Shell Pakistan a beneficiary of rising oil prices

Huge capital expenditure with innovative marketing will continue to provide edge over rivals in the near future

By SHABBIR H. KAZMI
Sep 20 - 27, 1999

Earnings Data (Rs in million)

.

1998-99

1997-98

sales

49,887

42,980

Gross Profit

2,921

2,204

Operating Profit

1,271

929

Before tax profit

1,341

922

After Tax Profit

881

592

Shell Pakistan, the second biggest oil marketing company in the country, has announced a robust earning growth of 49 per cent for the year ending June 30, 1999. The Company has posted Rs 881 million after tax profit for the year as compared to Rs 592 million for the previous year. The earning per share comes to Rs 25 per share. The Company also announced Rs. 8.5 in cash dividend (final) per share. It had previously paid interim dividend of Rs 4 per share. The total dividend paid to shareholders during the year comes to Rs 12.5 per share (125 per cent) .

Petroleum price increases provided the Company a higher rupee margin and substantial one-time inventory gains. Moreover, aggressive marketing has increased its share especially in the high-margin lubricants products. Considering government's huge reliance on development surcharge, a further surge in the prices of petroleum products will definitely increase the profit of oil marketing companies.

All these factors are reflected in its financial results for the year ending June 30, 1999. Earnings were primarily driven by an 18 per cent increase in gross sales which rose to Rs 49.89 billion. Two reasons appear to have had grounds for this notable growth. First, the year witnessed two oil price increases of 25 per cent in July 1998 and 15.8 per cent increase in May this year. Second, rising overall sales volumes of deregulated products, lubricants segment depicts the highest growth of 8 per cent on year to year basis. Net sales, however, demonstrated a decline of 9.6 per cent owing to a constant increase in duties, taxes and levies on petroleum products.

Overall profitability of the Company received boost from a drop in financial charges and rising other income. Financial charges dropped by 63 per cent as capital expenditures were funded mainly through the proceeds of the rights issue. Other income contributed 18 per cent to the profit before tax — showing a significant year to year increase of 50 per cent.

The analysts forecast Rs 118 million profit after tax for the year ending June 30, 2000. An upward margin revision in the deregulated segment appear improbable as development surcharge collection for the GoP are already under stain due to the GST imposition and surging international oil prices. Keeping this scenario in mind coupled with sluggish demand the analysts feel a POL product price increase will be pivotal in attaining the predicted profit after tax growth. And that increase, provided current international oil prices, should materialize in coming months.

OUTLOOK

It is indicated from the results that the share of duties, taxes and levies in the total sales has increased from 41.52 per cent in 1998 to nearly 54.20 per cent in 1999. This indicates a possible reduction in sales of POL products whose prices are regulated by the government. The analysts fear that constant increase in prices of petroleum products may adversely affect the sales of the Company. However, it is the higher profit margin on lubricants that will continue to help oil marketing companies in posting higher profit.

The results, posted by Shell, seem to vindicate earlier apprehensions that the Company has slowed down its capital expenditure plan in Pakistan. However, the lower financial charges, which dropped by 63 per cent, clearly indicates healthy cash flow situation and the ability of the Company to meet these expenditures from internal cash generation rather than depending on outside sources.

The analysts say that if their forecast remains unchanged at this stage, the shares of the Company are still trading at 14 per cent discount to their estimated price of Rs 230. While such a discount would warrant accumulation, these analysts suggest accumulation around the Rs 200 level given tight liquidity in the capital markets.

Pakistan State Oil Company (PSO) is also expected to post similar results. However, it still suffers from huge receivables from state-owned utilities. PSO enjoys a larger market share due to more elaborate network of outlets. The argument for a quasi currency hedge existing for the oil marketing companies is still intact, more so when international prices of crude oil are expected to remain firm.