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Financial Analysis of

Pakistan State Oil Limited

Group:

Fahad Ur Rehman Khan

Mohsin Alam

Hadiqa Hanif

Rimsha Tahir

Sama Asif

Zoya Arif

Course: Financial Management

Submitted to: Sir Mirza Raza Ali

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Table of Contents

Preamble .......................................................................................... 3

Industry Overview ........................................................................... 3

Key players/companies of the industry ........................................ 4

Background of the company with growth pattern ........................ 6

Financial analysis ............................................................................ 8

Conclusion and recommendation ............................................... 16

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Preamble:

The main reason of conducting this study on Pakistan State Oil is to see it’s growth

pattern and to see its future position that where it belongs in future, whether Pakistan state

oil is in Loss or Profit.

And also giving interpretation and analyzing it’s data for the future speculations. To

make it clear for a company that as a financial manager, it is duty to see what is ahead of any

company. And giving an accurate suggestion for the future steps, and suggesting the

alternatives to doing work to eliminate the future risks and managing the financial condition

expertly.

Moreover, seeing the value of Pakistan State Oil, that where it stands in Oil industry

in Pakistan. Furthermore, seeing the growth pattern of the oil industry growth as well.

Industry Overview:

The oil industry of Pakistan is on the rise and working hard to fulfill the national

demand. Oil and gas are the two of the key components of the energy mix contributing

around 80% share to the 64 million TOE of energy requirement in the country.

Industry is growing very quickly and the drilling activities in the country are going above

the average. There were 76 well drilled in the last year and it was never ever seen in the past

years to drilled so may wells in a single year.

According to last Economic Survey 2013, Pakistan estimated that there are 27

million barrels of reserves available that are recoverable for the use and Pakistan’s

consumption is 19.21 million tones. The average oil production was 66,032 barrels per day

in 2013 and it was the growth of around 13% over the last year. There are total 7 oil

Refineries, 6772 petrol stations are operating in Pakistan and 258 oil & gas discoveries and

803 wells drilled till now.

The liquidity ratios of Pakistan oil industry is not much efficient as it should need to

be. Current ratios give us the sense about the ability of a company to turn its product into

cash. The current ratio of industry is decreasing with the passage of time which means the

ability of industry to pay its short term liabilities is getting low as compare to past few years.

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Also the cash ratio of the industry is not much stronger as the industry has to pay high debt

to its suppliers.

It means that ratio of cash and marketable securities against current liabilities is very

low but cash ratio is increasing with the passage of time and working hard to pay its

liabilities. There are several reasons behind lowness of these ratios. The main reason is the

high amount debt taken by industry from its suppliers and in order to pay those debts,

industry does not have much cash in hand. As per profit of the industry concern, it is

increasing with the passage of time.

Profit of oil industry has been increased in the ninth month or 3rd quarter of fiscal

year 14 while it was decreasing before. It is come to know that the earning of oil and gas

explorers increase by 18% in third quarter of FY14 while in the previous quarter ended in

Dec 2013, the earning of the sector declined due to the appreciation of Pak rupee against

dollar. Major oil and gas exploration and production companies working in Pakistan include

Pakistan Oilfield (POL), Gas development Company and Pakistan Petroleum.

Key players of the company:

Mari Petroleum Company Limited:

In 1957, when MPCL was operating as Esso Eastern Inc.,[1]

the Mari Gas Field was

discovered in Daharki, Sindh, Pakistan, with an original gas in place (GIIP) estimate of

2.38 TCF. Over the years, with the phased development of the Field and subsequent

reservoir evaluations, the GIIP of the Field was enhanced to 10.751TCF, thus making

Mari one of the largest gas fields in Pakistan in terms of balance reserves.

In May 1983, the Fauji Foundation, a major Pakistani group, along with OGDCL (Oil

and Gas Development Company, Ltd.) and the Government of Pakistan acquired the

entire business operation of Esso Eastern Inc. in Pakistan, which included the Mari Gas

Field.

