CHAPTER # 01

INTRODUCTION

Introduction to Oil and Gas Industry:Pakistan has registered steady growth in the consumption of POL products. New OMC (Oil Marketing Company) licenses have been issued which poised to benefit from strong growth potential in a deregulated environment. This will also increase the competition in the market.Currently 11 players are operating in the oil marketing space. These include PSO, Shell, Caltex, Attock Petroleum Limited (“APL”), Total-Parco Pakistan Limited (“TPPL”), Admore Gas Limited, Hascombe Storages Pvt. Ltd., Overseas Oil Trading Co., Askar, Bosicor and Pearl Parco FO (Fuel and Oil) consumption levels have been high historically, recent slump in demand occurred due to availability of alternate energy sources and abundance of water in dams. Per capita consumption of oil per annum is amongst the lowest in the world at 0.10 tonnes (“tons”)Consumption level is on the rise now. Since 2001-02 the automobile market is growing rapidly by over 40% per annum due to readily available car financing and reduced interest rate. The automobile sector registered a growth of 29.8% in Jul-Mar FY06.It is expected now that in a deregulated environment with strong growth indicators the demand for Petroleum Oil and Lubricant (“POL”) will continue to grow.

Introduction to Pakistan State Oil (PSO):PSO is uniquely placed as a leading oil marketing company (“OMC”) of POL products in a growing market. PSO supplied 65% of the country’s total POL consumption (approximately 15.3 million tons) for FY06with market share 78% in black oil and 57% in white oil.PSO is the leading player in the retail sector having market shares of approximately 45% in motor gasoline and 59% in diesel oil. The industrial division enjoys high volumes and generates steadyprofitability and cash flowsPSO has exclusive long term fuel supply agreements with independent Power Producers. Its primary product is FO in which PSO has a market share of approximately 79%PSO is the market leader in aviation fuels with nearly 61% market shareLocally. It has operations at 8 airports and supplies fuel to international and domestic airlines. PSO has signed agreement with Sialkot International Airport to be the sole supplier of refueling facilitiesPSO achieved 30% share of JP-1 export to Afghanistan during FY06Lubricants have historically been a deregulated high margin business inPakistan. It has Alliance with Castrol for blending and marketing Castrol grades in PakistanPSO also sells its own brand of lubricants under the brand name DEO,Carient, Blaze 7 and CNG Oil.Its LPG business operates 4 storage/bottling plants with a storage capacity of over 700 metric tons and its distribution is under PAKGAS brand nameThe PSO sales volumes grew by 34% over last year to achieve the 25 year high of 21,000 metric tons.

Introduction to Topic:The topic for our project is “The Financial Performance of PSO”. Under this study we will use different techniques to study the financial performance of this company.

Rationale of the Study:The rationale of this study is to analyze the company’s financial performance by using the skills and knowledge, we acquired from our course. We will use all our analytical and other abilities to get maximum information about the financial performance of PSO through the data analyzing techniques.

Objective of the Study:The basic objectives of this study are:

To find the profitability of PSO To find whether PSO is using its resources effectively To compare the overall performance of PSO with its Competitor.

Limitations of the Study;The limitations mainly we are facing while conducting this study are:

Time constraints The obtaining of information about the company and its competitor is not an

easy task.

CHAPTER # 02

LITERATURE REVIW

Literature Review of the topic to be studied;This recent study on this topic has been done by JPMorgan with the name “investment opportunity; Pakistan State Oil Limited”. In this study they have analyzed the financial performance of the company with respect to investment. Basically this study was done for investors as PSO is going to be privatized so all the necessary information about the PSO and the oil and gas industry was included in that study.

CHAPTER # 03

METHODOLOGY

Data Collection Method:The method we have used for collecting our data is Secondary Data Collection Method.We have collected data from the following ways;

Website of the company News papers sites (Dawn, Jang and Daily Times) Google Search Engine for different studies on the topic

Data Analysis Methods:For analyzing the data we have used three techniques which are;

1. Ratio Analysis2. Vertical Analysis 3. Horizontal Analysis

Ratio Analysis

Financial ratios are calculated from one or more pieces of information from a company's financial statements. For example, the "gross margin" is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing.

