The reason that I chose this topic was cause, I have always been very comfortable working with numbers, and it's always interesting analyzing financial statements of companies. My first inclination was to base my project on a Financial Institution as it satisfied my curiosity for numbers, but after my internship period at PSO, I decided to focus on that as my final project organization, as it not jus offered me quantitative data to play with but it also offered me the opportunity to witness dynamics, involved in a oil industry, which perhaps was something novel to me.
HISTORY
Pakistan State Oil Company Limited (PSO), founded in the year 1976, is one of the leading companies in Pakistan's energy sector. PSO comes from a long line of company mergers that date back to the year 1974, and includes the merger of Pakistan National Oil (PNO) and Dawood Petroleum Limited (DPL) into Premier Oil Company Limited (POCL). PSO finally came into being when the Government of Pakistan merged POCL with another existing petroleum company called State Oil Company Limited (SOCL). As PSO, the company defined a new corporate culture and implemented a renewal program to implement it. This program was completed in 2004 after extensive organizational restructuring in terms of the company's architecture, employees, decision making process, and cross functional teams. With the successful implementation of the new and effective corporate culture, PSO has managed to not only to strive and complete in a highly competitive market, but has made its mark as a leading company within its genre.
COMPANY PROFILE
Figure Pakistan State Oil (PSO) is the market leader in Pakistan enjoying current market share of 82.3% in the black oil market and 59.4% share in the white oil market. It basically deals in the marketing, storage, distribution and marketing of various POL (petroleum, oil and lubricants) products including motor gasoline, high speed diesel (HSD), furnace oil, jet fuel, kerosene, LPG, CNG, petrochemicals and lubricants. This blue chip company, the winner of the Karachi Stock Exchange Top Companies Award and a member of the World Economic Forum, has been a popular topic of case studies in Pakistan and abroad based on its radical corporate turnaround over the last few years.
Figure The company's Mission statement is "We are committed to leadership in the energy market through a competitive advantage in providing the highest quality petroleum products and services to our customer" and its Vision is "To excel in delivering value to customers as an innovative and dynamic energy company that gets to the future first."
With 3384 out of 3620 outlets serving retail customers and the rest catering agricultural and other bulk needs, the company is recognized to have the largest distribution network with 1735 outlets modernized under the New Vision Retail Program.
In order to cover up the supply deficit in High Speed Diesel (HSD) consumed by transport and automotive sectors, and Furnace Oil (FO) used by power plants and IPPs, PSO has maintained a 30-year mutually-beneficial business relationship with Kuwait Petroleum Corporation (KPC); PSO imports almost 88% of the total OMCs' imports of around 9.8 million metric tons of oil.
From Karachi to Gilgit PSO possess huge infrastructure facilities which include 9 installations and 12+1 depots with a storage capacity exceeding a million metric tons, implying 80% of the total storage capacity which is also let out to the other players in the market.
PSO sets in when lubricants including automotive, hi-street and industrial, are nationally demanded on international standards and for this PSO has set up a state-of-the-art Lubricants Manufacturing Terminal (LMT) Karachi.
PSO has gone beyond fuel for its retail customers and has introduced a lot of value added services available at the PSO outlets. PSO also caters to the fuel demands of industrial consumers that include power generation, railways, sugar and textile industry; armed forces and even 9 airports and marine ship fuel at 2 ports in Pakistan.
OIL SECTOR
The entire oil sector of Pakistan including Exploration and Production (E&Ps), refineries and oil marketing companies (OMCs) posted a record profitability growth of 41pc on year on year basis in FY08 with total profits amounting to Rs114b.
Figure E&Ps sector secured the largest share of 68pc in FY08 oil sector profits (down from 84pc in FY07 due to increased share of Refineries and OMCs in the total), whereas OMCs and Refineries stood 2nd and 3rd in the row.
