Shell Pakistan is one of the oldest multinational companies in Pakistan and the history of the Company in Indo-Pak subcontinent dates back to 1903 when Shell Transport and Trading Company and Royal Dutch Petroleum Company decided to merge and supply petroleum to Asia.
The Company came to be known as Burmah-Shell Oil Storage and Distribution Company in 1928 in India with the merger of Royal Dutch Shell PlC and Burmah Oil Company.
Later in 1947, the Company was named Burmah-Shell Oil Distribution Company of Pakistan which became Pakistan Burmah Shell (PBS) Limited in 1970 when Pakistani investors gained 51 percent of the shareholding.
In 1993, the Burmah Group divested from PBS and Shell Petroleum jumped in to raise its stake to 51 percent. Today, Shell Petroleum is a 76 percent majority stakeholder in Shell Pakistan Limited.
Shell Pakistan Business Operations
The Company is divided into eight functional areas, namely retail, aviation, operations, lubricants, commercial fuels, finance, HR and corporate.
In the retail business, the Company is the largest player in the foreign retail segment and provides fuel to over 1 million customers daily. With over 800 retail outlets, Shell Pakistan is the only petrol retailer in the country to offer premier fuel.
The Company is a global leader in lubricants. The Company has three major lubricant brands: Shell Helix, Shell Rimula and Shell Advance, which have gained prominence not only globally but also within the country. These lubricants are market leaders across passenger cars, bikes and heavy duty vehicles.
The Company also provides world-class domestic heating oils, commercial road transport, industrial and wholesale products to business customers. Shell Pakistan is also one of the key suppliers of fuel to IPPs in Pakistan. The Company also has a good representation in the aviation segment.
The Company is amongst the three oil-marketing companies included in KSE100, the other two being PSO and Attock Petroleum Limited.
Company Performance
Revenues
Although the Company gets 99 percent of its revenues from fuel retail and exports, it also gets some from non-fuel retail. Gross sales witnessed a growth of 19 percent during nine months ended September 30, CY11 over corresponding year which includes sales from both fuel and non-fuel segments.
The poor economic condition of the country, particularly during the first nine months of CY11 led to a decline in the growth of gross sales. At the same time rising cost of doing business and accelerating international oil prices led a surge in the cost of products sold by 25 percent during 9MCY11 versus 20 percent in 9MCY10.
Profitability
The profitability of the Company was seriously hampered by the performance of the company during 3QCY11. During this quarter, the Company incurred a net loss of Rs 284 million as against the net loss of Rs 732 million during the same quarter last year.
Although the loss during 1QCY11 declined, the net loss weighed heavy on the Company's profitability. This was again driven strongly by dawdling sales volume and worsening macro economic indicators.
More precisely, the profitability was curtailed due to volatility in the oil market which resulted in heavy inventory losses. The net profit margin for 9MCY11 was 0.67 percent as compared to -0.01 percent in 9MCY10.
Though some recovery was seen during the nine months ending September 30, CY11, other factors that put a lid on profits were the soaring cost of financing due to government receivables and the incidence of minimum tax on the turnover of regulated products which led to high effective tax rates of 70 percent.
In the wake of such turmoil, the Company succeeded in posting net earning of Rs 1,122 million as against a loss after tax of Rs 12 million, during 9MCY10.
Operating Performance and Efficiency
At a time when the oil prices as well as the cost of doing business are galloping at a fast pace, the regulated margins for diesel and petrol in Pakistan remain the lowest in the region. This poses a threatening situation for the operational efficiency of the Company.
With inflationary pressure boggling the economy down to a crucial precipice, the regulated margins allowed by the government are not adequate to absorb the cost of operations, government receivables and high cost of financing.
The government receivables stood at Rs 14 billion, reflected by indirect taxes and subsidies. As a result the Company has been facing high interest charges to the tune of Rs 3.5 billion from the initiation of these receivables.
However, compared to PSO, the Company's receivable turnover is a lot higher depicting a better position in extending credit as well as collecting debts. Shell Pakistan has an inventory turnover of 9.95 times for 9MCY11 which witnessed growth compared 9MCY10 and 9MCY09.
Liquidity Position
Although the Company does not have any long-term liability on its balance sheet as of September 30, CY11, the financial soundness and short-term solvency of the Company attracts attention as the Company has availed short-term loans and financing.
These highlight loans taken for working capital requirement, which show that the Company is facing cash flow problems. Furthermore, the cash generated from operations and investing activities was also negative for the nine months ended September 30, CY11.
Outlook
Shell Pakistan Limited has been facing declining volumes underscored by lower fuel oil sales.
ECC had taken some measures to raise margins on regulated petroleum products, which is a good sign for oil marketing companies. However, Shell and other companies in the oil marketing sector look forward to further revisions in the margins of regulated petroleum products in accordance with rising cost of doing business.
The situation also demands at least some recovery in the circular debt crisis, and attention towards the corporate taxation and delayed government receivables.
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SHELL PAKISTAN LIMITED
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9MCY09 9MCY10 9MCY11
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Net sales Rs mn 113,404 139,355 167,264
Cost of sales Rs mn 104,487 131,086 157,395
Gross profit Rs mn 8,917 8,269 9,869
Operating profits Rs mn 3,451 1,961 3,731
Profit after tax Rs mn 1,704 (12) 1,122
EPS Rs 24.88 (0.17) 16.39
Profitability
Gross profit margin % 6.89 5.23 5.24
Operating profit margin % 3.04 1.41 2.23
Net profit margin % 1.50 -0.01 0.67
Return on equity % 22.99 -0.18 13.24
Liquidity
Current ratio 0.92 0.77 0.90
Debt to assets 0.80 0.83 0.83
Debt to equity 4.08 4.88 4.80
Efficiency
Total asset turnover times 3.01 3.78 3.41
Receivables turnover times 53.27 94.00 78.58
Payables turnover times 5.07 7.21 7.23
Inventory turnover times 7.61 9.86 9.95
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Source: Company accounts