Pakistan State Oil Company Boon or Busted

PSOPakistan State Oil Company (PSO) is country’s largest oil marketing company (OMC) operating in the public sector. It is scheduled to announce first quarter (July-September 2015) financial results shortly. The Company faces double-edged sword: 1) declining international oil prices and 2) mounting circular debt. It recently held a briefing for the analysts. With oil prices expected to move in the range of US$40-50/bbl, analysts believe the Company is unlikely to post the same level of inventory losses in FY16 as it did in FY15, resultantly they estimate the Company’s EBITDA to improve by 18% in FY16.

Major takeaways of the briefing based on FY15 included: 1) Rs135 billion in core receivables, with no further accumulation and payment on 7 days credit basis, 2) inventory losses worth Rs7.9 billion, 3) decline in market share to black oil as well as white oil as compared to last financial year, 4) late payment surcharges amounted to Rs55 billion (rising 28%YoY), while penal income from major IPPs fell as liquidity in the power sector improved, 5) L/C payments are on schedule with 60days instruments being availed for import, while exchange loss coverage under FA25 is being availed for a limited sum (up US$250 million) of imports.

During FY15, inventory loss was the major contributor to deteriorating gross profit as it contributed Rs7.9 billion to the Rs13.2 billion fall in FY15 over FY14. Additionally, the loss of market share to competitors played a strong role in curtailing profitability, particularly in the white oil segment, where fixed margins make the sale of low price products more attractive. Focus on expanding the current 25% market share in lubricants seems to have lost steam, due to lack of a cohesive strategy in the backdrop of abrupt senior management level changes.

RLNG remains a major opportunity for the firm to diversify revenue streams, as the OMC is poised to be a paymaster for the series of linked transactions involving the MoF, SNGP and SSGC. However, clarity on the RLNG pricing mechanism, procurement rules and procedure for timely payments remains elusive, while regulatory backlog from OGRA remains prevalent. Rs20 million in receivables have been booked on account of 12+ LNG shipments procured and processed, with more in the pipeline. The process for importing these is relatively shorter, lasting for fifteen days, almost half the time required for procurement of POL products.

With the change in top management, the company is likely to move forward with a potent strategy, something it lacked in FY15. Keeping this major development in mind, analysts believe FY16 is likely to be a breakout year for PSO. Moreover, with management in constant contract with the GoP with regards to clearing of partial or complete stock of receivables any concrete development on this front can act as a major price catalyst for PSO.

PSO suffers from liquidity crunch and inventory losses, circular debt the worst menace, crude oil price will determine its future profitability. During FY15, the Company’s profitability has been adversely affected by the sharp decline of 46% in the OPEC basket price of crude oil, from US$109 per barrel in July 2014 to US$59 per barrel in June 2015. This significant decline in crude oil price together with drop in black oil volumes by 12% resulted in a 21% reduction in the sales turnover to Rs1,114 billion as compared to Rs1,410 billion in FY14. Similarly, after tax profitability has also declined to Rs6.9 billion as compared to Rs21.8 billion for FY14 due to inventory losses on account of sharp fall in crude prices, increase in finance cost due to prevailing circular debt crisis and less receipt of interest from power sector.

However, a point worth mentioning is that despite reduction in profit PSO maintained high dividend distribution. It announced a final cash dividend of Rs4  per share, in addition to an interim cash dividend of Rs6 per share, taking the full year payment to Rs10 per share.



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