PSO UP FOR SALE ONCE AGAIN

Despite increasingly stiff competition in the market, PSO managed to reemerge as the market leader with an overall 65% market share.

AHMAD MA'AZ SHAMAIL
Feb 05 - 11, 2007

The latest attempt by the government to sell 51 per cent shares of Pakistan State Oil, the largest oil marketing company enjoying 65 per cent share of the overall market, along with management control to a strategic buyer attracted submission of statements of qualification from 12 companies/groups last month.

The 12 companies and groups which submitted the SoQs last month were: Abraaj Capital, UAE; Abu Dhabi Group, UAE; Al-Ghurair Investment, UAE; consortium of Aljomaih Group, Saudi Arabia; Noor Financial Investment, Kuwait; National Industries Group; Bakri International Energy Systems and Dabbahg Group Holding, Saudi Arabia; Goldman Sachs (Asia) Finance; Vitol SA (Switzerland); and local companies and groups MCB Bank; Fauji Foundation; Attock group of companies; and Kohinoor Group led by Kohinoor Textiles from Pakistan. Jomaih Holding, Al Ghurair Investment, Vitol, Abraaj and Fauji Foundation also submitted expressions of interest for the strategic sale of the entity in April 2005. They were among the companies that had earlier submitted a total of 15 EoIs.

PSO is the largest oil marketing company in Pakistan. In the fiscal year 2005-06 ended June last year its turnover was in excess of $ 5.8 billion and a market share of over 78% in Black oil and 57% in White oil. It is the first Pakistani public sector company to become member of the World Economic Forum (WEF). By the end of 2005-06 it had 3,700 retail outlets across the country, including 1,459 New Vision Outlets commissioned during the last seven years. It has a large storage capacity that makes up almost 81% of total national storage, i.e. around 8,60,000 metric tons.

The fiscal 2005-06 was a record year for PSO in many ways: an all-time high profit before tax of Rs. 11.7 billion, unprecedented profit after tax of Rs. 7.5 billion, up by around 33 per cent over the previous year. PSO also declared an all-time record cash dividend of 340% or Rs. 34 per share. The company recorded the highest Mogas market share of 45.3 per cent in last 10 years and expanded its cards infrastructure to 1,200 sales points in over 170 cities. It received Management Excellence Award-2005 from the Management Association of Pakistan and rated as AAA (Triple A) company by Pakistan Credit Rating Agency (PACRA).

FINANCIAL RESULTS

During FY'06, the company sales revenue touched Rs 353 billion (net 298.25 billion) compared to Rs 254 billion (net 212.50 billion) in the previous year. Consequently, PSO recorded on all-time high profit before tax of Rs 11.7 billion, up by 27 per cent over the previous year, and profit after tax of Rs 7.5 billion, up by 33% over the previous year - an all time high earning per share of Rs 43.90. The company paid record cash dividend of Rs 34 per share against 26 per share last year. Total assets increased to Rs 70.17 billion from 52.30 billion, up by 34.15 per cent. It paid Rs 58.8 B taxes to the government and distributed Rs 5.8 B to shareholders in dividends. Its assets were valued at Rs 70.168 B.

It has been a market leader with an overall share of 65 per cent, including 45.3 per cent market of motor gasoline for the last 10 years, HSD share of 59 per cent and 60.7 per cent share of JP-1 (Jet Fuel). Its sales volume was 9.8 million tons in fiscal 2006, which was marginally more than 9.7 million tons in fiscal 2005.

PSO is listed on all the three stock exchanges of the country, and is the recipient of the Karachi Stock Exchange's Top 25 Companies Award for 18 consecutive years. It enjoys AAA (Triple A) company grading by the Pakistan Credit Rating Agency (PACRA).

PSO is the only one of the two companies that made the list of 100 top business entities in the Muslim world by business strategy e-magazine Dinar Standard, covering 57 member countries of the Organisation of Islamic Conference (OIC). The other Pakistani company that made the ranking, called the DS100T, was the Oil and Gas Development Corporation. The ranking was based on the revenue figures of 2005.

THE INDUSTRY

Though increased international oil prices affected the domestic price, a structural shift is evident in the energy consumption pattern of Pakistan. Though consumption of petroleum products is declining, the consumption of other components of energy is on the rise.

Consumption of petroleum fuel products showed a modest growth of 0.4 per cent in fiscal 2006- consumption of white oil products declined by 4.4 per cent mainly due to a 4.6 per cent decline in the use of HSD, a major contributor while that of mogas declined considerably by about 10.5 per cent due to the availability of less expensive alternative fuel. In 2005-06, CNG consumption increased substantially by almost 47 per cent over the previous year as the number of vehicles increased in the country.

On the other hand, the consumption of black oil products increased in fiscal 2005-06 by 10.4 per cent, while the consumption of furnace oil rose by 11.4 per cent. During the first three quarters of FY'06, furnace oil consumption declined over the same period of previous year mainly due to the presence of sufficient reservoir levels for the generation of hydroelectric power projects at the start of the fiscal. The situation reversed after March 2006 when water availability declined, thus increasing furnace oil-based thermal power generation.

REDUCTION IN MARGIN

The oil marketing companies suffered a setback when the government changed the oil pricing formula w.e.f March 16, 2006, resulting in reduction of OMCs margin by 20%. In addition, OMCs faced a financial burden as a result of government's subsidy to the consumers, through OMCs, to protect them against oil price increase. The mandate for setting fortnightly oil prices was given to the Oil & Gas Regulatory Authority (OGRA), w.e.f April 1, 2006 .

CONCLUSION

Despite the increasingly stiff competition in the market, PSO managed to reemerge as the market leader with an overall 65% market share. It also consolidated its position by improving its retail marketing position in Mogas and CNG. The company also added over 200 New Vision Outlets to its retail network, bringing the total to over 1,450.

With so much going on, let's see if the latest attempt to privatize PSO succeeds, particularly in the context of a pre-bid meeting for privatization called in January 2006 produced no result as well as the earlier attempts made in May 2005 and August 2002 could not produce the desired result.

PROFIT & LOSS ACCOUNT

2003-04

2004-05

2005-06

Net Sales (Rs Billion)

161.54

212.50

298.25

Cost of product Sold (Rs Billion)

(152.35)

(198.75)

(281.25)

Gross Profit (Rs Billion)

9.19

13.75

17.20

Marketing & Admin Exp (Rs Billion)

2.64

3.21

3.42

Profit before Taxation (Rs Billion)

6.26

9.20

11.65

Profit after Taxation (Rs Billion)

4.2

5.65

7.52