Table of Contents

1. INTRODUCTION TO PAKISTAN STATE OIL..............................................2

1.1 Credit Rating ........................................................................................................................2

2. OPERATIONS OF PAKISTAN STATE OIL COMPANY ................................3

3. INDUSTRY ANALYSIS..............................................................................6
3.1 Threat of New Entrants.......................................................................................................6

3.2 Threat of Substitute Products.............................................................................................6

3.3 Bargaining Power of Suppliers............................................................................................6

3.4 Bargaining Power of Buyers................................................................................................7

3.5 Rivalry among Competitors ................................................................................................7

4. SWOT ANALYSIS ....................................................................................7

4.1 Strengths ..............................................................................................................................7

4.2 Weaknesses .........................................................................................................................8

4.3 Opportunities.......................................................................................................................8

4.4 Threats..................................................................................................................................8

5. FINANCIAL ANALYSIS.............................................................................9
5.1 Liquidity Ratios ....................................................................................................................9

5.2 Profitability Ratios .............................................................................................................10

5.3 Activity Ratios ....................................................................................................................11

5.4 Dupont................................................................................................................................12

5.4.1 Net profit margin: .........................................................................................................12

5.4.2 Assets turnover:............................................................................................................13

5.4.3 Equity multiplier:...........................................................................................................13

5.5 Long term debt paying ability:..........................................................................................13

1. INTRODUCTION TO PAKISTAN STATE OIL
Pakistan State Oil Company Limited (PSO) is Pakistan’s largest oil marketing company
(OMC). It is engaged in the nationwide storage, distribution and marketing of various
petroleum, oil and lubricant (POL) products including Gasoline, Diesel, Fuel Oil, Jet
Fuel, Kerosene, LPG, CNG and petro-chemicals. Through PSO’s network of over 3,800
retail outlets including 1,000 new vision outlets and other direct distribution channels,
PSO serves a broad customer base throughout the Country including the retail and
industrial, as well as aviation, marine and Government/Defense sectors. PSO has also
formed a strategic alliance with Castrol for the production of Castrol lubricants in its ISO
9000 certified facility. PSO infrastructure consists of 9 installations and 23 depots from
Karachi to Chitral and its supply chain is supported by a fleet of 8,500 tankers and 3,800
railway wagons. In addition, PSO’s 860,000 metric tons storage capacity is
approximately 81 percent of the total national storage. The company’s slogan these days
is “we are an oil company, but we touch your life in so many ways”. This statement
points to the company’s corporate social responsibility role with a focus on health, safety
and environment (HSE).

1.1 Credit Rating

Pakistan Credit Rating Agency (PAKCRA) has rated PSO as AA+ in 2008 compared to
AAA in the previous years. One of the reasons for this decline in credit rating is due to
increase in “circular debt” affecting the
liquidity management. Second reason is
the large inventory losses due to steep
decline in the oil prices and home
currency. The company’s short term
credit rating remains stable at “A1+”.
PSO has increased its market share from
68 percent in 2007 to 71 percent in 2008. This increase in market share is driven by an
increase in demand of Furnace Oil (FO) by power plants, High Speed Diesel (HSD) and

Analysis of Pakistan State Oil 2

 Motor Gasoline (Mogas) led by control over smuggling of these products from Iran and
increase in the use of generators for electricity supply backup.

2. OPERATIONS OF PAKISTAN STATE OIL COMPANY

The petroleum industry can be split into two segments, upstream and downstream halves.
Upstream refers to oil exploration, drilling, and moving the crude oil to the refinery, and
downstream refers to refining the oil plus the transporting and marketing of gasoline and
refined oil products to distributors and gas station retailers.

Pakistan State Oil Company (PSO) is a marketing company operating in oil & gas
industry. The commercial activities of the company are totally controlled and regulated
by the government through Oil and Gas regulatory Authority (OGRA).

