Shell Pakistan

Stock in trade

Horizontal analysis
2018 2017 2016 2015 2014

Stock-in-trade 30.30% 24.43% 24.39% 35.01% 33.83%

Breakdown of stock in trade

Company Analysis

Factors Effect How Much

Import of fuels Increase 7%
Non Fuel Retail (NFR) Increase 5%
offerings
Launch of Shell V Power Increase 10%
Fluctuation of oil prices Decrease -8%
Non-compliant vehicles Decrease -13%

 Import of Fuels
In addition to delivering strong business performance, shell Company has been at
the forefront of working closely with the Government to manage the fuel shortages
that affected shell since, leveraging their global supply chain to import extra fuel,
and sharing fuel parcels with other oil marketing companies, contributing to
inventory exposures. Continuation of import of fuel to lower the fuel margin is
expected to increase the inventory. Moreover, the country is set to start importing
higher-quality petrol from the next month, though abandoning the lower-grade fuel
would take time. Moreover, consumers are estimated to pay Rs2.75 more on a litre
of higher-grade petrol. The government is replacing imports of research octane
number (RON) 87 petrol with those of 92 RON, commonly known as Euro-II
gasoline. CEO of Shell Pakistan Ltd Jawwad Cheema said imports of 92 RON
petrol will get under way from the import/tender cycle of the Pakistan State Oil. He
said most countries have already switched to 92 RON as the main-grade petrol.
This will increase the stock in trade of shell Pakistan.
Source:
1. Annual report Shell Pakistan 2018
2. https://www.dawn.com/news/1287370

 Non Fuel Retails

The Company’s Retail Business has been delivering growth through a continued
focus on superior customer services and grew market share in motor fuels. To add
more value to its customer offering, Shell tends to refreshed focus of Non Fuel
Retail (NFR) offering, on sites, with the launch of 30 state of the art Lube Oil
Change facilities and the first McDonalds on a Shell site. Shell Pakistan is
expanding its non-fuel retail capabilities by leveraging its partnership with
McDonald’s. The two major brands announced that several McDonald’s drive-thru
outlets will be built at selected Shell fuel stations across the country. This will
Increase the inventory of Shell Pakistan by a significant amount in the future.
Source:
1. Annual report Shell Pakistan 2015
2. https://www.shell.com.pk/media/news-and-media-releases-2015/non-
fuel-retail-collaboration-with-mcdonalds.html

 Launch of Shell V power

New Shell V-Power is a premium fuel designed for improved performance. To
keep pace with new engine technologies, we have developed new fuels that
work effectively under these conditions to help maintain and restore. Shell have
approximately 120 fuels scientists and specialists across the globe working on
fuel innovation, development and product implementation to meet the evolving
needs of customers and their cars. It will be available in more than 100 fuel
stations nationwide and tend to increase it more by the end of 2019.
Source:
1. Annual report Shell Pakistan 2016
2. https://dailytimes.com.pk/265183/shell-launches-new-performance-
fuel-v-powerinpakistan/

 Fluctuation of oil prices

Oil prices continued to fluctuate since 2016 and the Company was constantly
exposed to inventory losses driven by the price volatility and compliance to the
requirement of maintaining strategic stock cover. If this continues, the prices of
cost of goods sold for shell Pakistan will continue to rise and will eventually
adversely affect the inventory especially for retail oil. Small players will pinch the
market share from shell with their aggressive tactics particularly in retail fuel
space, causing inventory losses in future for retail oil and other petroleum products
Source:
1. Annual report Shell Pakistan 2017
2. Business recorder- Shell marred by inventory losses April 2019

