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Pakistan State Oil Financial Analysis
Contents Executive Summary................................................................................................................3 History.....................................................................................................................................4 Introduction To The Petroleum Industry.............................................................................7 Introduction To The Company............................................................................................11 Company Profile...................................................................................................................13 Trends In Ratio Analysis:.....................................................................................................17 Trend Analysis:.....................................................................................................................28 Comparison With Shell Pakistan (Industry):....................................................................38
Pakistan state oil is the largest oil marketing company of Pakistan and also among the top 1000 largest companies in Asia. Pakistan state oil was set up on December 29th, 1976 through the merger of ESSO undertakings with Pakistan national oils limited (PNOL) and Premier Oil Company Limited (POCL). PSO is currently the largest oil marketing company (OMC) in Pakistan and is engaged in the storage, distribution and marketing of petroleum product, Petro-chemicals, LPG and CNG. The company has the largest market share ie.40% market share in motor gasoline and 60% market share in diesel oil. PSO is committed to begin the preeminent marketer of petroleum product and services to its customers and achieving its goal while maintaining high level of efficiency and profitability. PSO has reported a strong financial performance. For the fiscal year ended June 2008, PSO generated sales revenue in excess of Rs. 583 billion and after tax profit of Rs. 14.05 billion. PSO is the third largest public listed company in Pakistan by equity market capitalization. It is recipient of Karachi Stock Exchange Top 25 Companies award for 17 consecutive years.
PSO is well-managed company and is focused to meeting the energy requirements of Pakistan. The company recently embarked upon an extensive program of restructuring, rationalization of its network of retail outlets, improving its marketing image through a nationwide initiative to refurbish and re brand key retail stations and further improving efficiencies by streamlining its structure.
The history of Pakistan State Oil can be traced back to January 1, 1974, when under the marketing of petroleum products (federal control) Act, 1974, the Government of Pakistan took over and merged Pakistan National Oil (PNO) and Dawood Petroleum Limited (DPL) under the name of Premiere Oil Company Limited (POCL). Soon after that, on 3rd June 1974, Petroleum Storage Development Corporation (PSDC) came into existence. PSDC was then renamed as State Oil Company Limited (SOCL) on August 23rd 1976. Following that, the ESSO undertakings were purchased on 15th September 1976 and control was vested in State Oil Company Limited (SOCL). The end of that year (30th December 1976) saw the merger of Pakistan National Oil and Premier Oil Company into the State Oil Company Limited and then on December 30, 1976 renamed it to Pakistan State Oil Company limited (PSO). After PSO’s inception, the corporate culture underwent a comprehensive renewal program which was fully implemented in 2004. From 1999 to 2004, PSO had undergone radical changes, both internal and external and has emerged with a new look and as a market leader with a long term vision. The company is the only public sector entity in Pakistan that has been competing effectively with three multinationals (Shell, Caltex and Total) which are supported technically by their parent organizations.
The reinstitution program over the years included the revamping of the organizational architecture, rationalization of staff, employee empowerment and transparency in decision making through cross functional teams. This new corporate renewal program has divided the company’s major operations into independent activities supported by legal, financial, informative and other services. In order to reinforce and monitor this structural change, related check and balances have been established by incorporating monitoring and control systems. Human Resource Development became one of the main priorities on the company’s agenda under this corporate reform. It is due to this effective implementation of corporate reform and consistent application of the best industrial practices and business development strategies, that PSO has been able to maintain its market leadership in a highly competitive business environment.
PSO OVER THE YEARS
January 1, 1974 The federal government took over the management of PNO (Pakistan National Oil) and DPL (Dawood Petroleum Limited), renamed into POCL (Premier Oil Company Limited) under marketing of Petroleum Products (Federal Control Act, 1974) June 6, 1974 The government incorporates “Petroleum Storage Development Corporation’ PSDC
August 23, 1976 PSCDC renamed to State Oil Company Limited (SOCL)
September 15, 1976 The Governement purchases ESSO undertakings, vests their control in SOCL
December 30, 1976 The Government merges PNO and POCL into SOCL (State Oil Company Limited) and renames it Pakistan State Oil Company Limited (PSO) 1999 The new vision program is launched with the new logo of PSO.