Analysis of Pakistan State Oil 3

 The operations of Pakistan State Oil can be divided in the following activities:

I. Import of refined products

PSO is the sole importer of refined oil products. It imports oil from Kuwait and Saudi
Arabia on the direction of the government at a specified price and amount. Other
marketing companies in the industry get their share of oil at the port and store it in their
own storage depots.

II. Storage

Another main activity of PSO is storage of oil in their 23 storage depots, with a capacity
of 860,000 metric tons, across the country which amounts to approximately 81 percent of
national storage.

III. Transportation

With a strong fleet of 8,500 tankers and 3,800 railway wagons, PSO is responsible for
transporting oil to its storage depots across the country. The retailers and petrol pump
owners are then required to fulfill their demands by providing their own transportation.

IV. Profitability

Profits of PSO are totally based on commissions, being in middle of the supply chain.
The price they charge to the petrol pump owners and retailers include their commission
which amounts to about 2-3 percent. The only way PSO can suffer a loss is by poor
inventory management. Prices of oil fluctuate daily, owing to the demand and supply
factors. Purchase of inventory with high price and selling it on lower price will be the
only reason for loss to the company. On the other hand fluctuation in prices of oil has it
advantages. Inventory purchased on lower prices and selling it at higher prices results in
higher profits. Therefore, operations of PSO can be termed as highly risky.

Analysis of Pakistan State Oil 4

 Oil Price Determination
Gasoline HOBC* Kerosene LDO**
(Rs/Liter) (Rs/Liter) (Rs/Liter) (Rs/Liter)
Through Retail Direct Sale to Through Retail Direct Sale to
Outlets Consumer Outlets Consumer
Ex-refinery 47.68 47.68 57.94 57.94 42.21 38.38
Price
Petroleum 19.54 20.92 26.55 28.18 13.81 11.32
Development
Levy
Inland Freight 2.03 2.03 4.20 4.20 2.51 3.00
Charges
Dealers’ 1.38 - 1.63 - - -
Commission
Distributors’ 1.11 1.11 1.31 1.31 1.19 1.16
Margin
GST*** 7.95 7.95 9.94 9.94 7.15 6.62
Sale Price 57.66 57.66 72.08 72.08 51.87 48.00
* HOBC = High Octane Blending Component
** LDO = Light Diesel Oil
*** GST = General Sales Tax

Analysis of Pakistan State Oil 5

3. INDUSTRY ANALYSIS
The industry in which Pakistan State Oil (PSO) is doing business is highly competitive.
Being a national oil company has its advantages but the company still has to face
pressure from different sources. The following five key factors highlight this fact.

3.1 Threat of New Entrants

The threat of new entrants in the industry that PSO is associated with is small but it
cannot be eliminated. There are already four players in the market other then PSO itself,
namely Shell Pakistan, Caltex, Total Parco and Attock Petroleum. New companies will
not have a large market segment to capture therefore starting business in this industry will
be far from lucrative. This can be portrayed with the help of new entrants like Admore
and ZIC which haven't been able to pose a threat to the already present players.

3.2 Threat of Substitute Products

As alternative of fuel, Pakistan State Oil is developing Ethanol which will eventually be
available at reasonably less price. Other than that, CNG is already available at most PSO
outlets. It is evident that world oil will eventually run out and alternate sources of fuel
will be required hence PSO has to keep up with technology and be prepared for this
eventual repercussion to avoid being wiped.

3.3 Bargaining Power of Suppliers

It can be assumed that being an oil company, the bargaining power of suppliers would be
fairly high for PSO. However after some research it has been determined that this is not
the case. Firstly as Pakistan has to import oil, PSO has maintained a 30-year mutually-
beneficial business relationship with Kuwait Petroleum Corporation (KPC). This protects
PSO from frequent price fluctuations in the international market. The transport fleet
consists of 6000 tank lorries which are equipped with state of the art technology to keep
them monitored, thus there's no real threat from them either.