 Non-compliant vehicles
Since the incident of Ahmedpur 2017, where shell vehicle collapsed and lost
50,000 Liter of oil, the company has been facing a lot of problems in improving
their logistics departments and gaining back the trust of their customers. SPL is
committed to playing its role in road safety by inducting a total of 120 new
compliant oil tanker into its dedicated hauler fleet to date with a plan for
another 100 by December 2022. If not done so then these causalities will lead to
more loss of oil and other petroleum products reducing the inventories by a
relatively smaller percentage in future.
Source:
1. Dawn news 2017
2. Shell media releases and news 2018

Economic Analysis

Factors which will affect stock in trade of shell

1. Inflation rate
2. Taxes
3. Crude oil prices
4. Exchange rate
 Factors Effect How Much
Inflation rate Decrease -15%
Taxes Decrease -6%
Crude oil prices Decrease -11%
Exchange rate Decrease -18%

 Inflation

Pakistan's annual inflation rate rose to 13.07 percent in January 2020 from 12.42
percent in the previous month. This was the highest inflation rate since June 2011,
mainly boosted by prices of food & non-alcoholic beverages (19.3 percent vs 16.9
percent in December). Additional upward pressure came from transport (14.3
percent vs 12 percent). Increase in inflation will lead to a higher oil prices in
Pakistan. as oil prices will increase due to inflation this will leads to a lower
demand. With no serious demand in the market the stock in trade of shell will
decrease in the future
Source:
1. Dawn news
2. The news

 Taxes
Since the new government has taken the charge, they are keen to bring tax reforms.
As a part of their tax reform regimes they have imposed heavy taxes on the
automobile industry resulting in price hike of cars in Pakistan. As petrol demand is
derived from the demand of vehicles, in recent time the demand of vehicles has
dropped massively. The drop was so severe that two top players of automobile
industry were forced to shut their business 7 days a week.
Source:
1. Business recorder
2. Trading economics

 Exchange rate

As Pakistan is an importer of the crude oil, the imports are highly dependent on the
exchange rate of PKR to USD. Pakistani rupee is depreciated heavily from 104 to
154 in past 2 years. as Pakistani rupee depreciates, it is hard for OMCs to maintain
a certain level of stock in trade (keeping in view the low demand). Pakistan rupee
is expected to maintain the level in near future hence making imports very
difficult. This factor will affect stock in trade negatively as stock in trade in trade is
expected to decrease in future
Source:
1. Trading economics
2. Shell annual report 2018

 Oil prices

International crude oil prices are fluctuating. In recent time decrease in oil prices
has helped OMCs to increase their inventories. As for now, the current economic
situation in Pakistan is not favorable for any type of business. keeping in view the
previous factors the demand of petrol is decreasing in Pakistan. As crude oil prices
is expected to rise with Pakistan rupee being depreciated, this will compel shell to
decrease their imports hence effecting negatively to stock in trade of shell
Source:
1. Oilprice.com
2. Financial times

Horizontal analysis
Stock in trade 2018 2017 2016 2015 2014

Shell Pakistan 30.30% 24.43% 24.39% 35.01% 33.83%

PSO 77% 63% 48% 55% 81%
Hascol 17.69% 46.62% 84.61% -6.27% 10.146%
Attock 71.37% -14.84% 2.03% -43.11% -1.61%

Industry Analysis
Factors Effect How Much
Lower furnace oil demand Decrease -10%
International restrictions by Decrease -9%
IMO
GDP, CPEC and Auto sector Increase 18%
Infrastructure development Increase 12%
CPEC
Investment in oil storage Increase 20%
infrastucture

 Import Furnace oil demand

Lower furnace oil demand led to decline in overall volumes and inventory of all
OMCs company. Furnace oil used to be the first choice for running power plants in
Pakistan. In October 2017, however, by the Prime Minister’s proclamation, power
plants were forced to switch to RLNG, which is generally considered cheaper to
run. In 2018, just 3.285 metric tonnes per day of furnace oil was sold by oil
marketing companies in the country. That is substantially lower than what has
recommended by OCAC. If the consumption of furnace oil from power plants does
not immediately improve to higher levels, or shift to LNG then it could damage
Pakistan's petroleum inventory level. All of Pakistan's refineries could be forced to
shut down if the problems related to the slow off-take of furnace fuel oil are not
resolved on an urgent basis.
Source:
3. https://dailytimes.com.pk/541779/the-furnace-oil-crisis/
4. Annual report 2018
5. Annual report 2017