Pakistan State Oil (PSO), SHEL and Attock Petroleum Limited (APL) shared 64 per cent, 24 per cent and 12 per cent of the FY08 overall profit pie.
"Pakistan produces approximately 68,000b/d of crude oil and gas liquids -- from reserves estimated at 339mn bbl in the December 2008 Oil & Gas Journal (OGJ) survey -- but consumes some 389,000b/d of oil. While there is no prospect of Pakistan reaching self-sufficiency in oil, the government is encouraging the development of domestic production, and has targeted 100,000b/d by 2010. In our view, this is highly optimistic, although privatization of virtually all state oil companies could stimulate investment, activity and drilling success.
Refining capacity was expected to have reached 400,000b/d by the end of 2008, but progress has been slow, although there are firm plans to add at least 100,000b/d over the next year or two, with further expansion towards the end of the decade."
The Pakistan Oil and Gas Report from BMI is forecasting that Pakistan will only contribute 1.45% of Asia Pacific regional oil demand by 2013, providing 0.86% of its supply.
Figure "Pakistan's real GDP growth for 2009 is now forecast by BMI at 2.5%, down from 5.8% in 2008. In 2010, growth is put at 3.5%, followed by 4.3% in 2011, and 4.8% in 2012/2013. Several state-controlled oil and gas companies are in the throes of privatization and already work with international oil companies (IOCs) in the upstream segment. We foresee oil and gas liquids production of no more than 75,000b/d by 2013, with the country also able to pump an estimated 75,000b/d in 2009. Consumption beyond 2009 is forecast to increase by around 3.5% per annum to 2013, implying demand of 413,000b/d by the end of the forecast period."
During 2009, the Pakistani economy faced a lot of internal and external challenges. The major problem was the shortfall in the energy sector, which was mainly driven by the circular debt. Besides this, this year also saw decrease in supply and consumption of energy in different sectors, now this was due to the overall slowdown of the economy caused by inflation.
If we see the overall consumption of petroleum products in Pakistan in year 2009, it decreased by 1% compared to the previous year. On the CNG side, Pakistan has become the largest consumer of CNG in the world, with 2700 CNG stations catering to about 2 million vehicles as compared to 1.7 million vehicles during 2008, showing an increase of 17.6%. We can also see an increase in the consumption of Black Oil (Fuel Oil and Light Diesel Oil) which drew to 8.2 million tons, showing an increase of 5.7% over 2008. This is due to several reasons firstly, the supply constraints for natural gas in
the market and the significant production in hydro-electricity. This trend is expected to continue cause of the above reasons.
During 2009, local refineries produced 9.6 million tons whilst the deficit requirement of around 9.8 million tons was imported. The major chunk of the demand was in Fuel Oil and High Speed Diesel for which 5.1 million tons and 4.3 million tons were imported respectively. A significant reduction in the refining capacity of different refineries was witnessed mainly due to mounting circular debt.
The global crash of oil prices in the international market, however, helps Pakistan in addressing the rising trade deficit due to a significant decrease in the imports value of the country.
AIMS & OBJECTIVES
To analyze the financial performance of PSO by comparison with historical data using absolute data and ratios
To evaluate the financial position using SWOT analysis. It basically combines the results of environmental analysis and internal appraisal to identify and assess the organizations internal strength and weaknesses, and opportunities and threats from the environment.
Application of International Accounting Standards
What effect is it making on the economy
Contribution towards the Corporate Social Responsibility
To understand functions of an Oil Marketing Company
INFORMATION GATHERING
As we are focusing on analysing the financial statements of the company, we would mainly work on the secondary data that we have gathered from the various sources which are as follows:
Text Books
Internet- web sites
Newspaper reports on the company, and announcements
Business Monitor International
Government reports
Stock Exchange reports
Audited Financial Reports by PSO
Technical Articles
Discussions with Management & Board of Directors members
Text Books: ACCA Study guides for papers Financial Management (F9), Financial Reporting (F7), Advance Corporate Reporting (P2), Business Analysis (P3) and Advance performance management (P5) were invaluable sources. I referred to them extensively as not only did these texts give me the relevant formula but also guided me how to interpret them and also the difficulties associated with evaluating financial performance by looking at financial data alone.
