SHELL PAKISTAN LIMITED

MULAZIM ALI KHOKHAR
Research Analyst, PAGE

Feb 18 - 24, 2008

COMPANY PROFILE

The Shell Pakistan, the second-biggest fuel supplier to the country's 160 million people after Pakistan State Oil, supplies furnace oil, diesel, jet fuel and engine lubricants. Her principal activities are to market petroleum and petrochemical products. It also blends and markets various kinds of lubricating oils. Its operations are located in Pakistan.

It also caters to aviation industry and exploration and production activities sharing the pie of both offshore and on-shore projects. Shell's offshore operations are managed and operated by Shell Development & Offshore Pakistan B.V. Its onshore functions are managed by Khirthar Pakistan B.V. Both of these companies are wholly owned subsidiaries of the Royal Dutch/Shell Group. It also offers liquefied petroleum gas products to meet commercial, industrial, agricultural and domestic needs.

She is worth Rs.33bn with share capital of Rs.548mn and total equity of Rs.9.6bn. Out of her 55mn shares about 42mn shares are closely held (only 23% of shares are free floating share which amount to a market capitalization of Rs.24bn approximately).

FINANCIAL PERFORMANCE AND LIQUIDITY

Shell Pakistan Limited is facing severe liquidity crisis due to her increasing receivables from Government on account of price differentials claims and refunds. Along with these liquidity issues her sales have declined by 5% to Rs.29bn as compared to Rs.30.3bn for the 1QFY07.

Since last Financial Year 07 her financial performance seems deteriorating. Her annual sales declined by 2.2% and the Cost of Goods Sold increased by 86% resulting in the lesser gross profits and weakening financial percentages and ratios with net income declining at 77%. The ratios and percentages have improved in the 1QFY08 but are not that stable. See table # 1.

The first quarter in Financial Year 2008 was comparatively better than last year performance. Although she couldn't get to higher sales and to any improved liquidity ratios, but was successful in reducing the cost of goods sold substantially by the amount of Rs.2.5bn (9% decline) which resulted in gross profit of Rs.2.1bn about 118% higher than the corresponding period last year.

Her operational expenses have ramble up to Rs.851mn compared to Rs.249mn for the corresponding period last year indexing an increase of 242%.

Her financial performance has turned in higher earning per shares of Rs.9.72/share for the 1QFY08 compared to Rs.3.93/share same period last year. This translated into a growth of 147% in EPS. See Table # 2

DUPONT ANALYSIS

Her net profit margin has gone up by only 3.6% to 1.84% as compared to 0.71% loss in the corresponding period last year. Her assets turnover declined to 0.88% (with 0.15% decline) and equity multiplier hiked to 3.43% (with 0.11% increase). See Table#3

The analysis suggests that company has been successful in improving in the operational performance and maintaining equity while lacks to improve on assets turnover. This shows the previously stated problem of receivable in the form of claims and refunds is creating further operational problems for the company. She needs to pay more heed to enhance liquidity ratios and have a halt on the inflating trade and other debts.

EMPLOYEE PERFORMANCE

Shell employees about 534 professional and technical people with Rs.204mn sale per employee. Her sales per employee have actually gone down to Rs.204mn/employee in the FY07 as compared to Rs.208mn/employee for the same period previous year.

INTERNATIONAL OIL PRICES

The international oil market continues to change its shape and structure with rising complexities and ever-present political risks in supplier countries. The price of standard crude oil in international market was under $25/barrel in September 2003, but by August 11, 2005, it had risen to over $60/barrel, and traded at over $100 in November 2007. Today the crude oil products are trading at $90-$100 a barrel.

There are many reasons for the shortage in oil supply, leading to increased prices: Growing turbulence in the Middle East, the world's largest oil-producing region, has led to decreased exports, instability in Saudi Arabia, North Korea's missile launches, the Crisis between Israel and Lebanon, Iranian nuclear brinkmanship, terrorist attacks on oil and gas installations this factor adds an additional premium -including insurance costs- to the price of oil, reports from the U.S. Department of Energy showing a decline in petroleum reserves.

Outside the Middle East, other oil producing nations have experienced similar problems, such as the strikes and political problems in Venezuela and potential instability in West Africa.

OIL CONSUMPTION

The total petroleum oil consumption has gone up by 15.18% from 14.65 million metric tons to 16.85 million metric tons. The major petroleum consumer sectors are Transport and Power with average consumption share of 48% and 40% respectively. The transport sector's petroleum consumption declined during FY07 from 8.15 million Metric tons to 7.98 million metric tons. While Power sector's oil consumption increased from 4.2million metric tons to 6.74 million metric tons. The share of both the sectors' consumption to total consumption is about 85% on average. Since both Transport and Power sectors are the back bone of our developing economy we see increasing average growth of the Petroleum consumption in Pakistan with about 5% CAGR.

FUTURE OUTLOOK

The oil marketing sector is doing well for the last two quarters FY08. This is due to the hiking oil prices in the market which are expected to further increase right after the election on 18th February '08.

The company is witnessing increased competition as there has been surge in the sector and many refineries are divesting to oil marketing business in Pakistan. This will have the negative impact for the company and it needs to pay more attention on marketing and retaining its previous customers.

Shell is an oil marketing giant in the world and has greater potential to overcome the existing problems and challenges and has vast ground to out compete its new rivals. With increase in the oil prices in the coming days the company will be able to manifest higher sales and profits in the subsequent periods of the financial year.

TABLE 1

INTERNAL LIQUIDITY

SEP.FY08

JULY FY07

CHANGE %

Current Ratio

1.02

1.02

-0.24%

Quick Ratio

0.60

0.60

0.50%

Cash Ratio

0.05

0.04

9.78%

Receivable Turn Over

6.26

6.62

-5.49%

Inventory Turn Over

3.00

3.55

-15.53%

Payable Turn Over

2.28

2.46

-7.30%

Cash Conversion Cycle

20.32

9.86

106.15%


TABLE 2

OPERATIONAL PERFORMANCE

SEP.FY08

SEP. FY07

CHANGE %

Net Sales

28,961,092

30,339,335

-4.54%

COGS

26,810,403

29,354,170

-8.67%

Gross Profit

2,150,689

985,165

118.31%

Operating Profit Margins

2.99%

-0.65%

-556.23%

Net Profit Margins

1.84%

-0.71%

-359.00%

EPS

9.72

-3.93

147%


TABLE 3

GROWTH POTENTIALS

SEP.FY08

SEP. FY07

CHANGE %

DUPONT ANALYSIS (ROE)

Net Profit Margins

1.84%

-0.71%

3.59

Asset TurnOver

0.88

1.04

(0.15)

Equity Multiplier

3.43

3.09

0.11

DuPont Analysis (ROE)

5.58%

-2.28%

3.45

Growth Rate

2.79%

-1.14%

3.45