Introduction to the Petroleum Industry
The Petroleum industry includes the global processes of exploration, extraction, refining, transporting (often by oil tankers and pipelines), and marketing petroleum products. The largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics. Pakistan’s Institute of Petroleum plays a vital role in Pakistan’s Petroleum industry. The mission of PIP is to assist and guide organizations and individuals associated with the Petroleum Industry in Pakistan to accomplish the objectives of PIP and to ensure PIP’s continuing relevance in helping to build a professional and informed group that enhances the quality of service to the petroleum industry, encourages high ethical standards in the petroleum industry and undertakes studies of policy and regulatory issues affecting the development of the Petroleum Industry in Pakistan. Admore, Asia petroleum limited, Attock Refinery limited, Bhp Billiton, Bosicor, bp, Chevorn, MOL, National refinery limited, New horizon exploration and production limited, OGDCL, OMV ,PARCO, PAPCO, PRL, PSO, SHELL, SHV, PETRONA, Shell, SHV and TOTAL are the main members of Pakistan Petroleum industry. Pakistan Petroleum Ltd is one Pakistan's leading E&P company, the oldest and largest Exploration and Production Company in the country. The main objectives of all these conpanies are conducting exploration, development and production of Pakistan's oil and natural gas resources. Some of the companies are planning to hold international exploration in partnership mode. Pakistan produced 63,000 (bbl/day)1 in 2007 and 67680 (bbl/day) in 2008. Pakistan is ranked 60th in oil production. The total oil consumption for Pakistan was 324000 (bbl/day) in 2007 and 345000(bbl/day) in 2008. Pakistan imports 82 percent of its annual requirement — around 250,000 barrels a day from Saudi Arabia, 150,000 from Abu Dhabi, 18,000 from Qatar and 15,000 barrels from Iran. The total oil imports of Pakistan are 290,600(bbl/day), it is ranked 35th among the oil importing countries. While the oil exports of Pakistan are 28060(bbl/day) and it is ranked 83rd among oil exporting countries. Given the high level of imports the country’s economy is vulnerable to world market price fluctuations of crude oil. The oil and gas sector accounts for a significant share of government total revenue. During the current year, Pakistan made oil related deals of 1.3 to 1.5 million tons; whereas deals of 600,000 tons were reported last year. According to an estimate petroleum constitutes 40% of the GDP in Pakistan. Pakistan now ranks fifth, just behind the Philippines, in BMI’s updated Upstream Business Environment rating, reflecting a reasonable resource position, better-thanaverage output growth outlook and falling state involvement. The country sits just ahead of Thailand and Malaysia, and should be able to keep both at bay over the near term. Pakistan now ranks outright eighth in BMI’s Downstream Business Environment rating, reflecting its significant refinery capacity expansion plans, above-average oil and gas demand growth outlook and low level of retail site intensity. It is ahead of Thailand and just behind Indonesia in the league table.
Barrel per day
PSO’s Market Share
Introduction to the Company
Pakistan State Oil is the oil market leader in Pakistan’s energy sector. The company has the largest network of retail outlets of over 3,800 outlets, representing 80% participation in total industry network, to serve the automotive sector and is the major fuel supplier to aviation, railways, power projects, armed forces and agriculture sector. PSO takes pride in continuing the tradition of excellence and is fully committed to meet the energy needs of today and rising challenges of tomorrow. Pakistan State Oil, the largest oil marketing company in the country, is currently engaged in storage, distribution and marketing of various POL products. The company’s current value of Rs. 75 billion, its 82.1% share in the black oil market and 61.2% share in the white oil market, alone speak volumes about its success.
PSO has the widest strategic oil distribution network. This network comprises of 29 storage depots and 9 installations, 860,000 MTs of capacity i.e. almost 81% of total national storage, numerous pipe lines network and equity partnership in White Oil Pipeline Project (WOPP) from Karachi to Mehmood Kot. With its 3612 distribution outlets, PSO has the largest network in the country. Out of these, 1,610 outlets have been upgraded as per the New Vision Retail Program, with most modern facilities like electronic dispensing units, convenience stores, business centers, Easy Payment Centers and customer friendly staff to provide unmatched and diverse services to its customers, all of which are comparable to international practices. The fact that PSO serves 2.8 million retail customers on daily basis, along with 2000 industrial units and business houses, is indicative of its vast customer base. The company has also been meeting the fuel needs of various government entities, armed forces, railways, agriculture sector, IPPs and industrial units. PSO also provides Jet Fuel to Refueling Facilities at 9 airports in Pakistan and ship fuel at 3 ports. In July 2002, ‘PSO Loyalty Cards’ were introduced to reward the retail customers for their loyalty and patronage towards the company. In February 2003 PSO launched its ‘Fleet Cards’ and ‘Corporate Cards’, which are fuel-based credit cards for the business entities. These cards along with the company’s Prepaid Cards provide convenience, flexibility and security to customers, while enabling them to earn redeemable loyalty points and avail attractive discounts on non-petroleum products. PSO is considered as one of the most successful mergers in the history of Pakistan. The company has been the winner of Karachi Stock Exchange Top Companies Award for many years and because of its astounding growth in terms of sales and turnover, combined with its status of being the first Pakistani Public Sector Company to become a member of the World Economic Forum (WEF) had made PSO a notable company world over.
