Pakistan State Oil (pso) Industry And Financial (ratio) Analysis

Table of Contents 1. INTRODUCTION TO PAKISTAN STATE OIL..............................................2 1.1

Credit Rating ........................................................................................................................2

2. OPERATIONS OF PAKISTAN STATE OIL COMPANY ................................3 3. INDUSTRY ANALYSIS..............................................................................6 3.1

Threat of New Entrants.......................................................................................................6

3.2

Threat of Substitute Products.............................................................................................6

3.3

Bargaining Power of Suppliers............................................................................................6

3.4

Bargaining Power of Buyers................................................................................................7

3.5

Rivalry among Competitors ................................................................................................7

4. SWOT ANALYSIS ....................................................................................7 4.1

Strengths ..............................................................................................................................7

4.2

Weaknesses .........................................................................................................................8

4.3

Opportunities.......................................................................................................................8

4.4

Threats..................................................................................................................................8

5. FINANCIAL ANALYSIS.............................................................................9 5.1

Liquidity Ratios ....................................................................................................................9

5.2

Profitability Ratios .............................................................................................................10

5.3

Activity Ratios ....................................................................................................................11

5.4

Dupont................................................................................................................................12

5.4.1

Net profit margin: .........................................................................................................12

5.4.2

Assets turnover:............................................................................................................13

5.4.3

Equity multiplier:...........................................................................................................13

5.5

Long term debt paying ability:..........................................................................................13

INTRODUCTION TO PAKISTAN STATE OIL

1.

Pakistan State Oil Company Limited (PSO) is Pakistan’s largest oil marketing company (OMC). It is engaged in the nationwide storage, distribution and marketing of various petroleum, oil and lubricant (POL) products including Gasoline, Diesel, Fuel Oil, Jet Fuel, Kerosene, LPG, CNG and petro-chemicals. Through PSO’s network of over 3,800 retail outlets including 1,000 new vision outlets and other direct distribution channels, PSO serves a broad customer base throughout the Country including the retail and industrial, as well as aviation, marine and Government/Defense sectors. PSO has also formed a strategic alliance with Castrol for the production of Castrol lubricants in its ISO 9000 certified facility. PSO infrastructure consists of 9 installations and 23 depots from Karachi to Chitral and its supply chain is supported by a fleet of 8,500 tankers and 3,800 railway wagons. In addition, PSO’s 860,000 metric tons storage capacity is approximately 81 percent of the total national storage. The company’s slogan these days is “we are an oil company, but we touch your life in so many ways”. This statement points to the company’s corporate social responsibility role with a focus on health, safety and environment (HSE). 1.1

Credit Rating

Pakistan Credit Rating Agency (PAKCRA) has rated PSO as AA+ in 2008 compared to AAA in the previous years. One of the reasons for this decline in credit rating is due to increase in “circular debt” affecting the liquidity management. Second reason is the large inventory losses due to steep decline in the oil prices and home currency. The company’s short term credit rating remains stable at “A1+”. PSO has increased its market share from 68 percent in 2007 to 71 percent in 2008. This increase in market share is driven by an increase in demand of Furnace Oil (FO) by power plants, High Speed Diesel (HSD) and

Analysis of Pakistan State Oil

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Motor Gasoline (Mogas) led by control over smuggling of these products from Iran and increase in the use of generators for electricity supply backup.

2.

OPERATIONS OF PAKISTAN STATE OIL COMPANY

The petroleum industry can be split into two segments, upstream and downstream halves. Upstream refers to oil exploration, drilling, and moving the crude oil to the refinery, and downstream refers to refining the oil plus the transporting and marketing of gasoline and refined oil products to distributors and gas station retailers.

Pakistan State Oil Company (PSO) is a marketing company operating in oil & gas industry. The commercial activities of the company are totally controlled and regulated by the government through Oil and Gas regulatory Authority (OGRA).

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The operations of Pakistan State Oil can be divided in the following activities: I. Import of refined products PSO is the sole importer of refined oil products. It imports oil from Kuwait and Saudi Arabia on the direction of the government at a specified price and amount. Other marketing companies in the industry get their share of oil at the port and store it in their own storage depots. II. Storage Another main activity of PSO is storage of oil in their 23 storage depots, with a capacity of 860,000 metric tons, across the country which amounts to approximately 81 percent of national storage. III. Transportation With a strong fleet of 8,500 tankers and 3,800 railway wagons, PSO is responsible for transporting oil to its storage depots across the country. The retailers and petrol pump owners are then required to fulfill their demands by providing their own transportation. IV. Profitability Profits of PSO are totally based on commissions, being in middle of the supply chain. The price they charge to the petrol pump owners and retailers include their commission which amounts to about 2-3 percent. The only way PSO can suffer a loss is by poor inventory management. Prices of oil fluctuate daily, owing to the demand and supply factors. Purchase of inventory with high price and selling it on lower price will be the only reason for loss to the company. On the other hand fluctuation in prices of oil has it advantages. Inventory purchased on lower prices and selling it at higher prices results in higher profits. Therefore, operations of PSO can be termed as highly risky.