Internet: The major chunk of the information has been provided by the PSO website as it includes all the relevant information needed. The website mostly provides us with a good background and history of the company, its operations, investors, and audited annual reports as well.
The website also includes detailed information about its Social Action Program, in other words its Corporate Social Responsibility (CSR). PSO's main CSR thrusts are Education, health care and community building which entails activities for women
empowerment, children welfare and relief efforts during and after natural calamities have emerged. The site also contains all the information regarding the Board of Directors, the details of the power plant.
News Papers: the major newspaper source that was used was the Business Recorder as it is the leading business newspaper. This was followed by Dawn and The News. Their websites were visited to search for any news reports on PSO, which would help in understanding the company financially and in return help in a more efficient analysis of the company's financial statements.
Business Monitor International: BMI provides data, analysis, ratings and forecasts on country risk and industry sectors for 170 markets. From this website I found a report, 'Pakistan Oil and Gas Report Q4 2009' which included a 5 year and 10 year industry forecast. This report provided me with the industry information, the production and consumption of oil in Pakistan and an overview of the competitors.
Government Reports: I also visited relevant sites such as those of "The Ministry of Petroleum & Natural Resources", "The Oil Companies Advisory Committee", "Shell Pakistan", "Pakistan and Gulf Economist", "VentureLine.com", etc. The Google search engine was my primary tool to get to all these websites.
Karachi Stock Exchange (KSE): The web site of KSE has also been used. It is a member of South Asian Federation of Exchanges (SAFE); it holds the Vice Chairmanship of the South Asian Federation of Exchanges Member Federation of Euro-Asian Exchanges (FEAS). It is also an affiliate member of International Organization of Securities Commissions (IOSCO) and World Federation of Exchanges (WFE).
KSE plays a key role in Pakistan's economy as KSE is one of Pakistan's largest tax payer and in the fiscal year 2006-2007 contributed over Rs. 4 billion towards the national exchequer. Listed Companies contribute over 10% of total revenue collected by the Government of Pakistan. KSE brokers on average pay more than 50% of their profit
before tax as presumptive tax and the investors pay 10% tax on dividends. Karachi Stock Exchange. Available at: http://www.kse.com.pk/aboutus/introduction.php?id=7&sid=7.01
KSE holds 3 indexes namely KSE-100, KSE-30 and KMI-30. It was the best performing Asian stock exchange before the global financial crisis reaching a peak of 15000 points.
Thus relying on the data present on the KSE website was useful for the purpose of this research.
Annual Reports: The most important data source for the project was the 'Annual Reports' of Pakistan State Oil Ltd. All the financial information about the company has largely been drawn from the Annual Reports. I referred to last four financial statement of the company from the Financial Year 2006 to the Financial Year ended 2009. These reports were obtained from a friend working at Karachi Stock Exchange (KSE), whereas the latest financial statements for the year ended 2009 was readily available immediately after they were published on the website.
Discussions with Management & Members Board of Directors: the only primary source of information that I gathered was from the meeting with the senior management of PSO. This meeting was very fruitful as it gave a great insight from the real people on how the company works, its strengths and weaknesses, the impact of privatization and how it has also affecting the company's financials. All the information gathered from this meeting has been used throughout the report where relevant.
Technical Articles: The articles published by the ACCA in the Student Accountant magazines were useful. The principal articles used were from the August 2005 issue, titled: "Making the most of your mentor" by Pippa Riley, the August 2009 issue, titled: 'GRADE 'A' RAP' by Shane Johnson and 'WORKING BEST WITH A MENTOR' by Alastair Neilson. These articles helped me understand the role of the mentor and how I can avail and use my mentors knowledge and experience to do better on my work.