PSO’s PHYSICAL RESOURCES
TRANSPORT PSO Railway Wagons Tank Lorries under PSO Control (Karachi & Upcountry) 1120 13,400
BLENDING PLANTS PSO Owned 4
As the largest oil marketing company of Pakistan, PSO is engaged in storage, import, distribution marketing of petroleum products petrochemicals aviation and bunker fuels LPG and CNG dominates the country’s fuel and energy need. The company has largest retail network in the country and the most extensive terminal and depot network. PSO has listed in Asia’s largest 1000 companies by Asia Week. Since its inception in 1976, the company has been meeting more than 70% of country’s fuel needs. PSO’s 3805 outlets all across the country markets more than 12 million tons of fuel products annually.
“To excel in delivering value to customers as an innovative and dynamic energy company that gets to the future first.”
“We are committed to leadership in energy market through competitive advantage in providing the highest quality petroleum products and services to our customers, based on:
Professionally trained, high quality, motivated workforce, working as a team in an environment, which recognizes and rewards performance, innovation and creativity, and provides for personal growth and development Lowest cost operations and assured access to long-term and cost effective supply sources. Sustained growth in earnings in real terms Highly ethical, safe environment friendly and socially responsible business practices”
Excellence: We believe that excellence in our core activities emerges from a passion for
satisfying our customers' needs in terms of total quality management. Our foremost goal is to retain our corporate leadership.
Cohesiveness: We endeavor to achieve higher collective and individual goals through team.
This is inculcated in the organization through effective communication.
Respect: We are an Equal Opportunity Employer attracting and recruiting the finest people
from around the country. We value contribution of individuals and teams. Individual contributions are recognized through our reward and recognition program.
Integrity: We uphold our values and Business Ethics principles in every action and decision.
Professional and personal honesty, dedication and commitment are the landmarks of our success. Open and transparent business practices are based on ethical values and respect for employees, communities and the environment.
Innovation: We are committed to continuous improvement, both in New Product and
Processes as well as those existing already. We encourage Creative Ideas from all stakeholders.
Corporate Responsibility: We promote Health, Safety and Environment culture both
internally and externally. We emphasize on Community Development and aspire to make society a better place to live in.
Products and services:
PSO caters to petroleum, oil and lubricant (POL) requirements of a wide spectrum of customers comprising the retail consumer, various industrial units, government, power projects, and aviation and marine sectors of Pakistan. PSO industrial consumer dominance in the government sector can be judged by the fact that all the major government entities like OGDC, Pakistan Army, Pakistan railways, Navy, NLC, PAF Wah and HIT have entrusted PSO to meet their POL needs. Besides supplying fuel to national power utilities like WAPDA and KESC, PSO is the sole furnace oil supplier to all Independent Power Projects (IPPs) in Pakistan with a share of over
80% in furnace oil market. Moreover, PSO is also playing its due role in meeting the growing energy demand of the country. Major products and services of the company include:
RETAIL FUELS: Premier XL Green XL
GASEOUS FUELS: • • CNG LPG
CARDS: • • • • Fuel Based Cards Reward Based Cards Fleet Management System Vehicle Identification System (VIS)
LUBRICANTS: • • • PSO Automotive Oils PSO Industrial Oils PSO Fuel Oils
AVIATION & MARINE: • • • • Into-Plane Re-Fueling Facility Aviation Customers Marine Products Marine Customers
NON FUEL RETAILS: • • • • ATMs Auto Car Wash Shop Stop Courier Service Centers
Quick Service Restaurant
With a network of 3612 retail outlets, PSO cater to the fuel and non fuel needs of approximately 2.8 million customers per day. PSO in involved in the distribution of its products and services through its various outlets spread throughout the country, and also at their sites, and through their transport facilities (PSO railway wagons and lorries).
TRENDS IN RATIO ANALYSIS:
A. Measures of Short-term liquidity: (1). Current ratio:
This test is used to test financial strength of a company.
Current Ratio= Current AssetsCurrent Liabilities
PSO Current Ratio %
A business should always have enough current assets to cover its current liabilities. This ratio should normally be between 1.5 and 2. As it is visible from the above table, the current ratio of PSO in 2006 is 1.24:1. This means that PSO had RS.1.24 for paying Rs. 1 liability. This is sufficiently enough for companies like PSO to pay their debts. Similarly in the year 2007 and 2008 the ratio is 1.22 and 1.24. The increase in current asset for 2008 year is more than the increase in current liabilities which lead to an increase in current ratio.
(2). Quick ratio:
This ratio is a measure of short-term debt paying ability of the company. It is also known as acid test. It specifies whether your current assets that could be quickly converted into cash are sufficient to cover current liabilities. The quick ratio should normally be around 0.7-1. To be safe, the quick test ratio should be at least 1, which indicates that quick assets exceed current liabilities
Quick Ratio= Quick AssetsCurrent Liabilities
PSO Quick Ratio %
PSO quick ratio has seen an increase of .01 in 2007 but then it has fallen from 0.64 to 0.57 which is not a good sign for the company as now there are lesser quick assets to cover the liabilities of the company. The reason can be an increase in account receivables from Rs.13600 to Rs.33904.7 i.e. an increase of Rs.20304.7. Another reason can be that change in current liabilities was Rs.42350.5 corresponding to an increase of Rs.21733.9 in the quick assets.
