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Shell Pakistan: Quarterly progress and improvement in net profit

FIRST QUARTER 2016 (MARCH 31, 2016)

The Company has continued to make progress on improving its operational performance during the quarter, registering profitable delivery in all our chosen focus segments. Downward oil price movements continued to impact our otherwise robust operational performance, resulting in a net profit after tax of Rs21 million for the quarter, compared to a net loss of Rs 753 million in first quarter last year.

In an import dependent market with fixed margins for motor gasoline and diesel, the extent of inventory losses due to decline in international oil prices is rather large. With the oil prices taking a further plunge in the first three months of 2016, your Company incurred significant inventory losses during the quarter, although this impact was mitigated to some extent through optimizing our global supply chain network to get the best available prices for imported products. We also continued to maintain adequate stocks of fuels as per legal requirements along with ensuring a steady supply of fuel to our customers. The Company continued with its focus on enhanced customer value propositions and superior portfolio offering. Advertising and promotional spend of Rs 91 million, along with exciting new initiatives in non-fuel retailing have set up a springboard for a successful 2016. However, the financial performance of your Company continues to be affected by low regulated fuel margins, continued significant impact of the turnover tax mechanism and financial burden resulting from overdue receivables from the government.

During the current period, the Company was not able to collect further refunds from the government with an implication that it continued to incur financing cost on bank borrowings required to fund these receivables. As at 31st March 2016, the Company is still owed Rs4,019 million as receivables. The Company’s management is continuously engaged with relevant Government authorities to pay the remaining amount on an expedited basis to ensure business continuity and growth.

Petrol and diesel margins in Pakistan are regulated and fixed in Rupees per liter. Currently, these margins are not at a level sufficient to cover steadily rising direct costs of operations and the high cost of financing required for investment in stocks and business assets. Currently regulated margins for motor gasoline and diesel still remain the lowest in the region and we continue to advocate for a further favorable revision of these margins to bring them in line with increasing costs of doing business.

Due to the minimum tax on turnover regime applicable to oil companies, your Company pays Corporate Tax irrespective of the level of profits earned in the period, which has unfairly eroded its operating profit performance and is stifling future investment and growth prospects in the industry. The Company’s management is in continuous discussions with Government authorities to remove this anomaly and to bring us in line with various allowances and lower rates that are granted to other similarly regulated sectors in the country.

HALF YEARLY REPORT

The Company has built on its positive operational performance during the quarter, with a clear focus on key strategic priorities and profitable growth. Despite declining oil prices that continue to impact operational performance, your Company delivered a profit after tax of Rs2,213 million for the half year ended June 2016, compared to a profit after tax of Rs534 million in the same period last year. In acknowledgement of the solid performance of the company, the Board of Directors declared a cash dividend of Rs 6 per share.

In an import dependent market with fixed margins for motor gasoline and diesel, the extent of inventory losses due to decline in international oil prices continues to be a major factor. With the oil prices continuing to fluctuate in 2016, your Company incurred significant inventory losses during the period under review as it continued to comply with regulatory requirements of maintaining adequate stock levels. However, we continued to leverage our global supply chain network to get the best available prices for imported products, and these efforts were successful in mitigating these losses to some extent. Additionally, the financial results of your Company continue to be affected by the financial burden resulting from overdue receivables from the Government of Pakistan.

During the current period, your Company was unable to collect further refunds from the Government due to which the Company continues to incur financing cost on bank borrowings required to fund these receivables. As at 30th June 2016, total outstanding receivables stand at Rs6,389 million. The Company’s management is constantly engaged with relevant Government authorities and we continue to demand payment of the remaining amount on an expedited basis to ensure we enhance shareholder returns, drive for efficient business and invest in growth opportunities in Pakistan.

Motor gasoline and diesel margins are fixed in Rupees per liter by the Government and currently the margin environment is not conducive to cover rising direct costs due to inflation, high financing costs on receivables, working capital tied up in minimum stock to be maintained, or indeed for the investments in business assets that are required to give our customers a world class experience. In July 2016, the Government of Pakistan approved a small increase in regulated fuels margins for motor gasoline and diesel. However, comparing the unit margins in Pakistan with the available margins in the region, we continue to advocate for a further favorable revision, to bring them in line with increasing costs of doing business in Pakistan.