During December 1984, the business was reorganized and incorporated as Mari

Petroleum Company Limited, and it acquired the assets, liabilities and operational

control of the Mari Gas Field. MPCL primarily operated as a production company until

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1997, when it began the phased development of the Habib Rahi Reservoir to supply gas

for new fertilizer plants. The company also simultaneously pursued appraisal activities

within its Mari D&P Lease by drilling stepout wells to determine the boundaries of the

Habib Rahi Reservoir.

The hallmark of MPCL’s growth and expansion is also represented by its entry into

exploration activities in 2001.

Oil and Gas Development Company

Oil and Gas Development Company Limited commonly known as OGDCL is

an Pakistani multinational oil and gascompany. It has primary listing on Karachi Stock

Exchange, and secondary listings on London, Lahore and Islamabadstock exchanges.

Established in 1961 by the Government of Pakistan, it was turned into a public listed

company on 23 October 1997. Today it is involved in exploring, drilling, refining and

selling oil and gas in Pakistan. It is the market leader in terms of reserves, production

and acreage.[5]

It is based on Jinnah Avenue, Blue Area in Islamabad, with

theGovernment of Pakistan holding 74% stake in the company. Rest are held by private

investors. In 2013, it has revenue of Rs. 223.365 billion and profit before tax soaring

at Rs. 90.777 bil

Pakistan Oilfields

The Pakistan Oilfields Limited is a global competitive oil exploration consortium and

megacorporation, located in Rawalpindi, Punjab Province of Pakistan.[1]

The Pakistan

Oilfields is a subsidiary of the Attock Group of Companies, was incorporated on 25

November 25, 1950, with the financial capital and technical cooperation of the Soviet

Union.[2]

In 1978, Pakistan Oilfields took over the exploration and production business of Alishba

Oil Company. Since then, Pakistan Oilfields has been investing independently. Pakistan

Oilfields is a leading oil and gas exploration and production company listed on all the

three stock exchanges of Pakistan.

Pakistan Petroleum

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Pakistan Petroleum Limited is a multinational, global competitive and one of the

largest state-owned megacorporation of Pakistan. It was incorporated on June 5, 1950,

when it inherited the assets and liabilities of the Burmah Oil Company Ltd. which

initially holds 70% of the share with the rest mostly held by the government

of Pakistan (GoP). As of June 2011, GoP held 70.66% of the shares.

The company is headquartered in Karachi. It operates major oil and gas fields, including

the Sui gas field, has non-operating interests in other fields, and has an interest in an

exploration portfolio onshore and offshore. The company is now planning international

exploration in partnership mode.

Pakistan State Oil

Pakistan State Oil is a Karachi-based Pakistani state-owned multinational petroleum

corporation involved in marketing and distribution of petroleum products. It has a

network of 3,689 filling stations, out of which 3,500 outlets serve the retail sector and

189 outlets serve bulk customers.

Background of Company and Growth Pattern:

PSO is the market leader in Pakistan’s energy sector. The company has the largest

network of retail outlets to serve the automotive sector and is the major fuel supplier to aviation,

railways, power projects, armed forces and agriculture sector. PSO also provides Jet Fuel to

Refueling Facilities at 9 airports in Pakistan and ship fuel at 3 ports. The company takes pride in

continuing the tradition of excellence and is fully committed to meet the energy needs of today

and rising challenges of tomorrow.

Pakistan State Oil, the largest oil marketing company in the country, is currently

engaged in storage, distribution and marketing of various POL products. The company’s current

market share of 82.3% in the black oil market and 59.4% share in the white oil market, alone

speak volumes about its success.

Pakistan State Oil, the largest oil marketing company in the country is currently engaged

in the marketing and distribution of various POL products, including Motor Gasoline, High

Speed Diesel, Furnace Oil, Jet Fuel, Kerosene, LPG, CNG, Petrochemicals and Lubricants. In

addition to this we also import different products according to their demand pattern and possess

the biggest storage facilities representing 80% of the country’s total storage capacity.