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Oil Price Determination Gasoline HOBC* (Rs/Liter) (Rs/Liter) Through Retail Direct Sale to Through Retail Direct Sale to Outlets Consumer Outlets Consumer 47.68 47.68 57.94 57.94

Ex-refinery Price Petroleum 19.54 20.92 Development Levy 2.03 Inland Freight 2.03 Charges 1.38 Dealers’ Commission 1.11 1.11 Distributors’ Margin 7.95 7.95 GST*** 57.66 57.66 Sale Price * HOBC = High Octane Blending Component ** LDO = Light Diesel Oil *** GST = General Sales Tax

Kerosene (Rs/Liter)

LDO** (Rs/Liter)

42.21

38.38

26.55

28.18

13.81

11.32

4.20

4.20

2.51

3.00

1.63

-

-

-

1.31

1.31

1.19

1.16

9.94 72.08

9.94 72.08

7.15 51.87

6.62 48.00

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3.

INDUSTRY ANALYSIS

The industry in which Pakistan State Oil (PSO) is doing business is highly competitive. Being a national oil company has its advantages but the company still has to face pressure from different sources. The following five key factors highlight this fact. 3.1

Threat of New Entrants

The threat of new entrants in the industry that PSO is associated with is small but it cannot be eliminated. There are already four players in the market other then PSO itself, namely Shell Pakistan, Caltex, Total Parco and Attock Petroleum. New companies will not have a large market segment to capture therefore starting business in this industry will be far from lucrative. This can be portrayed with the help of new entrants like Admore and ZIC which haven't been able to pose a threat to the already present players. 3.2

Threat of Substitute Products

As alternative of fuel, Pakistan State Oil is developing Ethanol which will eventually be available at reasonably less price. Other than that, CNG is already available at most PSO outlets. It is evident that world oil will eventually run out and alternate sources of fuel will be required hence PSO has to keep up with technology and be prepared for this eventual repercussion to avoid being wiped. 3.3

Bargaining Power of Suppliers

It can be assumed that being an oil company, the bargaining power of suppliers would be fairly high for PSO. However after some research it has been determined that this is not the case. Firstly as Pakistan has to import oil, PSO has maintained a 30-year mutuallybeneficial business relationship with Kuwait Petroleum Corporation (KPC). This protects PSO from frequent price fluctuations in the international market. The transport fleet consists of 6000 tank lorries which are equipped with state of the art technology to keep them monitored, thus there's no real threat from them either.

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Bargaining Power of Buyers

3.4

PSO has a wide customer base which includes retail customers, various industrial units, government, power projects, aviation and marine sectors of Pakistan including Pakistan Army, Pakistan railways, Pakistan Navy, NLC, WAPDA, KESC and many more. All these buyers combined form a formidable force which can have the power to influence PSO, however nothing like that has materialized to date. PSO enjoys the advantage that the government regulates the prices of its various petroleum products. PSO only allows a small discount to large organizations on its own behalf.

Rivalry among Competitors

3.5

The petroleum, oil and lubricants industry in Pakistan is composed of two major players, PSO and Shell Pakistan. Caltex and Total Parco were the third and fourth entrants respectively. Last but not least Attock Petroleum has the smallest share of the market. All these companies in essence are competing for the same customers. Even though PSO has an 82.1 percent share of the Black Oil market and 61.2 percent share of the White Oil market, it still faces fierce competition from its competitors which are vigilant in launching their advertisement campaigns according to the prevalent conditions of the market. This can be portrayed with the example of Shell that was the first to highlight the longer mileage with its fuel when oil prices were soaring around the world.

4.

SWOT ANALYSIS Strengths

4.1 

Majority of market share in major product categories making it a market leader in major product categories.



PSO has sustained its growth in earnings.



It has the largest retail outlet network in Pakistan.



PSO has long term contract with public and private sector organizations for the supply of fuel.



Modern lubricants manufacturing plant.



Strong vertical integration. Analysis of Pakistan State Oil

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Weaknesses

4.2 

Large number of outstanding claims from client organizations.



Weak inventory management system.



Major products like HSD and Furnace Oil are imported.

Opportunities

4.3 

Confirmed margins of 3.5% on all regulated products.



Possible privatization in the near future.



Growth opportunities in the non-fuel segment.