NINE MONTHS 2016 (SEPTEMBER 30, 2016)

The Company has built on its positive operational performance during the quarter, with a clear focus on key strategic priorities and profitable growth. Despite continued volatility in international oil prices, your Company delivered a profit after tax of Rs 3,422 million for the nine months ended September 2016, compared to a profit after tax of Rs 186 million in the same period last year. We continue to drive towards creating and sustaining a culture that drives our commitment to the safety of people, protect the environment, and drive for achieving Goal Zero, in our safety performance.

With the oil prices continuing to fluctuate in 2016, your Company is exposed to inventory losses driven by price volatility and compliance to regulatory requirements of maintaining strategic stock levels in the country. With Shell’s global supply chain network we continue to drive for best available prices for imported products, and some of these efforts have been successful in mitigating potential losses.

The results of your Company continue to be affected by the financial burden resulting from overdue ‘receivables’ from the Government of Pakistan. During the current period, your Company was unable to collect further refunds from the Government, due to which the Company continues to incur financing cost on bank borrowings required to fund these receivables. As at 30th September 2016, total outstanding receivables stand at Rs 6,441 million. The Company’s management is in engagement with relevant Government authorities for the recovery of ‘receivables’ to ensure we enhance shareholder returns, drive for efficient business, and invest in growth opportunities in Pakistan.

Motor gasoline and diesel margins are fixed in Rupees per liter by the government, and the recent initiative by the Government of Pakistan to revise margins based on CPI is a welcome change. In line with this, there was a small increase announced in July 2016; however, comparing the margins in Pakistan with the available margins in the region, we continue to advocate for a further favorable revision to bring them in line with increasing costs of doing business in Pakistan. Additionally, the Government of Pakistan announcement on deregulation of RON 95 & RON 97 motor gasoline is a welcome initiative, which will allow OMC’s to offer better quality fuels to customers.

The move by the Government to upgrade the Main Grade fuel from RON 87 to RON 92 is another positive step. However, margin environment for the main grade continues to be under stress. This has a negative impact as it does not allow companies to cover rising direct costs due to inflation, high financing costs on receivables, working capital tied up in minimum stock to be maintained, or indeed for the investments in business assets that are required to give customers a world-class experience.

ANNUAL 2016 (DECEMBER 31, 2016)

It has been a strong year in terms of performance, with your Company delivering a reported profit after tax of Rs. 6,764 million (including recognition of a deferred tax asset of Rs. 2,763 million) compared to Rs. 911 million same period last year. In acknowledgment of the solid performance of the Company, the Board of Directors decided to recommend a final cash dividend of Rs. 28 per share, which is in addition to the earlier interim dividend of Rs. 6 per share. Oil prices continued to fluctuate in 2016 and your Company was constantly exposed to inventory losses driven by the price volatility and compliance to the requirement of maintaining strategic stock cover. However, with Shell’s global supply chain network we continued to drive for best available prices for imported products and achieved some success in mitigating potential losses.

Our customers continue to be at the heart of everything we do. Following the deregulation of margins for premium gasoline, your Company launched Shell V-Power, the most technologically advanced fuel in Shell’s global portfolio, for the Pakistani customer. In 2016, we also introduced Shell Advance Ultra, one of our top tier lubricants for motorcycles. We are confident that we will continue to use our Global technology leadership to bring higher quality and cleaner energy solutions to Pakistan along with enhancing customer experience across our network through superior customer service and value added propositions.

The results of your Company continue to be affected by the financial burden resulting from overdue ‘receivables’ from the Government of Pakistan. During 2016, your Company did make some further recoveries of these dues; however, the Company continues to incur financing cost on bank borrowings required to fund these receivables. As at 31st December 2016, total outstanding receivables stand at Rs. 4,733 million. The Company’s management is in engagement with relevant Government authorities for the recovery of ‘receivables’ to ensure we enhance shareholder returns, drive for efficient business, and invest in growth opportunities in Pakistan.

Main Grade Motor Gasoline and Diesel margins are fixed in Rupees per litre by the Government of Pakistan, and the recent initiative by the Government to revise margins based on CPI is a positive and welcome change. In line with this, there was a small increase announced in July 2016; however, comparing the margins in Pakistan with the available margins in the region, we continue to advocate for a further favorable revision. Lower margin environment has a negative impact on your Company’s profitability. We continue to advocate and push for further deregulation of the downstream value chain in Pakistan to drive for more investments in the downstream sector.

The Government of Pakistan made it possible for the Oil Marketing Companies to improve Main Grade Motor Gasoline RON specifications from 87 to 92, and the forthcoming upgradation of Diesel to EURO II specifications are positive steps towards providing Pakistani customers with better quality fuels.

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