(3). Working capital:
The working capital of a company is the measure of its efficiency and its short-term financial health. It measures a company’s potential excess sources of cash over its upcoming usage of cash.
Working Capital= Current Assets-Current Liabilities
PSO Working capital
2008 $ 22,142,472,000
2007 $ 111,275,46,000
PSO`s working capital is positive in all the three years. The working capital has gradually increased 2006-2008. The main reason behind this change can be an increase in receivables.
(4). Percentage change in working capital:
The excess of current assets over current liabilities is referred to as the company’s working capital. The difference between the working capital for two given reporting periods is called the change in working capital.
Percentage change in working capital = working capital of the current year ×workng capital of the previous yearworking capital of previous year%
PSO Percentage change in working capital
The change in working capital from 2006-07 was an almost equal increase in the current liability and assets in the two years. While in period 2007-08 there was tremendous increases in current asset i.e. increase of Rs.533365.4 and this because of an increase in receivables i.e. current assets.
(5). Percentage in cash and cash equivalents from prior year:
Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet. Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities and commercial paper. Cash equivalents are distinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months. Another important condition a cash equivalent needs to satisfy is that the investment should have insignificant risk of change in value; thus, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can be.
Percentage in cash and cash equivalents =cash and cash equvalents of current yearcash and cash equvalents of previous year -1
PSO 2008 Percentage in cash and cash equivalents from prior years 98.3 2007 19.8 2006 -1.2
The cash and cash equivalents percentage has increased from 19.8 to 98.3in the year 2007 -2008. The reason behind this large change is the increase of Rs. 1496.3 in cash and cash equivalents.
(6). Percentage change in net sales:
Percentage change in net sales= net sales of curent yearnet sales of previous year-1
PSO Percentage change in net sales
The percentage change in net sales to net income has increased from 1.03 to 20.4 during the period 2006-07 because PSO handles three quarters of the petroleum trade of the country. Due
to the global fluctuation in oil prices during the period 2007-08 the oil demand declined and the shift towards CNG further intensified this decline.
(7). Percentage Change in net earnings:
Percentage change in net earnings= net earnings of current year net earnings of previous year -1
PSO Percentage sales in net earnings%
During the period 2007-08 the net earnings of the company increased by 161.93%, due to high construction activity the demand for oil rose, increasing the net sales. The demand for oil and thus net earnings are anticipated to increase further in the coming years because of the intensification of construction activity.
B. Measures of Profitability:
(1). Gross profit rate:
Gross profit rate=Gross profitNet sales
Gross profit rate%
The net sales and gross profit dropped in 2007n leading to a decrease in gross profit rate. But as the sales increased in 2008 so did the gross profit thus the rate increased. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, A gross profit of 6.06% mean that the company has a net income of Rs. 0.06 for each Rs.1 of sale.
(2). Net income as a percentage of sales:
It is the measure of management’s ability to control cost. Net income as a percentage of sales= Net incomeNet sales
PSO Net income as a percentage of sales%
The initial decrease in this ratio from 2006-07 depicts the company’s reduced control over the cost, which was mainly due to a global increase in oil prices. The company regained its control in 2008 and the ratio increased to 2.4. It means that for every Rs.1 in net income, Rs0.024 contribution is that of the net sales.
(3). Return on Asset:
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.
ROA = Net incomeTotal assets%
PSO Return on Assets%
In the year 2006 assets contributed 10.72% in the net income. While the total assets contributed 6.3% in the net income during the year 2007 and in the year their contribution towards the yearly earnings increased to 11.1%, the reason being an increase in the total assets from Rs.74,737,315(’07) to Rs.127110020(’08). The higher the ROA the better, it gives investors an idea of how effectively the company is converting the money it has, to invest into net income.
(4). Return on Equity:
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE = Net incomeShare holders equity%
Return on Equity%
In 2006 return on equity was 36.2%, which fell to 22.4% in 2007.It portrays a negative change in profitability during this period. But the company restored its ROE in 2008 plus added an extra amount, totaling to a ROE of 45.4% in 2008. The reason being the increase in the shared capital and reserves by an amount Rs. 10,025,837, corresponding to a relatively lower increase of Rs. 9,373,997 in net income for the period 2007-08.
Property plant and equipment Intangibles Long term investments Long term loans advances and receivables Long term deposits and prepayments Deferred tax
99.22 68.14 82.37 68.43
106.56 81.52 91.20 89.94
100 100 100 100
(1). Non-current Assets:
We see decline in noncurrent assets in 2008 while and increase in 2007. In 2008 company’s focus was more on modernization and improvement of their filling stations. However, company retired or sold off a lot of assets which resulted in the negative growth in 2008. The company also decreased the interest free loans which it lent to its executives and employees and recovers it in the period of three to five years. It is treated as an asset.