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Brief overview of each business facet of PSO is stated below:

PSO Major Highlights

Sold 7 million tons of furnace oil – the highest in the last 8 years

Efficiently managed supply to the power sector despite the liquidity crisis

Imported approximately 90% of the country’s POL imports - 3.4 million tons of HSD and 5

million tons of FO Helped in the revenue collection of more than Rs. 161 billion to the GOP

(Sales Tax: 97 billion, taxes: 1.4 billion,PDL: 61 billion)

Extended support to various charitable organizations in the health & education sector

including contribution for the rehabilitation of IDPs due to the Swat operation

The company has the largest distribution network comprising of 3,620 outlets. Out of

which 3,384 serve retail customers, 53 outlets cater to agriculture sector and 183 outlets

serve our bulk customers. Out of a total number of 3620 outlets, 1,735 have been upgraded

as per the New Vision Retail Program with most modern facilities.

Moreover, there are 37 company owned and company operated (Co-Co) sites to

serve our retail customers. The idea of setting CoCo sites was to make these stations

flagships under maximum supervision and intense scrutiny to maintain the highest level of

efficiency, service and customer care.

PSO serves 2.8 million customers every day. Our leading retail brands include

environment friendly fuels - Premier-XL Green-XL. Moreover, the company also was a

pioneer in introducing an array of cards for the convenience of our customers. These cards

include corporate, fleet and pre-paid cards fpr individuals. These cards are well-established

and have received an overwhelming response from the corporate world and from the masses.

The Pakistan State Oil’s (PSO) market share in different product groups witnessed

significant growth over the past five months. According to official sources, from August

onwards, PSOs share in the HSD market rose from 50 percent to 57 percent while share in

mogas remained steady at 50 percent despite stiff competition in the market.

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The company’s share in the lubricants market also rose from 16 percent to 28 percent among

oil marketing companies across Pakistan within a period of just three months, the source

added.

Financial Analysis:

Liquidity Ratios:

Analysis:

Cash to current liabilities is rising: Due to the factor of credit sales.

Cash flow from operations to sales is decreasing: Due to the factor of credit sales, because

it’s key players got the fuel on credit, and due to the patrol crisis and raise in price, the cash

flow to operation to sales goes down which means they’re are inefficient at converting their

sales into available cash.

Current Ratios:

Total current assets 313,514,125

Total current liabilities 288,346,263

Current Ratio 1.09

If we pay 5% of total current assets and pay off our total current liability can higher the

current ratio by 1.2. The Ratio tells the ability to full fill its short term obligation

Company data shows that for every one rupees of liability there is 1.14 rupees of asset in

2012. The ratio was 1.15, 1.03, 1.09 in the year 2012, 2013 and 2014 respectively.

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Company can improve its current ratios by increasing its accounts receivables and by

decreasing the account payables.

Quick Ratio: A quick ratio lower than 1:1 may indicate that the company relies too

much on inventory or other assets to pay its short-term liabilities. Higher quick ratio is

needed when the company has difficulty borrowing on short-term notes. A quick ratio

higher than 1:1 indicates that the business can meet its current financial obligations

with the available quick funds on hand.

The Ratio tells more precisely and accurately companies the ability to full fill its short term

obligations.

Turnover Ratios:

Analysis:

Inventory turnover ratio is rising: The inventory is raising as compared to 2013. in 2014

that there is a substantial increase in turnover ratio. Which means the inventory is been

managed effectively and products are being sold all over the country.

Debt Ratio: Shows that the company has lost it’s ability to pay it’s liabilities, as compared

to 2013, they were more capable of paying off their current liabilities but in 2014, there was

a substantial decrease due to installments of new machines.

Creditor Turnover Ratio: Shows that the company has gained it’s ability to pay it’s

creditors, as compared to 2013, they weren’t more capable of paying off their credits but in

2014, there was a substantial increase due to raise in sales.

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Total Asset Turnover Ratio: Well, there is a little change in the ratios of total asset which

means they are utilizing their assets to generate their sales, but there was a little raise

between the years 2013/14.

Total Fixed Asset Turnover Ratio: Fixed turnover ratio has gained it’s value which means

that PSO is doing an effective job of generating sales with a relatively small amount of fixed

assets, Outsourcing work to avoid investing in fixed assets and Selling off excess fixed asset

capacity.