Analysis of Pakistan State Oil 6

 3.4 Bargaining Power of Buyers
PSO has a wide customer base which includes retail customers, various industrial units,
government, power projects, aviation and marine sectors of Pakistan including Pakistan
Army, Pakistan railways, Pakistan Navy, NLC, WAPDA, KESC and many more. All
these buyers combined form a formidable force which can have the power to influence
PSO, however nothing like that has materialized to date. PSO enjoys the advantage that
the government regulates the prices of its various petroleum products. PSO only allows a
small discount to large organizations on its own behalf.

3.5 Rivalry among Competitors

The petroleum, oil and lubricants industry in Pakistan is composed of two major players,
PSO and Shell Pakistan. Caltex and Total Parco were the third and fourth entrants
respectively. Last but not least Attock Petroleum has the smallest share of the market. All
these companies in essence are competing for the same customers. Even though PSO has
an 82.1 percent share of the Black Oil market and 61.2 percent share of the White Oil
market, it still faces fierce competition from its competitors which are vigilant in
launching their advertisement campaigns according to the prevalent conditions of the
market. This can be portrayed with the example of Shell that was the first to highlight the
longer mileage with its fuel when oil prices were soaring around the world.

4. SWOT ANALYSIS

4.1 Strengths
 Majority of market share in major product categories making it a market leader in
major product categories.
 PSO has sustained its growth in earnings.
 It has the largest retail outlet network in Pakistan.
 PSO has long term contract with public and private sector organizations for the
supply of fuel.
 Modern lubricants manufacturing plant.
 Strong vertical integration.

Analysis of Pakistan State Oil 7

4.2 Weaknesses
 Large number of outstanding claims from client organizations.
 Weak inventory management system.
 Major products like HSD and Furnace Oil are imported.

4.3 Opportunities
 Confirmed margins of 3.5% on all regulated products.
 Possible privatization in the near future.
 Growth opportunities in the non-fuel segment.

4.4 Threats
 Plan of Attock Petroleum Limited (APL) of network expansion in Southern
Region.
 Instability in oil prices in international market.
 Fall in economic growth rate due to uncertain business environment.
 Introduction of substitute/alternative sources of energy like bio diesel for
automobiles and nuclear for energy sector.
 The threat of reduction in OMC margins by OGRA.

Analysis of Pakistan State Oil 8

5. FINANCIAL ANALYSIS

5.1 Liquidity Ratios

Pakistan State Oil (PSO) shows a positive trend in current ratio. FY06 (1.23) and FY08’s
(1.24) current ratios are almost same as compared to FY07 (1.22). This year, the
company saw an increase in the current assets by 54 percent. The company’s trade debt
increased to almost 40 percent, on the other hand, the stock in trade also showed an
increase of almost 47 percent. The increase was also observed in the cash and bank
balances by 50 percent. So in short, this was the stage of the company where its current
asset base demonstrated a fine position. Overall the company’s current assets grew by 50
percent from 2007 to 2008 because this year its sales grew by 29 percent.

As horizontal analysis
1.24
shows that current assets
1.24
of FY08 are 200 percent
1.23
and FY07 108 percent
keeping FY06 100 percent 1.23 Current Ratio
1.22 Cash Ratio
as base year, while current
liabilities of FY08 were 1.22

199 percent and in FY07, 1.21

109 percent and in FY06 1.21

2008 2007 2006
100 percent as base year.
This shows that both
current assets and current liabilities for consecutive three years are increasing at a very
high volume.

Vertical analysis shows increase in current assets for FY06 as 82, FY07 83 and FY08 91
percent as compared to 100 percent total assets for three consecutive years, while current
liabilities for FY06, FY07, and FY08 are 67, 68, and 73 percent consecutively. This
indicates that the company is encouraging level of current assets as well as current
liabilities or the company is financing its current assets with current liabilities.