FINANCIAL ANALYSIS
Financial analysis of the company PSO has been carried out for three years using ratios based under 4 major classifications, each concentrating on major portion of the business;
Profitability ratios
Asset Utilization ratios
Leverage ratios
Investment ratios
3.1 PROFITABILITY RATIOS
The underlying principle behind any business to existence is for the maximization of wealth. A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
Table
3.1.1 GROSS PROFIT MARGIN
A frequently used financial ratio that is one indicator of a company's financial health. Companies often refer to the fact that their gross margins are improving, which means
that the expenses involved in selling their goods are decreasing, thereby leading to increased profits. Gross profit is sales, or revenues, minus the cost of goods sold. That number is divided by sales to get the gross profit margin, which is expressed in percentage terms.
Figure
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Gross profit margin mainly deals with revenue and cost of goods sold of the company. The sales revenue of the company increased around 41% in 2008 compared to that in 2007. This reflected the highest increase in revenue ever experienced by PSO. The cost of goods sold also increased by 37% in 2008 in relation with 2007, which led to increase its gross profit margin in 2008 to 5.15% representing an increase of almost 73% as compared to that in 2007. This tremendous increase in profit margins was mainly due to high inventory gains, reaching a total of Rs. 11 billion, owing to increasing oil prices in international market.
Following this remarkable rise of gross profit margin in 2008, there was a drastic fall of almost 92% in 2009, bringing it to a level of 0.42%. Sales in 2009 increased by 23% and cost of goods sold increased by 31% as compared to the previous financial year. The Increase in COGS being more than the increase in sales turned out to be the major
reason for such a drastic decline in gross profit margin. One of the major reasons for the increase in cost of goods sold in 2009 is PSO suffering heavy inventory losses because of a sharp fall of 50% in international oil prices during 2009, which forced the company to bear an inventory loss of Rs. 18.9 billion during 2009.
3.1.2 NET PROFIT MARGIN
Net profit divided by net revenues, often expressed as a percentage. This number is an indication of how effective a company is at cost control. The higher the net profit margin is, the more effective the company is at converting revenue into actual profit.
Figure
Net profit of the company is the excess of gross profit over all the operating and other expenses. Gross profit in 2008 rose by almost 144% in relation to that in 2007. Also, the operating expenses and finance costs have increased by 54% and 18% respectively. The company increased the net profit margin by 110% to 2.41% in comparison to that in the previous year. The rise in the operating expenses was mainly caused by the heavy exchange losses incurred by the company due to devaluation of Pakistani Rupee by
19% against US$. Company's income tax payments during 2008 reflected an increase of 200% mainly due to a 35% tax on inventory gain recorded in 2008 accounts. Increase in gross profit was more than the increase in operating expenses which resulted in the net profit margin to rise.
Following an increase of 144% in 2008 net profit drastically declined in 2009 to (0.93%) showing a fall of 140%. It was mainly because of the reduction in the gross profit for the year followed by significant increase in finance cost and operating expenses for the year by 356% and 17% respectively. The major crisis that PSO underwent in 2009 was "Circular Debt". Company had to face liquidity issues owing to receivables who defaulted on payments to PSO. Its financial charge for financial year 2009 increased mainly due to bank borrowings to deal with the liquidity crunch that resulted from circular debt. As PSO booked the inventory loss during 2009, it resulted in a deferred tax asset which contributed a bit in reducing losses for the year.
3.1.3 RETURN ON SHAREHOLDERS EQUITY
Figure 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. It is used for comparing over the years to see any improvement or
decline, to compare it with the returns being earned by other companies or competitors and for comparison with current borrowing rates for the purpose of deciding whether it is viable to borrow.
