DESPITE RISING OIL PRICES GOVT ABSORBS HIGHEST SUBSIDY

DIESEL AT RS37.73 PER LITER AGAINST ACTUAL PRICE OF RS54.87

AMANULLAH BASHAR
Feb 18 - 24, 2008

Despite the rising international prices, government continued to provide subsidy to diesel, touching its highest ever level at Rs 17.14 per liter in December 2007.

It may be mentioned that at the current level of subsidy the sale price of diesel would have been at Rs 54.87 per liter versus current price of Rs 37.73 in the market.

The international crude oil prices averaged over $78 / bbl during first half of financial year 2008 as against $61 / bbl in the same period of fiscal 2007.

The oil prices in Pakistan however are bound to increase after the elections to shed a reasonable portion of the subsidy by passing some of the price differential on to the consumers in the second half of financial year 2008.

The trend of increase in crude price witnessed in the first quarter of FY08 continued during the second quarter, with OPEC basket price peaking at $92 / bbl during the first half as compared to $73 / bbl during the same period last year.

Throughout the first half the PSO, the largest oil market company continued to face liquidity problems due to ever-increasing receivables from the government resulting in galloping financial cost.

The subsidy accumulation on account of Price Differential Claims (PDC) reached a level of Rs 26 billion at the end of November; however, a reimbursement of Rs 12 billion was received through financing arrangement with a syndicate of banks, thus mitigating the cash flow crunch to some extent. The company is pursuing another similar arrangement to address the increasing PDC receivable.

Meanwhile, Pakistan State Oil (PSO), declared a cash dividend of Rs 6 per share to its shareholders for the first half of financial year 2007-08 ended December 31, 2007.

The announcement came following the Board of Management (BoM) review of the first half of FY07-08 performance of the country's largest oil marketing entity. Sardar M. Yasin Malik, BoM Chairman, presided over the meeting.

Despite intense domestic competition PSO was able to sell over 6.2 million tons of POL products, showing a 13% growth and translating into an all time high sales turnover of Rs 248 billion - an increase of 25% over prior year. The all time high profit before tax of Rs 8.2 billion and profit after tax of Rs 5.5 billion was achieved owing to 13% higher sales volume as well as due to inventory gains during the period. It may be pertinent to observe that PSO has approximately 80% of the country's storage capacity and has recorded gain or loss on its stock depending upon international oil price movement. Last year the company had an inventory loss during the same period.

Based on the improved performance, the Board of Management announced the second interim cash dividend of Rs 6 per share, in addition to the first interim dividend of Rs 5 per share translating into a cash payout of Rs 1.9 billion to its shareholders which is Rs 5 per share more than the prior year period.

Following a 13% growth in sales volume PSO was able to enhance its overall market share to approximately 70% compared to 67.4% in the same period last year. The company outperformed its competitors by recording 14% increase in White Oil sales volume against industry growth of 10%, whereas Black Oil sales increased by 11% versus a single digit industry growth of 6%.

Consequently, the company improved its market share in Motor Gasoline from 46.3% to 50.1%, while High Speed Diesel market share increased to 62.9%. Similarly, Jet A-1 market share increased to 63.6% versus 62.8% in the same period last year. In fuel oil, the company maintained its leadership with 81.5% market share.

PSO has been maintaining strong focus on enhancement of Non-fuel retail business. Accordingly ATMs were installed in collaboration with leading banks at selected retail outlets. The company also established food outlet as part of its QSR network plan in collaboration with a foreign fast food chain at one of its retail outlet, which is the first internationally recognized quick service restaurant (QSR) established at any OMC's forecourt in Pakistan. PSO customers can now experience state-of-the-art car cleaning solution "Wash Express" which has been introduced at selected outlets.

In order to maintain its leadership position in aviation industry, PSO developed exclusive aviation, consumer and retail facilities at the newly developed Sialkot International Airport (SIAL) inaugurated by the President of Pakistan in December 2007. PSO's refueling facility at SIAL is fully capable of providing services to larger body aircraft as per international Aviation Quality Control & Safety Standards.

The Pakistan Credit Rating Agency (PACRA) assigned the company long-term and short-term entity ratings of "AAA" and A1+, which is the highest credit ratings in PACRA's rating scale.

During the period under review, PSO also won the Pakistan Society of Human Resource Management (PSHRM) Most Preferred Local Company Award thus moving towards becoming the "Employer of Choice". The company also won ICAP-ICMAP "Best Corporate Report Award 2006 in Fuel and Energy sector. The Board expressed its confidence that the management remains well poised to meet anticipated market challenges and continue to deliver improved performance.