Threats

4.4 

Plan of Attock Petroleum Limited (APL) of network expansion in Southern Region.



Instability in oil prices in international market.



Fall in economic growth rate due to uncertain business environment.



Introduction of substitute/alternative sources of energy like bio diesel for automobiles and nuclear for energy sector.



The threat of reduction in OMC margins by OGRA.

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5.

FINANCIAL ANALYSIS

5.1

Liquidity Ratios

Pakistan State Oil (PSO) shows a positive trend in current ratio. FY06 (1.23) and FY08’s (1.24) current ratios are almost same as compared to FY07 (1.22). This year, the company saw an increase in the current assets by 54 percent. The company’s trade debt increased to almost 40 percent, on the other hand, the stock in trade also showed an increase of almost 47 percent. The increase was also observed in the cash and bank balances by 50 percent. So in short, this was the stage of the company where its current asset base demonstrated a fine position. Overall the company’s current assets grew by 50 percent from 2007 to 2008 because this year its sales grew by 29 percent. As horizontal analysis 1.24 shows that current assets 1.24 of FY08 are 200 percent 1.23 and FY07 108 percent 1.23 Current Ratio keeping FY06 100 percent Cash Ratio 1.22 as base year, while current 1.22 liabilities of FY08 were 1.21 199 percent and in FY07, 1.21 109 percent and in FY06 2008 2007 2006 100 percent as base year. This shows that both current assets and current liabilities for consecutive three years are increasing at a very high volume. Vertical analysis shows increase in current assets for FY06 as 82, FY07 83 and FY08 91 percent as compared to 100 percent total assets for three consecutive years, while current liabilities for FY06, FY07, and FY08 are 67, 68, and 73 percent consecutively. This indicates that the company is encouraging level of current assets as well as current liabilities or the company is financing its current assets with current liabilities. Liquidity Ratios

Formulae

2008

2007

2006

Current Ratio

Current Assets / Current Liabilities

1.24

1.22

1.23

Quick Ratio

Current Assets - Inventories / Current Liabilities

1

0.64

0.63

Cash Ratio

Cash + Marketable Securities / Current Liabilities

1.24

1.22

1.23

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As compared to industry average of 1.4, PSO’s current ratio of 1.24 times is relatively low in 2008 but it has increased slightly when compared with 1.22 in FY07 and 1.23 in FY06. PSO is less liquid as compared to other companies in the industry. The company has low capacity to pay its short term debt. The cash and cash equivalents of company increased to almost 50 percent. Moreover we can see there was no change in other receivables of the company, it remained constant in 2007 and 2008. Quick ratio is 1, 0.64 and 0.63 respectively in 2008, 2007 and 2006. In 2008 quick ratio is comparatively high. In these critical situations to improve the liquidity, the company increased its trade debts and loans and advances, increasing trade debts allowing receivables to government agencies and increased its loans and advances by increasing its credit line with banks. However, the company showed a positive sign in its efficacy of paying off its liabilities. PSO has a high cash and equality as compare to its industry average. PSO has cash ratio of 1.24 in 2008 as compare to industry average which is 0.23 5.2

Profitability Ratios

FY07 has seen only a marginal decrease in the profit margins for the company. The Net profit of the company showed a positive trend from 2005 to 2007. However in the year 2007 the whole company went into the declining trend. The Net Profit was decreases by 88 percent. But in 2008 net profit margin increased significantly. In 2008 net profit margin increased by 11 percent as compared to FY06. Overall PSO is a strong company, poised to meet competition from local as well as foreign competition by strengthening itself from within by making continuous investments in its marketing operations. FY07 was not impressive in terms of EPS as the profit margins remained at a lower side.

7.000 6.000 5.000 Gross Profit Margin

4.000

Operating Profit Margin 3.000

Net Profit Margin

2.000 1.000 0.000 2008

2007

2006

Operating profit also decreased in 2007 by 66 percent but in 2008, it increased its operating profit by 17 percent.

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Overall the gross margin increased around 5 percent. Booming consumerism driven by demand of its items in various new products, like generators etc, and profitability figures, which are mostly better than the industry averages. Profitability