Operation Cycle: This means that on average it takes 25 days for PSO to turn purchasing

inventories into cash sales. Due to high amount of sales, their operation cycle has raised to

25 days.

Profitability Ratios:

Analysis:

Gross Profit Ratio: Low gross profit margin indicates that the business is unable to control

its production cost. Gross profit margin can be used to compare a company with its

competitors. More efficient firms will usually see a higher margin. Also, it provides clues

about company's pricing, cost structure and production efficiency. Therefore, gross profit

margin can be used to compare company's activity over time.

Net Profit Ratio: Net profit margin provides clues to the company's pricing policies, cost

structure and production efficiency. Different strategies and product mix cause the net profit

margin to vary among different companies.

EBITDA Margin: This stands for earnings before interest, taxes, depreciation, and

amortization, is a financial calculation that measures a company’s profitability. It says a

slight raise in profitability of companies.

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Return on shareholders’ equity: The return on equity ratio or ROE is a profitability ratio

that measures the ability of a firm to generate profits from its shareholders investments in

the company. This is clearly seen that, PSO, raised it’s return on shareholder’s equity which

means people are investing in PSO.

Return on Total Asset: is a profitability ratio that measures the net income produced by

total assets during a period by comparing net income to the average total assets. There is a

substantial gain in ratio which means that PSO is investing in assets which are giving them

profitability.

Return on Capital Employed: return on capital employed shows investors how many

dollars in profits each dollar of capital employed generates. Is raised since 2013, means that

shows investors are getting increasing rupees in profits each dollar of capital employed

generates.

Operating Leverage Ratio: An incredible change in leverage ratio, Operating leverage is

highest in companies that have a high proportion of fixed operating costs in relation to

variable operating costs. It means, they are making more money then PSO used to make in

2013.

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HORIZONTAL AND VERTICAL ANALYSIS - BALANCE

SHEET

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Comparative analysis:

Pakistan State oil vs Attock Oil Limited

Analysis Pakistan State Oil Attock Oil Company Limited

Earning Per Share 80.31 65.17

Stock in trade 86,297,218 6,787,904

Sales 1,409,574,264 240,567,960

Net Sales 1,187,639,316 205,162,911

Pakistan State Oil, is easily taking over the Attock Oil Company, as in boosted sales due to the broad

inventory of fuel delievery.

Auditors report:

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Conclusion and recommendation:

In the conclusion of this report, it is clear that Pakistan State Oil, is gaining its

market share, sales as well as the overall value of the company. Furthermore, after analyzing

all the ratios and statements, it is clearly seen that Pakistan State Oil has been flourishing

while they face a lot in the 2012, but they start get better results at the mid of 2013 and still

we can see its impact on 2014.

As we know that there are certain things which Pakistan State Oil needs to fix, are

the current ratio and they need also to focus on less credit sales, as their payback time is

high, but cash sales should also, be focused due to the factor of seeing converting sales into

cash. Moreover, the Gross profit needs to fixed as their payback period is so long, which

makes them do credit sales, and credit sales are making gross profit low.

Pakistan State Oil’s Future Planning:

PSO future plan entail exploring new markets, increasing POL sales using innovative

ways, enhancing retail network, expanding lubricant product range, improved

product movement mechanism in coming years.

Enhanced focus shall be on operational streamlining, cost reductions, cash sales,

minimizing product losses, cash sales, improved quality, quantity testing, joint

ventures.

By establishing this refinery, PSO has taken yet another step on the road to

developing a self-reliant energy supply chain for the country.

In addition to these benefits, this refinery will also help create job opportunities for

the local populace as well as professionals from various technical backgrounds.

Rising international crude oil prices amid fixed absolute margins for the OMCs will

increase working capital requirements and reduce return on working capital for

them.

PSO is expected to benefit from this deregulation with the largest distribution

network in the country. This would result in setting competitive market prices and

increase its market share in the southern region.

PSO has a market share of 22% in CNG industry in 2013. It has shown growth of

13% in 2014 against industry growth of 11% as compared to 2012.

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PSO’s plans to promote PSO’s lubricants range in the market to further strengthen

the company’s balance sheet.