Liquidity Ratios Formulae 2008 2007 2006

Current Ratio Current Assets / Current Liabilities 1.24 1.22 1.23

Quick Ratio Current Assets - Inventories / Current Liabilities 1 0.64 0.63

Cash Ratio Cash + Marketable Securities / Current Liabilities 1.24 1.22 1.23

Analysis of Pakistan State Oil 9

As compared to industry average of 1.4, PSO’s current ratio of 1.24 times is relatively
low in 2008 but it has increased slightly when compared with 1.22 in FY07 and 1.23 in
FY06. PSO is less liquid as compared to other companies in the industry. The company
has low capacity to pay its short term debt.

The cash and cash equivalents of company increased to almost 50 percent. Moreover we
can see there was no change in other receivables of the company, it remained constant in
2007 and 2008. Quick ratio is 1, 0.64 and 0.63 respectively in 2008, 2007 and 2006. In
2008 quick ratio is comparatively high. In these critical situations to improve the
liquidity, the company increased its trade debts and loans and advances, increasing trade
debts allowing receivables to government agencies and increased its loans and advances
by increasing its credit line with banks. However, the company showed a positive sign in
its efficacy of paying off its liabilities.

PSO has a high cash and equality as compare to its industry average. PSO has cash ratio
of 1.24 in 2008 as compare to industry average which is 0.23

5.2 Profitability Ratios

FY07 has seen only a marginal decrease in the profit margins for the company. The Net
profit of the company showed a positive trend from 2005 to 2007. However in the year
2007 the whole company went into the declining trend. The Net Profit was decreases by -
88 percent. But in 2008 net profit margin increased significantly. In 2008 net profit
margin increased by 11 percent as compared to FY06.

Overall PSO is a strong

7.000
company, poised to meet
6.000
competition from local as
well as foreign competition 5.000
Gross Profit Margin
by strengthening itself from 4.000
Operating Profit Margin
within by making 3.000
Net Profit Margin
continuous investments in 2.000
its marketing operations.
1.000
FY07 was not impressive in
0.000
terms of EPS as the profit 2008 2007 2006
margins remained at a lower
side.

Operating profit also decreased in 2007 by 66 percent but in 2008, it increased its
operating profit by 17 percent.

Analysis of Pakistan State Oil 10

Overall the gross margin increased around 5 percent. Booming consumerism driven by
demand of its items in various new products, like generators etc, and profitability figures,
which are mostly better than the industry averages.

Profitability Formulae 2008 2007 2006

Gross Profit Margin Gross Profit / Net Sales 6.062 3.506 5.769

Operating Profit Margin Operating Income / Net Sales 4.533 2.273 3.777

Net Profit Margin Net Income / Net Sales 2.838 1.341 2.523

5.3 Activity Ratios

PSO fares reasonably above the industry average in terms of inventory turnover; this
being a virtue of its continuous innovation, and understanding and catering to the market
needs. However, in terms of collection of receivables PSO lags behind its competitors.
The operating 60.00 A/R Turnover in Days
cycle is increasing,
50.00
but also showing Inventory turnover in
40.00 Days
efficiency in terms
30.00 A/P Turnover in days
of its cash
20.00
conversion cycle, Fixed Assets turnover
10.00
its cash conversion
- Total Assets turnover
cycle as also
2008 2007 2006
below than the
industry average, means its operations are converted into cash more quickly as compared
to its competitors. The total assets turnover is almost same as the industry average,
showing that the company is better off as its rivals, as far as managing assets to generate
sales is concerned. The rising net sales have a major role to play in elevating this measure
of asset management, and this can be attributed to better marketing, launching of newer
models of cars, and improved delivery timings.

The account receivable

showed turnover as 29 days 70.00
60.00
for FY06. However the
50.00 2008
company was able to 2007
40.00
maintain the level in FY08 30.00 2006
as compared to FY07, in 20.00 industry average
FY07 and FY08 the cash 10.00
-
collection of the company
Inventory turnover in Days
became very weak and

Analysis of Pakistan State Oil 11

because of that the account receivable turnover in days shoots up to about 30 days,
previously it was 26 days in 2006.