(2). Current Assets:
We see a significant increase in current assets in 2008 comparing to 2007 taking 2006 as base year. This is mainly due to sharp increase of stock in trade which increased to 62.3 billion from 29.5 billion. The trade debts which are also accounts receivables for the company also experienced a drastic rise.
2008 Stores spare parts and loose tools Stock in trade Trade debts Loans and advances
92.63 221.38 289.39 143.69
102.2 104.9 116.08 132.72
100 100 100 100
Deposits and short term prepayments Other receivables Cash and bank balances
31.16 107.68 158.96
122.98 108.16 80.166
100 100 100
Equity and Liability:
2008 Shared capital Reserves
The number of assets in 2007 and 2008 remains the same. The 48.77% increase in the equity ad liability is due to the significant change of inappropriate profits.
Long term deposits Retirement and other service benefits 112.17 101.2
There has been stability in the noncurrent liabilities. In fact, there has been a slight decrease in 2008 comparing to 2007. The noncurrent liabilities of PSO consist of Long term deposits and retirement and other service benefits. The long term deposits experienced a slight increase. They went up to 834,598,000 to 768,309,000. They include payments from the customers for LPG equipment which are refundable on the return on equipment. Also includes the deposits against the contract for the transportation of petroleum.
2008 2007 2006
Trade and other payables Provision Accrued interest Short term borrowing Taxes payable
220.2 93.41 180.50 143.78 42.86
112.5 88.58 109.3 118.5 4.09
100 100 100 100 100
The drastic increase in the current liabilities is because of the purchase of oil on credit which also includes the payments of Rs 2106478 to Pakistan refinery limited an related party. The amount is actually lower than the amount of 2007 which was Rs 2747429. Also includes the pipeline charges owed to Pak-Arab pipeline company limited and Asian petroleum limited
Net cash flow from operating activities (%) Net cash flow from investing activities (%) Net cash flow from financing activities (%)
The cash generated from operating activities has experienced a steady growth from year 2006 and onwards. Profit before taxation has experienced a sharp growth increasing from Rs 7,121,980 to Rs 21,377,412. This can also be a reason for the increased dividend income which rose from 26,092 to 31,244. We can see a decrease in cash flow from investing activities in 2008 comparing to 2007. Purchase of property plant and equipment has been significantly low. However, purchase of intangibles and proceeds from disposal of operating assets is relatively higher. Dividends received also decreased from the previous year in 2008. Cash flow from financing activities has also experienced an upsurge in 2005 which continued vigorously in 2008 as well.
Sales Net sales Gross profit Distribution and marketing expenses Administrative expenses Total operating cost Finance cost Profit before taxation Net profit
165 166 174 131 124 127 155 187 187
117 117 71 111 105 82 131 62 62
100 100 100 100 100 100 100 100 100
The company’s net sales have grown steadily over time and in 2008 stand at RS 465 billion. We can also see the significant change in the gross profit which increased by 174% in 2008 comparing to 71% change in 2007. We can also see an increasing trend in the expenses of each type. Despite of all that, the company’s net profit is 187% more than in 2006 which clearly indicates towards its market leadership and future prosperity.
Comparison with Shell Pakistan (Industry):
Measures of Short–term Liquidity
(1). Current Ratio:
Current ratio=Current AssetsCurrent Liabilities
2008 Current Ratio PSO Shell 1.24 1.30
2007 1.22 1.01
2006 1.24 1.13
From the table above, we can see that the current ratio of both the companies have declined from 2006 to 2007. However, Shell experienced a larger decrease than PSO, due to the sudden increase of 1.6 billion in liabilities. As we go to 2008, the ratios have increased for both the companies, but shell experienced a larger increase than PSO which also compensated for the previous loss. Than in 2008, it can be seen that both the companies are in a more stable position. Compared to shell, PSO managed to accomplish a relatively stable position.
(2). Quick Ratio:
Quick Ratio= Quick AssetsCurrent Liabilities
2008 Quick Ratio PSO Shell 0.57 0.52
2007 0.64 0.58
2006 0.63 0.58
Quick ratios include cash, marketable securities and receivables, i.e. those current assets which can be converted into cash most quickly. In order to evaluate the shore-term liquidity for the short term creditor, we have calculated the quick ratios. These ratios do not include inventory and pre-paid expenses. The quick ratios for PSO remained relatively stable in year 2006 and 2007 showing a difference of only 0.01 However, the quick ratio declined significantly from 2007 to 2008 by 0.07, which can be explained due to a 42 billion increase in current liabilities. Shell’s quick ratios remained relatively stable during 2006 and 2007 with a slight decrease of 0.04 in 2008, as there was no significant increase or decrease in its current liabilities and quick assets. This shows that PSO displayed a greater decline in the year 2008 as compared to the rest of the industry.