Return on investments basically deals with return gained by the capital invested by the share holders. ROE increased by 103% in 2008 as compared to that in the preceding year. In 2008, PSO showed an increase of 200% in profit after tax in relation to that in 2007. This was mainly due to the remarkable inventory gains booked by PSO in 2008 of almost Rs. 11 billion, due to which it proposed an interim plus a final dividend of Rs. 23.5 per share which was 114% more than the dividend paid in 2007. This shows that the return on the investments of share holders had improved which led them to gain high returns from it. Higher the ROE better the position of company.
Just after an outstanding performance in 2008, company recorded a fall of 171% in return of shareholders equity bringing it down to 32.10% in 2009. Profit after tax figures showed a radical fall of 148% in 2009 as compared to that in 2008. This fall was caused due to few major reasons, firstly in 2009 company booked a high inventory loss owing to sharp fall in international oil prices, followed by the liquidity issues faced by the company due to "Circular Debt" crisis. This crunch was addressed by heavy bank loans taken up by the company which caused the financial charges for the year to increase immensely worsening the company's profitability. This led the company only to pay an interim dividend of Rs. 5 per share to its shareholder reducing it almost by 80% compared to that in the previous year.
3.2 EFFICIENCY RATIO
Efficiency ratio helps to evaluate the company's use of the resources i.e. how efficiently the company is using its resources.
Table
3.2.1 DEBTORS TURNOVER RATIO
Debtor turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. The higher the value of debtor turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors.
Figure
The two basic components of debtor turnover ratio are sales and average trade debtors. Sales have increased by 42% with average debtors increasing by 87% in the year 2008. This in net caused the debtor turnover ratio to decline by 25% and bring it down to the level of 24.55 times in comparison to that in 2007. Average debtors include dues from government agencies and other consumers as well. This increase of average debtors was mainly caused by some large fuel consumers defaulting there payments to PSO.
In 2009, this ratio further declined by 49% falling down to the level of 12.57 times. This was a drastic fall ever experienced by PSO since past 7 years. In 2009, PSO showed a 23% increase in sales and 141% increase in average debtors in relation to 2008. Average debtors have increase 6 times more than the increase in sales. It was because of the very high default of payments on the receivables which totaled up to Rs. 79 billion and also an extensive rise in dues from other customers. It clearly shows that company is very inefficient in debt management as debtors rise extensively pushing company in to the liquidity problems. If this inefficiency is maintained, it can have severe effects on the company and its shareholders.
3.2.2 INVENTORY TURNOVER RATIO
Figure This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Inventory turnover ratio indicates the number of
time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.
Average inventory and cost of goods sold are the two elements of this ratio. In 2008, sales increased by 42% and average inventory increased by 60% in relation to 2007. Higher increases in average inventory than increase in sales caused the inventory turnover ratio to fall by 13% coming down to 10.12 times in 2008. This increase in average inventory shows whether there is excess inventory; some obsolete inventory; gain in inventory; or slow moving inventory. This increase in average inventory was mainly due to high inventory gains booked during 2008 due to increasing international oil prices. Moreover, there was 106% increase in the inventory that is Stock in Transit "in pipeline system of Pak-Arab Pipeline Company Ltd and Pak-Arab Refinery Ltd", though there was no change in slow moving inventory. Inefficient management by reinforced poor inventory conditions.
In 2009, inventory position improved and inventory turnover ratio increased by 17% getting up to the level of 11.83. Sales increased by 23% and average inventory by 12% representing a favorable scenario for PSO. Even though the actual inventory decreased, average inventory increased due to technical reasons. But the major reasons for the fall in average inventory during 2009 were the inventory losses that have been booked by the company and massive reductions of 60% in Stock in Transit.
The inventory management system of the company is now working efficiently as after a fall of inventory turnover ratio in 2008, company recovered and is back in line with its position in 2007.
3.2.3 CREDITOR TURNOVER RATIO
Creditor turnover ratio indicates the velocity of debt payment of a firm. In simple words it indicates the number of times average creditors are turned over during a year. The
higher the value of creditor turnover the more efficient is the payment to creditors. Similarly, low creditors turnover ratio implies inefficient payment to creditors.