 International restrictions by OMC

Because of new regulations issued by the International Maritime Organization
(IMO), crude oil import had reduced during the first six months of the current
fiscal year 2020. Under these regulations, RFO containing more than 0.5 per
cent of Sulphur content is disallowed for use in ships and its violation carries
heavy fines. This will slow down the oil operations and productions and cause
decrease in inventory levels for all OMCs in Pakistan specially PSO and Shell
in the coming years.
Source:
3. https://www.dawn.com/news/1530189

 Rising GDP, CPEC & growing auto sector to boost white oil volumes
Pakistan total petroleum sales improved by 5-year CAGR of 5.3% to 23.5m tons in
FY2016. We expect the growth trend to continue at 5.5% CAGR to 27m tons by
FY2020. Rising automobile sales (cars on road have increased at a 5-Year CAGR
of 16%), pickup in economic activity and CPEC related projects are likely to keep
the white oil segment growth at 7% CAGR. If this trends continue the volumes for
white oil will increase positively impacting the inventory levels of PSO, Shell and
Hascol.
Source:
4. OCAC Insight research
5. http://insightsec.com.pk/bkoff/Files/Pakistan%20Oil%20Marketing
%20Companies%20-%2020170902%20-%20Profits%20pumping
%20back%20into%20stations%20(Detailed%20Report).pdf

 Infrastructure development by CPEC to support HSD volume

Once the corridor (expected completion in 2021) and Gwadar port is operational,
we expect China to rapidly start diverting bulk of its trade activities and channel it
through the Gwadar Port. In this backdrop, we opine that OMCs in Pakistan will be
one of the key beneficiaries of China’s trading activities. As per World Shipping
Council’s statistics, China is the largest exporter of containerized cargoes with an
estimated 36mn TEU (Twenty Foot Equivalent) of global annual exports. The
Chinese cargoes passing through Pakistan have the potential to shift POL demand
curve altogether post FY20 in the country. To put things into perspective, our back
of the envelope calculations suggest that for a minimal assumption of 5% of
China’s containerized cargoes passing through Pakistan, the incremental increase
in HSD (assuming diesel based carriers) sales can go upto ~1.9mn tons/annum.
This will increase HSD volumes for all OMCs of Pakistan and hence the inventory
levels.
Source:
1. PAKISTAN INSIGHT FEBRUARY 7, 2016
2. World shipping council JS research

 Investment in oil storage infrastructure

Pakistan is expecting at least seven billion rupees in investment from new oil
marketing companies in building of storage infrastructure within the next three
years, officials said, as growing demand of retail fuels is attracting investors to
capitalize on the country’s low oil inventory capacity. Officials at the ministry of
energy told The News that Oil and Gas Regulatory Authority (Ogra) granted
provisional or construction licenses to 15 new companies, which are mostly local,
to build storage infrastructure across the country. They are registered with the
Securities and Exchange Commission of Pakistan. Currently, there are more than
7,000 retail outlets of OMCs operational in the country, according to the annual
report 2016/17 of Ogra. There are around 10 OMCs with major ones including
state-owned Pakistan State Oil, Attock Petroleum, Shell, Hascol, Parco and Byco.
Umair Naseer, deputy head research at Topline Securities said there is need of
further investment in OMCs sector as demand of retail fuels is increasing, while
inventory holding capacity stands at less than a month. This strategic decision is
expected to increase inventory levels by huge amount.
Source:
1. https://www.thenews.com.pk/print/290760-pakistan-set-for-rs7-5bln-
investment-in-oil-storage-infrastructure-in-3-years