(3). Working Capital:
Working Capital = Current Assets – Current Liabilities
2008 Working capital PSO Shell $ 22,142,472,000 $ 6,912,398,000
2007 $ 11,127,546,000 $ 101,517,000
2006 $ 10,978,097,000 $2,414,344,000
It can be seen from the above data that the working capital of PSO has increase over the subsequent years. This is due to a greater increase in the current assets as compared to current liabilities for the company. In case of Shell, there has been a dynamic instability over the three year. From 2006 to 2007, there is a drastic decrease 9in working capital due to a great increase in current liabilities. These liabilities have decreased to a certain extent in the year 2008; however the working capital is still far from that of PSO’s. The high working capital of PSO reflects it high debt-paying ability and also its excess sources of cash. However, the low working capital of Shell cannot be declared to be an indication of financial difficulty, rather this increase in liability may be a part of daily business operations.
(4). Net Cash from Operating Activities:
The net cash from operating activities appears in the Statement of Cash Flows
2008 Net Cash form Op. act.(Rupees) PSO Shell
The value of Net Cash from Operating Activities indicates the cash amount generated by operations after allowing for expenses and operating liabilities. Form the above data, it can be seen than PSO’s net cash showed an appreciable increase from 2006 to 2008. Whereas on the other hand, Shell’s net cash decreased drastically from 2006 to 2007 and then in 2008 managed to increase its net cash to an amount slightly greater than it was in 2006. But overall, PSO remains at a more stable position than Shell. These values for PSO can be attributed to the high value of cash generated from operations for all three years. Shell’s cash generated from operations is very low, with a slight increase in the recent period.
(5). Receivables Turnover Rate:
Receivable turnover rate = Net SalesAverage Accounts Receivables
Receivables turnover rate PSO Shell
2008 17.38 33.18
2007 30.42 30.42
2006 30.42 26.07
Receivable turnover rate indicates how quickly a company converts its receivables to cash. PSO’s turnover rate remained the same for the year 2006 and 2007, but decreased considerably in the year 2008. As for Shell, the turnover rate increased from 2006 to 2008.PSO’s receivable rate has decreased as if faced a severe liquidity crises in the year 2008 due to high receivable from the Government of Pakistan.
(6). Days to collect Average Accounts Receivables:
Days to collect receivables= 365 daysRecievable Turnover Rate
Days to collect A/R
Indicates in days how quickly a company can collect its accounts receivables. From the data we can see that during 2006, it took PSO 12 days to collect receivables which remained the same in 2007. But this number increased significantly in 2008. For Shell, the number of days was already fewer in 2006 which continued to decline till 2008. This is due to the same reason as mentioned for receivable turnover rate. The difference in the days to collect accounts receivable for both the companies lies in the difference in their credit terms, since the oil crises had a great impact on the entire Oil industry.
(7). Inventory Turnover Rate:
Inventory turnover rate = Costs of Good SoldAverage Inventory
Inventory turnover rate PSO Shell
2008 19.21 28.07
2007 26.07 22.81
2006 36.5 33.18
The Inventory turnover rate indicates how quickly inventory sells, how many times during the year a company is able to sell goods equal to its average inventory. The trends in the rates show that PSO’s turnover rate has increased from 2006 to 2008, whereas those of Shell first decreased from 2006 to 2007 and then increased in 2008. PSO’s low turnover rates are unfavorable since they indicate that sales are low and/or there is excessive inventory and they kept on decreasing for all three years. On the other hand, Shell is at
a considerably better position as it had a high turnover rate in 2006 which decreased in 2007 but again showed an increase in 2008. So it can easily be concluded from the data that PSO is at a weaker position.
(8). Days to sell the Average Inventory:
Days to collect average inventory= 365 daysInventory Turnover Rate
Days to sell inventory PSO Shell
2008 19 13
2007 14 16
2006 10 11
Days to sell average inventory gives the same interpretation as does the Inventory turnover rate. That is, PSO takes a greater number of days to sell its inventory and this duration is continuously increasing from 2006 to 2008. Comparatively, Shell is at a better position as it takes fewer days to sell its products.
(9). Operating Cycle:
Operating Cycle = Days to Sell Inventory + Days to Collect Receivables
Operating cycle PSO
Operating cycle indicates how quickly the asset is converted into cash after sales. Short-term creditors are mainly interested to know about the company’s ability to generate cash. The operating cycle for PSO has increased over the three years due to longer days to sell inventory and inventory turnover. This is clearly reflecting that company's cash is tied up longer in its core operations which are also creating cash flow problems for the company in the form of very high receivables from Government.