Figure
Two things that are considered in calculating creditor turnover ratio are cost of goods sold and average creditors. A higher credit turnover ratio shows that creditors are being paid on time or company is not making an efficeint use of there credit period.
A decline of 11% in 2008 and a further decline of 34% was seen In creditor turnover ration bringing it to the level of 9.6 times in 2008 and 6.3 times in 2009 respectively. Payables have incresed t great level in 2009 since 2007 onwards. Therefore, a declining trend has been seen in the company which shows that payables arent being paid on time. This is mainly caused due to the liquidity problems faced by the company due to Circular Debt Crisis.
3.3 SHORT TERM SOLVENCY RATIO
A class of financial metrics used to help determine a company's ability to pay off its short-term debt obligations. Generally, the higher the value of the ratio is, the larger the margin of safety that the company possesses to cover short-term debts.
Table
3.3.1 CURRENT RATIO
Current ratio may be defined as the relationship between Current Assets and Current Liabilities. It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm.
Figure
Current Assets and Current Liabilities are the two components of current ratio. In 2008, current ratio rises to 1.24 by 1.7% followed by a decrease by 14% coming down to 1.07 in 2009. Current Assets have increased by 85% along side Current Liabilities have also increased by 82% in 2008 and by 20% and 38% in 2009.
Current Assets have mainly increased due to Trade Recievables and Stock in Trade. In 2008, few large fuel consumers defaulted there on payment to PSO of the amounts recievables by PSO and also other recievables which cummulated subsequent to the year end. In 2009, company faced serious liquidity problems owing to recievables from
the IPP's who defaulted payment of huge amount to PSO. Another reason for increase in current asset in changes in Stock in Trade, in 2008, its inevntory increased due heavy inventory gains and a large amount of Stock in Transit from "in pipeline system of Pak-Arab Pipeline Company Ltd and Pak-Arab Refinery Ltd".
On other hand Current Liabilities have mainly increased due to Trade and Other Payables and Short Term Borrowings. In 2008, trade and other payables increased rapidly, due to rapid increase in international oil prices, company faced major exchange losses and in 2009, amount owed to a related party has substantially increased. There was a small increase in short term borrowings in 2008 to cover up some liquidity problems faced by the company, but in 2009 a large default on payments by customers pushed PSO in liquidity crises, in order to deal with it company had to make short term borrowings.
Overall, current ratio was quite stable, in 2008 there were hard times but due to higher increase in Current Assets than to Current Liabilities minimized the effect stabilized the current ratio but in 2009 higher increase in Current Liabilities than Current Assets has caused the ratio to worsen off. If company does not improve its current ratio it could be faced to severe liquidity crisis and current financial position will be affected badly.
3.3.2 QUICK RATIO
The quick ratio, often called the acid test, shows how truly liquid and flexible the available working capital is. Quick ratio is a variant of Current ratio. The only difference between the two is that, in quick ratio stock is excluded. It is believed that quick ratio is a better indicator for determining company's liquidity position as in some businesses, stock is considered to be the least liquid asset thus should be excluded when determining company's liquidity position. The rule of the thumb is 1:1.
Figure
Current Assets excluding stock in trade and current liabilities are the two main components of Quick Ratio. In 2008 company experienced a decrease of 11% bringing it down to 0.57 times. The major reason in the decline was the heavy inventory gains booked by the company due to increase in International Oil Prices which also resulted in heavy exchange losses (Increase in Payables). It caused inventory and payables both to increase. For calculating Quick Ratio we do not account for inventory, so the huge increase in payables caused the Quick Ratio to decline creating liquidity problems for the company in comparison to current ratio.
