Fluctuation in international oil prices has rendered the performance of Oil Marketing Companies (OMCs) unpredictable in terms of productivity. While, the profitability has declined in HY07 owing to heavy inventory losses caused by decrease in crude oil prices, nothing can be envisaged about future.

Sales are directly linked with the international oil prices, therefore, any up or down will affect the industry's performance accordingly. The consumption pattern has also become unusual. Major transport-led categories recorded decline in oil consumption, while the furnace oil consumption increased considerably.

Pakistan State Oil came into existence in 1976 when the government merged PNO (Pakistan National Oil) and POCL (Premier Oil Company Limited) into SOCL (State Oil Company Limited) and named it as Pakistan State Oil Company Limited (PSO). It is the largest oil marketing company of Pakistan with a market share of 68%.

Continuous improvement, innovation along with diversification has enabled PSO to enrich its market share. It has strategic investments in refining and distribution companies such as Asia Petroleum Limited, Pak Grease Manufacturing Company, Pakistan Refinery Limited and White Oil Pipeline Project, which give it a strong backing in terms of procuring inventory. With an extensive storage capacity of 860,000 metric tons, the company has 3,700 retail outlets across the country while more to come in future.

RECENT RESULTS - 3Q'08: The year 2008 shows a different story compared to its preceding year. The rising crude oil prices allowed the OMCs to scoop handsome inventory gains, and improve their profitability figures. On the other hand, the rising prices, with the reluctance of the government to pass on the complete increase to the customers led to the issue of PDC receivables. The PDC receivables stood at Rs 31.5 billion on 31st March 2008.

Energy demands of the country are also on a rise, and notwithstanding the GDP growth figures, the deficit in hydro-electricity generation also leads to increase

demand of FO. In above stated period, the highest growth was observed in HSD and Mogas. Mogas witnessed an increase due to curbing of Iranian oil smuggling, while HSD increased because of high demand for transport and power generation.

During the third quarter, PSO's sales volume increased by 18% to achieve a market share of 70.6% as compared to 68.8% in the same period last year. The sales growth in white and black oil products was higher than the industry trends. Total sales volume of POL products stood at 9.3 million tons during the said period compared to 8.1 million tons in 9mths'07, depicting an increase of 14.3%.

The sales revenue was increased by 36% to Rs 394 billion, resulting in a PAT of Rs 8.5 billion compared to Rs 2.1 billion for the same period last year. The main contributing factor was inventory gains along with an increase in sales.

In the balance sheet, a huge increase was witnessed in receivables and trade debts, most of which was contributed by PDC, along with non-payment of dues from other government bodies who are its customers. However, this is not seen complemented by an increase in borrowing, although an increase in the trade and other payables can be witnessed.

Complete dependence on the international oil prices has given rise to erratic sales growth trend as illustrated by the 'sales trend' chart. The record sales growth of 39% in FY06 is attributable to the soaring oil prices after which a tremendous rise in demand for FO was witnessed in FY07 consequently increasing the sales revenue of the company.

Subsequently the market share of PSO surged to 81% in the black oil category. PSO enjoys strong competitive advantage in FO business over its competitors on the back of strong distribution network and backward linkages. On the other hand, White Oil products (HSD, MOGAS, SKO, JP) registered a 4% decline.

This was due to a significant price difference between white oil and CNG, which led to a switching attitude in consumers. Other than that, smuggled diesel from Iran also affected the local demand. Similarly jet fuel and kerosene also posted a decline in demand. It also enjoys a substantial market share of 30% in export of JP-1 to Afghanistan.

With its current ratio hovering around 1.25, PSO has been efficient enough in paying off its short-term debt as compared to its competitors. Owing to nationwide expansion of retail outlets and mounting imports, current ratio has declined recently as a result of accumulated payables. Until PSO pays off its liabilities, debt-paying ability is likely to dwindle gradually in future.

Escalating oil prices in the international market is rendering the industry inefficient in its asset management ability as well. In addition to volatile prices affecting its sales, PSO has to suffer huge inventory losses as well. Driven by high international oil prices, higher sales coupled with much higher inventory level gave rise to poor inventory turnover ratio along with a slightly prolonged operating cycle in FY07.

PSO, however, has performed better than other players in terms of sales-to-equity ratio on account of high sales volume. Similarly, asset turnover has also shown a positive trend, owing to better marketing, improved distribution network and implementation of SAP ERP system. FY07 has been a favourable period for company's performance as a result of steep rise in oil prices consequently enhancing the asset management ability of the company.

FY06-07 proved to be lacklustre for the OMC sector of Pakistan. Despite an increase in demand of furnace oil, the profitability of the companies posted a decline owing to high inventory losses (due to fluctuations in international oil prices), a surge in financial charges (due to higher interest rates), and amendments made by GoP in calculations of margins. The top line of PSO showed a growth of 16.6% owing to high sales as discussed previously. Likewise, a massive increase was also witnessed in COGS surging by almost 35% in FY07.

Lower demand for petroleum products in consequence of soaring oil prices and availability of cheap substitutes has been a grave concern for the company. However, increased furnace oil and high speed diesel (HSD) consumption proved to be a respite for PSO as sales volume kept gaining momentum till Jun 2006 consequently beefing up the profitability position.

The company suffered a setback when the government revised the pricing formula resulting in depressed margins. Further, the government's subsidy to the consumers in the wake of high oil prices proved to be an added burden on the company's financials. FY07, onward has been unfavourable so far because of enormously high oil prices in the international market, which adversely hit the sales and net income of the company by manifold.

Regardless of this, the company has sustained its market leadership, which can be attributed to aggressive marketing, constant innovation and improvement, strong distribution network and backward linkages. Owing to credit purchases from local refineries, imports and borrowing from banks, PSO is indebted to large amount of money consequently hitting its debt-to-asset ratio.

Interest cover ratio (TIE) has been declining lately as a result of high interest expense. However, TIE ratio is reasonably above the industry average indicating company's better interest coverage strength. On account of considerable leverage capacity, PSO can further expand its retail network.

It can also form strong backward linkages through acquisition of refinery and can further improve upon its infrastructure capabilities. Although long-term debt to Equity ratio is greater than industry, PSO is still better off since it has no long-term loans.

Complete dependence upon international prices has left the company on the mercy of changing political scenario. While high oil prices have fetched higher earnings for the company in FY05-FY06, a downside price risk always lies ahead. Likewise, the company's ability to pay dividends, its market price and PE ratio are all linked to wavering prices in one way or the other.

Recently, the EPS has declined by a huge percentage. DPS owing to a large number of shareholders than that of other players has decreased. However, the net worth of the company is still better off than the industry average.