Formulae

2008

2007

2006

Gross Profit Margin

Gross Profit / Net Sales

6.062

3.506

5.769

Operating Profit Margin

Operating Income / Net Sales

4.533

2.273

3.777

Net Profit Margin

Net Income / Net Sales

2.838

1.341

2.523

5.3

Activity Ratios

PSO fares reasonably above the industry average in terms of inventory turnover; this being a virtue of its continuous innovation, and understanding and catering to the market needs. However, in terms of collection of receivables PSO lags behind its competitors. The operating 60.00 A/R Turnover in Days cycle is increasing, 50.00 but also showing Inventory turnover in 40.00 Days efficiency in terms 30.00 A/P Turnover in days of its cash 20.00 conversion cycle, Fixed Assets turnover 10.00 its cash conversion Total Assets turnover cycle as also 2008 2007 2006 below than the industry average, means its operations are converted into cash more quickly as compared to its competitors. The total assets turnover is almost same as the industry average, showing that the company is better off as its rivals, as far as managing assets to generate sales is concerned. The rising net sales have a major role to play in elevating this measure of asset management, and this can be attributed to better marketing, launching of newer models of cars, and improved delivery timings. The account receivable showed turnover as 29 days for FY06. However the company was able to maintain the level in FY08 as compared to FY07, in FY07 and FY08 the cash collection of the company became very weak and

70.00 60.00 50.00

2008

40.00

2007

30.00

2006

20.00

industry average

10.00 Inventory turnover in Days

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because of that the account receivable turnover in days shoots up to about 30 days, previously it was 26 days in 2006. Asset Management

Formulae

2008

2007

2006

Industry Average

A/P Turnover in days

365 / A/P Turnover

48.05

42.32

41.11

39.49

Fixed Assets turnover

Net Sales / Avg. Capital Assets

42.23

28.71

25.41

34.65

365 / Inventory Turnover

36.06

31.22

31.66

61.53

A/R Turnover in Days

365 / A/R Turnover

29.09

30.01

26.58

23.1

Cash Conversion Cycle

Inventory T/O -A/P T/O+A/R T/O in Days

17.09

18.92

17.12

55.4

Net Sales / Average Total Assets

4.91

4.83

4.88

4.57

Inventory turnover in Days

Total Assets turnover

The inventory turnover ratio is also climbing, as you can see from the table that in FY06 and FY07, it was 31 times and in FY08, it became 36 times which is impressive as compared to industry average which is 61 times. The inventory turnover ratio of the company is going to the positive trends and reflecting that the inventory turnover is 36 times in the year. This may be the reason reflecting that there might be a decline in sales overall in the industry. 5.4

Dupont Dupont Formulae

2008

2007

2006

Industry Average

Net Income / Net Sales

66.66

69.05

72.50

59.9

Assets Turnover (Times)

Net Sales / Assets

3.90

4.68

4.25

4.57

Equity Multiplier (Times)

Assets / Shareholder’s Equity

4.10

3.57

3.37

4.13

Net Income / Average Total Equity

54.15

22.46

39.47

41.62

Net Profit Margin (%)

Return on Equity (%)

5.4.1 Net profit margin: Because of increase in oil prices of about 80 percent in the last few years, sales of PSO have been drastically affected. This is one of the reasons for decrease in the net profit margin. Another reason of increase in cost of products sold, indicated in horizontal analysis, is 44 percent increase as compared to 2007 and 66 percent as compared to 2006. The net profit margin of PSO is still higher than industry analysis. Analysis of Pakistan State Oil

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5.4.2 Assets turnover: Assets turnover is the lowest in 2008 when compared with 2007 and 2006 showing ineffective asset utilization by the company. Comparing with companies in the same industry, it is evident that PSO’s assets are increasing at a far higher rate than its net sales, decreasing the assets turnover.

5.4.3 Equity multiplier: Equity multiplier is increasing over the years due to the increase in the owner’s equity for the last few years. When we look at the return on equity (ROE) as a whole comparing it with previous years and industry, it is showing a positive trend. This may seem attractive until we examine the equity multiplier which is a component of return on equity which is increasing, indicating that ROE is increasing because of owners’ equity. 5.5

Long term debt paying ability: Formulae

2008

2007

2006

Debt Ratio

Total Liabilities / Total Assets

1.24

1.22

1.23

Debt/Equity Ratio

Total Liabilities / Total Equity

3.74

2.99

2.79

Debt ratio shows that company is in good condition 4.00 to pay off its long term debt 3.50 easily. Debt ratio of FY06 is 3.00 1.23 which slightly decreased 2.50 debt ratio 2.00 in FY07 to 1.22 as liabilities Debt/Equity Ratio 1.50 increased by 109 percent but 1.00 assets increased with 107 0.50 percent. In the FY08, its debt 0.00 2008 2007 2006 ratio again improved to 1.24 because its liabilities increased by 181 percent as compared to assets which increased by 199 percent in FY08 while industry average (0.59) is quite low as compared to any of its last three years. Debt/Equity ratio is also very impressive which shows that in FY 06, its liabilities were 2.79 times financed by the equity which increased by 7 percent to 2.99 times. In FY 08, debt equity ratio increased by 20 percent to 3.74 times showing that it is more financed by equity so risk rate is low. Analysis of Pakistan State Oil

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