Asset Management Formulae 2008 2007 2006 Industry

Average

A/P Turnover in days 365 / A/P Turnover 48.05 42.32 41.11 39.49

Fixed Assets turnover Net Sales / Avg. Capital Assets 42.23 28.71 25.41 34.65

Inventory turnover in Days 365 / Inventory Turnover 36.06 31.22 31.66 61.53

A/R Turnover in Days 365 / A/R Turnover 29.09 30.01 26.58 23.1

Cash Conversion Cycle Inventory T/O -A/P T/O+A/R T/O in Days 17.09 18.92 17.12 55.4

Total Assets turnover Net Sales / Average Total Assets 4.91 4.83 4.88 4.57

The inventory turnover ratio is also climbing, as you can see from the table that in FY06
and FY07, it was 31 times and in FY08, it became 36 times which is impressive as
compared to industry average which is 61 times.

The inventory turnover ratio of the company is going to the positive trends and reflecting
that the inventory turnover is 36 times in the year. This may be the reason reflecting that
there might be a decline in sales overall in the industry.

5.4 Dupont
Dupont

Formulae 2008 2007 2006 Industry

Average

Net Profit Margin (%) Net Income / Net Sales 66.66 69.05 72.50 59.9

Assets Turnover (Times) Net Sales / Assets 3.90 4.68 4.25 4.57

Equity Multiplier (Times) Assets / Shareholder’s Equity 4.10 3.57 3.37 4.13

Return on Equity (%) Net Income / Average Total Equity 54.15 22.46 39.47 41.62

5.4.1 Net profit margin:

Because of increase in oil prices of about 80 percent in the last few years, sales of PSO
have been drastically affected. This is one of the reasons for decrease in the net profit
margin. Another reason of increase in cost of products sold, indicated in horizontal
analysis, is 44 percent increase as compared to 2007 and 66 percent as compared to 2006.
The net profit margin of PSO is still higher than industry analysis.

Analysis of Pakistan State Oil 12

5.4.2 Assets turnover:
Assets turnover is the lowest in 2008 when compared with 2007 and 2006 showing
ineffective asset utilization by the company. Comparing with companies in the same
industry, it is evident that PSO’s assets are increasing at a far higher rate than its net
sales, decreasing the assets turnover.

5.4.3 Equity multiplier:

Equity multiplier is increasing over the years due to the increase in the owner’s equity for
the last few years. When we look at the return on equity (ROE) as a whole comparing it
with previous years and industry, it is showing a positive trend. This may seem attractive
until we examine the equity multiplier which is a component of return on equity which is
increasing, indicating that ROE is increasing because of owners’ equity.

5.5 Long term debt paying ability:

Formulae 2008 2007 2006

Debt Ratio Total Liabilities / Total Assets 1.24 1.22 1.23

Debt/Equity Ratio Total Liabilities / Total Equity 3.74 2.99 2.79

Debt ratio shows that

company is in good condition 4.00
to pay off its long term debt 3.50
easily. Debt ratio of FY06 is 3.00
1.23 which slightly decreased 2.50 debt ratio
2.00
in FY07 to 1.22 as liabilities Debt/Equity Ratio
1.50
increased by 109 percent but
1.00
assets increased with 107 0.50
percent. In the FY08, its debt 0.00
ratio again improved to 1.24 2008 2007 2006

because its liabilities

increased by 181 percent as compared to assets which increased by 199 percent in FY08
while industry average (0.59) is quite low as compared to any of its last three years.

Debt/Equity ratio is also very impressive which shows that in FY 06, its liabilities were
2.79 times financed by the equity which increased by 7 percent to 2.99 times. In FY 08,
debt equity ratio increased by 20 percent to 3.74 times showing that it is more financed
by equity so risk rate is low.

Analysis of Pakistan State Oil 13