After expeiencing a fall Quick Ratio of the company increased by 32%. As inventory gains caused the quick ratio to fall in 2008, this year huge inventory loses have made the position better again. In 2009, company booked huge inventory loses due to sharp fall of 50% in International Oil Prices resulting in exchange gains which caused inventory to fall and other recievables to rise and bringning the Quick Ratio up to the level of 0.75 times.
3.4 Investment ratios
These ratios help an equity investor to analyze the quality of investment in the ordinary shares of the company.
Table
3.4.1 EARNING PER SHARE
EPS measures the earning available to the ordinary shareholder. A company must be able to sustain its earnings in order to pay dividends and re-invest in the business to achieve future growth.
Figure
Profit after tax and issued share capital are the two components of EPS. PSO has demonstarted a very instable Earning per share over the years, as we can see from the graph above great peaks in 2008 where as big dips in 2007 and currently 2009 as well.
In 2008, there was drastic increas of 200% bringing it upto 81.94/share. This was beacause of remarkable increase the profit after tax for the year. In 2009, there was a massive dip of 148% bringing it down to (39.05%). It was because there was huge loss incurred by PSO this year due to, default recievables, inventory losses and heavy increase in finance cost. This has created fear amongst its shareholders and has increased uncertainity over their investments.
3.4.2 PRICE EARNING RATIO
Price earnings ratio (P/E ratio) is the ratio between market price per equity share and earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether or not to buy shares in a particular company. It helps the investor in deciding whether to buy or not to buy the shares of a particular company at a particular market price.
Figure
Earnings per share and market price per share are the two components of Price Earnings ratio. PSO has encountered a declining trend of PE Ratio. In 2007, it decreased from 14.30 to 5.10 showing a decline of 64%, continuing the trend it further decreased by 209% to (5.50) in 2009. This downward movement implies that investment in PSO is becoming more and more risky, shareholders will be hesitant in investing in the company and existing shareholders would be concerned about their investment in the company, as performance of the company in 2009 have not been very satisfying.
BUSINESS ANALYSIS OF PSO
SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities and Threats involved in a business. It involves assessing the objective of the business and identifying the internal and external factors that maybe favorable or unfavorable to achieving that objective.
STRENGTHS:
PSO, being the largest Oil and Marketing Company of Pakistan, enjoys around 70% of the market share; this contributes as its major strength, leaving the remaining 30% to be distributed between its competitors. This in turn helps preventing the new entrants into the industry.
PSO possesses the largest distribution and fleet network which covers over 81% of the country's retail network. It comprises of 3,620 outlets out of which 3,384 serve retail customers and has over 6,000 tank Lorries for the product movement. So far no other rival company holds such strong distribution and fleet network.
Holding 80% of total storage capacity of the country, PSO possesses huge infrastructure facilities from Karachi to Gilgit with a storage capacity exceeding 1 million metric tons.
One of the key strengths of PSO is its relations with government and private sectors. Through proper approvals and negotiations PSO gained legal protection. Also, PSO has long term contracts with public and private sector organizations for the supply of fuel products.
PSO has maintained a 30 year mutually-beneficial business relationship with Kuwait Petroleum Corporation (KPC). This protects PSO from frequent price fluctuations in the international market.
PSO has set up a state-of-the-art Lubricants Manufacturing Terminal (LMT) at Korangi Industrial Area in Karachi. With raw materials acquired from internationally reputed suppliers; computerized equipment like the Automatic Batch Blender (ABB), Simultaneous Metered Blending (SMB) and Additive Dozing Unit (ADU), Lubricant Manufacturing terminal (LMT), a state-of-the-art terminal in Karachi, produces top-quality lubricants.
PSO has been working to introduce substitute/alternative sources of energy like bio diesel for auto mobiles and nuclear for energy sector. In 2008 PSO started research and development work on bio diesel which included tests vehicles and generators.
