the growing demand of feeding products to the upcoming retail outlets. Fire fighting network is also being upgraded to pledge safety measures.
-- A fuel supply agreement has been signed with Attock General Limited for supplying FO to upcoming 150MW FFO based power plant at Morgah, Rawalpindi. For this purpose necessary arrangements including the installation of piping system are being made.
-- In order to cater the growing demand of furnace oil in the country the Company is planning to import furnace oil.

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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