B. Measures of Long-term Credit Risk
(1). Debt Ratio:
Debt Ratio = Total LiabilitiesTotal Assets
2008 Debt Ratio % PSO Shell 0.76 0.66
2007 0.72 0.68
2006 0.70 0.64
Debt ratio indicates the portion of debt a company has relative to its assets and helps determine a company’s level of risk. While analyzing PSO’s debt ratio, it can be seen that it has increased over the three years, whereas the debt ratio of Shell increased from 2006 to 2007, but experienced a decline of 0.02 from 2007 to 2008.
Even though the debt ratio of PSO has increased, it still remains less than 1, indicating that the company’s total assets are greater than its debts. Whereas for Shell, the same is the case from 2006 to 2007 and then in 2008 the debt ratio decreased, showing that the total assets increased again
C. Measures of Profitability
(1). Gross Profit Margin:
Gross Profit Margin = Gross ProfitNet Sales
Gross Profit rate% PSO Shell
2008 6.06 10.83
2007 3.51 5.54
2006 5.77 8.49
Gross Profit rate is the gross profit expressed as a percentage of net sales. The sales of PSO have decreased in the year 2007 and later on increased in 2008, whereas for shell, the data shows the same trend. Gross Profit rate usually lies between 20% and 50% for merchandising companies but PSO’s low gross profit rate can be explained due to the fact that is a fast-moving merchandise company where the gross profit rates are lower. The significant change in the gross profit rates for the Oil Marketing Industry can be attributed to the sudden rise in oil prices globally, thus explaining the reason for the similarity in trends of both the companies.
(2). Operating Income:
Gross profit-Operating Expenses
Operating Income (in billions) PSO Shell
2008 20.74 8.4
2007 6.25 1.1
2006 9.87 4.99
Operating income refers to the relationship between revenue earned from the customers and expenses incurred in producing this revenue. It measures the profits from the business’s core operations only. The operating income for PSO is showing a positive trend. This shows that the company’s operating expenses are not significantly high. Its net profit gets lowered during extraordinary losses. Theses extra ordinary losses exempt the daily expenses due to business operations of the company. The operating income for PSO is relatively lower which means that the company has higher operating expenses as compared to PSO.
(3). Net Income to Sales:
Net Income to sales = Net IncomeNet Sales
Net income to net sales % PSO Shell
2008 2.83 3.67
2007 1.34 0.61
2006 2.52 2.68
Net sales provide an indication of the management’s ability to control expenses and to retain a reasonable portion of its revenue as profit. The net income to sales percentage of PSO has increased continuously with a decrease in the year 2007 due to the high oil prices. Shell company also followed the same trend with a loss in the year 2007 but regaining it in the next
year. For oil companies like PSO and Shell, earning a net income of 2-3% of net sales is sufficient for the success of the company.
(4). Return on Assets:
ROA=Operating IncomeAverage Total Assets
2008 Return on Assets% PSO 11.06 Shell 12.95
2007 6.28 2.42
2006 10.72 11.12
Indicates what returns the company is generating from its investments/assets. Form the above data it can be seen that PSO’s ROA decreased from 2006 to 2007 and then increased in the next period. The ROA in the year 2008 is greater than the rate of borrowing.
(5). Return on Equity:
ROE=Net IncomeAverage Total Equity
Return on equity
2008 45.4 44.53
2007 22.4 7.2
2006 36.2 34.1
Return on equity for PSO remained higher than for Shell throughout the period of three years. In the period 2007-08, PSO revenue reserve increased by Rs. 1,100,000, while no change was observed for Shell as its equity reserve remained the same. And the net income for PSO was greater than that of PSO by Rs. 9,366,701.
(6). Earnings per Share:
EPS= Net Income-Preferred DividendsAverage Number of Common Stock Outstanding
Earnings per share
2008 27.34 12.90
2007 81.94 93.76
2006 36.2 57.4
PSO profitability ratios showed positive trends in FY08. Company's profit before taxation stood at Rs 21.4 billion and profits after taxation stood at Rs 14.1 billion - highest ever earned by any company in Pakistan. PAT this year recorded 200 percent increase as compared to last year's Rs
4.68 billion. As a result, earnings per share rose by 200 percent and stood at Rs 81.94 as compared to Rs 27.24 in 2007.While that of shell also increased from 12.9 to 93.6, Shell recorded a higher EPS for 2008 than PSO due to comparatively higher profitability.
D. Measures for Evaluating the Current Market Price of Common Stock
(1). Price Earnings Ratio:
Price Earnings Ratio= Current Stock Price Earnings per Share
2008 Price/Earnings ratio PSO Shell
The p/e ratio expresses the relationship between the market price and earnings per share of common stock. The p/e ratio of PSO has varied widely in all the three years. The same variation is showed by Shell. This is due to the sudden changes in the oil demand globally due to fluctuations in its prices.
• Largest oil marketing company of Pakistan.