4.2 WEAKNESSES:
Due to serious liquidity problems, owing to receivables of a total of Rs. 79 billion, from IPPs such as HUBCO, KAPCO, PEPCO and PIA who defaulted on payments to PSO, the board has decided not to announce any dividend in respect of financial year 2009. An interim dividend declared though. The liquidity crunch resulting from circular debt increased PSO's financial pressures mainly due to heavy bank borrowing to encounter the problem.
The fall in the profitability of the Company is mainly attributed to heavy inventory losses suffered because of a sharp fall in international oil prices during FY09 compared to an increase last year which resulted in inventory gains. The Company registered a heavy loss of Rs. 18.9 billion due to weak inventory management system.
To meet the dynamic market demand, more than 70% products were imported including Diesel, Furnace Oil, LSFO, JP-1; Mogas etc. 80.1% of the HSD imports and 99.3% of imports of Furnace Oil were managed by PSO. This resulted in heavy balance of trade deficits; finalizing an agreement with Kuwait Petroleum Company; and signing new POL Hospitality and Sale Purchase Agreements with OMCs & local refineries.
4.3 OPPORTUNITIES:
Possibility of privatization in the near future. Privatization would come with the new motive of profit maximization which in turn would result in increased efficiency, lower costs and above all improved management structure. Government companies are often subject to political pressures and privatization would work to cure this as well.
PSO could merge or acquire the smaller players in the market as the oil market is highly dynamic and can be unstable as well, due to which it may get difficult for the smaller players to survive.
THREATS:
Plan of Attock petroleum (APL) of network expansion in Southern Region. This will probably kill business for the company and reduce market opportunities in the southern region. The network expansion will also bring with it opportunities for APL to set up more outlets to raise even higher threats in the future.
Instability in oil prices in international market is the biggest threat to PSO. Being a large company with the most massive storage capacity PSO holds large inventories. The rapid fluctuations in the oil prices, even minor ones, results in heavy inventory losses or gains depending on the direction of the price trend.
These fluctuations make it almost impossible for the company to forecast its actual earnings and results in uncertainty regarding the performance of the company.
Fall in economic growth rate due to uncertain business environment is also one of the highlighted threats to PSO. The global word recession has influenced business confidence throughout the world and has also resulted in the contraction of the manufacturing sector resulting in unpredictable cut downs in the demand for fuel products. PSO expects such demand deficits in the future due to this falling economic growth rate and the global business crisis.
CONCLUSION
As I started doing my Research and Analysis Project on PSO some important points that came to my attention were Pakistan State Oil being the largest OMC of Pakistan enjoys being the market leader enjoying highest market share in Black and White Oil market.
PSO has been one of the very profitable and stable Government owned organization. Recently we have seen a lot of fluctuations in the financial performance of the company. Like in 2008, we have seen PSO making huge amounts of profits and distributing a very large amount of dividend. Just after this in 2009 we saw a big fall in the company as it booked its losses.
An uncontrollable factor, fluctuations in International Oil Prices that caused major inventory gains and losses due to fluctuations in International Oil Prices, again PSO can't avoid it as it being its major business activities. PSO can hedge this risk through future rate contracts as deciding on a particular rate of buying no matter what the rate in market is.
Circular Debt Crises, one of the most important things that affected PSO overall. Number of key customers defaulted there payments to PSO. This problem was sort of initiated from 2008, which impacted PSO at large in 2009. When initiated it could have been minimized by taking strong actions about it but for some reasons it couldn't be done. In 2009 it highly affected the profitability and liquidity concerns of the company. It could be controlled by improving the debt management system in PSO and taking corrective actions towards it.
Lastly, but not the least as we have seen from our business analysis of PSO, it has a great number of strengths, which it can use to overcome its weaknesses and ample opportunities in the market place due to which it can fight its threats. Most of all PSO has the support of the government, but in order for it to avail all this and make the
consumers and investors believe in the company, it needs to pay attentions to its financials and make sure that it is on top of the market no matter what the economy is.