• • • • • • • • • • • • • •
Brand recognition and customer loyalty. PSO is the market leader in the retail sector in Pakistan with approximately 40% market share in motor gasoline and over 60% in diesel oil. Extensive and vast distribution network of over 3750 outlets throughout Pakistan. Strengthening the ranks of its work force with quality professionals at various levels of management. It takes several steps to increase its productivity It is the top business enterprise of the Muslim world and has been awarded the KARACHI STOCK EXCHANGE TOP COMPANIES AWARD Diversified into products such as PSO loyalty card, fleet card etc, that are basically fuel based credit cards Only public sector entity in Pakistan that has been competing actively with shell, Caltex and Total One of the most successful mergers in Pakistan. Large number of outlets throughout Pakistan. By the launch of Green XL Plus Diesel PSO is offering its customers more productivity and Ethyl Technology has decreased maintenance expense of the engine It is financially backed by the Government of Pakistan. It has high storage capacity and geographical coverage of its depot network is one of its strengths. PSO continues to expand its physical, technical and marketing resources to meet the requirements of the country. PSO has maintained International collaborations to import latest technology. Its employees are committed and highly motivated. Employees work as a team
• • It is an oil marketing company thus it requires to search for supplement supplies of and exploration which is high cost Given the high level of oil imports the company is vulnerable to world market price fluctuations of crude oil
As the company’s majority stake is owned by the government and hence most of the decisions are made by the government that is it is subjected to a lot of government regulations which affects the working of Pakistan State Oil. As PSO has inherited a government system the decisions made by PSO are very slow which generally makes it lag behind other competitors
• • • •
Strong competition with shell, Caltex Threat of new entrants Increase of fuel price in international market Political and security instability in the country Convincing and gaining loyalty of employees is the biggest threat as employees is the biggest asset of a company.
• • •
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 It can introduce new petroleum products to attract new consumers and to retain the old customers. As PSO’s majority market share is owned by the government, PSO can turn this weakness into a opportunity by taking major and huge venture from the international industries establishing in Pakistan in collaboration and support from the government. Also the living style of people at Pakistan is shifting and they have shifted to luxury cars and vehicles, PSO can cater the needs of these customers and can operate successfully. Pakistan is greatly moving from agriculture base country to industrialization, this mean a lot of factories and plants that continually require petrol and petroleum products. thus PSO has a great opportunity to make contracts and widen its operation linkages.
Conclusions and Recommendations:
Fluctuations in international oil prices have rendered the performance of Oil Marketing Companies (OMCs) unpredictable, in terms of productivity. But still the OMC sector of Pakistan showed remarkable performance in FY07-08. The overall market share of Pakistan State Oil at the end of FY08 stood at 67.9, which clearly depicts its market leadership in the OMC sector.
During FY08, PSO's net revenue increased by an impressive 41.62 percent to achieve a market share of 68 percent. Total sales volume, on the other hand, stood at 13 million tons as compared to 11.8 million tons last year. Total sales revenue or turnover stood at Rs 583.2 billion as compared to 411.058 billion million last year. The main contributing factor was the inventory gains along with an increase in sales. PSO profitability ratios showed positive trends in FY08. Company's profit before taxation stood at Rs 21.4 billion and profits after taxation stood at Rs 14.1 billion - highest ever earned by any company in Pakistan. Higher profitability translated into higher gross profit margins and net profit margins. Gross profit margin rose by 6.06% as compared to 3.51% in 2007. ROA and ROE also showed an impressive performance mainly because of higher profitability. ROA for FY08 stood at 11.06% as compared to 6.28% in FY07. Total assets, on the other hand showed 70 percent growth in FY08. Growth in total assets was mainly stimulated by 85.3 percent in current assets of the company in FY08. PSO's record earnings during FY08 were also supported by inventory gains made especially during the second half of FY08 due to ever increasing oil prices. Currently, oil prices have dipped below $70 per barrel, which may result in inventory losses for the company in current accounting period. PSO, however, has performed better than other players in terms of sales-to-equity ratio on account of high sales volume. Sales to equity declined marginally in FY08 because equity grew at 47.88% as compared to 41.6% growth in n PSO, however, still its performance was. Sales to equity declined marginally in FY08 because equity grew at 47.88 percent as compared to 41.6 percent growth in net sales. Similarly, asset turnover has also shown a declining trend, owing to 70 percent growth rate witnessed in total assets as compared to 41.6 percent growth in net sales. 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. PSO can achieve even higher profits by acting upon the opportunities mentioned above. The company can expand its business in rural areas on account of its leverage capacity. PSO can continue to remain the market leader if it maintains its management strategies and focus on its long-term goals.
• • •
http://www.brecorder.com/index.php?id=830536&currPageNo=1&query=&search=&ter m=&supDate Financial statements of PSO and SHELL Pakistan for the fiscal year 2006,2007 and 2008. www.google.com www.wikipedia.com Financial and Managerial Accounting, 13th Edition by William Haka Bettner
Various Financial Journals
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