A ratio gains utility by comparison to other data and standards. Taking our example, a gross profit margin for a company of 25% is meaningless by itself. If we know that this company's competitors have profit margins of 10%, we know that it is more profitable than its industry peers which is quite favourable. If we also know that the historical trend is upwards, for example has been increasing steadily for the last few years, this would also be a favourable sign that management is implementing effective business policies and strategies.

Financial ratio analysis groups the ratios into categories which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below.

Leverage Ratios which show the extent that debt is used in a company's capital structure.

Liquidity Ratios which give a picture of a company's short term financial situation or solvency.

Operational Ratios which use turnover measures to show how efficient a company is in its operations and use of assets.

Profitability Ratios which use margin analysis and show the return on sales and capital employed.

Solvency Ratios which give a picture of a company's ability to generate cashflow and pay it financial obligations.

Vertical Analysis

This technique is also known as comparative analysis. It is conducted by setting consecutive balance sheet, income statement or statement of cash flow side-by-side and reviewing changes in individual categories on a year-to-year or multiyear basis. The most important item revealed by comparative financial statement analysis is trend.A comparison of statements over several years reveals direction, speed and extent of a trend(s). The horizontal financial statements analysis is done by restating amount of each item or group of items as a percentage.

Such percentages are calculated by selecting a base year and assign a weight of 100 to the amount of each item in the base year statement. Thereafter, the amounts of similar items or groups of items in prior or subsequent financial statements are expressed as a percentage of the base year amount. The resulting figures are called index numbers or trend ratios.

Horizontal Analysis

Vertical/Cross-sectional/Common size statements came from the problems in comparing the financial statements of firms that differ in size.

In the balance sheet, for example, the assets as well as the liabilities and equity are each expressed as a 100% and each item in these categories is expressed as a percentage of the respective totals.

In the common size income statement, turnover is expressed as 100% and every item in the income statement is expressed as a percentage of turnover (sales).

From the vertical analysis above, an analyst can compare the percentage mark-up of asset items and how they have been financed. The strategies may include increase/decrease the holding of certain assets. The analyst may as well observe the trend of the increase in the assets and liabilities over several years.

Example: It can be observed that there is an increase in the holding of the current assets of the company. The management can seek the reasons of why the holding of these assets is continuing increasing.

CHAPTER # 04

ANALYSIS

Growth:

The company is not showing a steady growth over the last four years which is a parallel

response to the growth of industry (as show by the table below).Best year in this regard

was 2005 when the increase in net sales was by 25.96% while in the industry it was by

33.08%. Worst year was 2004 when the sales were decreased by 6.34% %. While

decrease in industry it was 1.04%.

  Company Industry company Industry company Industry

  2003 2004 2005

Sale%

increase/(decrease)

12.61% 13.61% -6.34% -1.04% 25.96% 33.08%

Profitability:

Company’s GP ratio and Net profit ratio is lower than that of industry’s ratio from last

few years, which is due to the higher cost of production .As the table (attached) shows

that ratio of cost of sales to net sales is always higher than from that of industry’s while

operating cost to net sales is always lower than that of industry. This shows that the other

income was contributing in the profits of the company up to 2003 but not after wards

while there is a consistent contribution by it in the industry.

Overall the Gross profit & Net profit remains increasing during the four years for the

company as it can be seen from the table blow, but at decreasing pace.

  company Industry Company Industry company Industry

  2003 2004 2005

GP%

increase/(decrease)

17.32% -10.86% 9.33% 16.87% 8.28% 1.06%

             

NP%

increase/(decrease)

12.24% -9.52% 11.58% 19.56% 8.19% 15.89%

The pattern for the variance in sales and cost of sales of the company and the industry

over the last four years is as follows,

  Company Industry company Industry company Industry

  2003 2004 2005

sale

increase/(decrease)

12.61% 13.61% -6.34% -1.04% 25.96% 33.08%

             

CGS

increase/(decrease)

11.71% 13.30% -6.82% -1.74% 25.33% 33.23%

The reason for the successes of the company in the year 2003 was that that the increase

in sales of the company was by 12.6% and increase in the cost of sales was by 11.71%

leaving the net increase of 0.9%.While in the industry the net increase is by 0.31%.Same

reasons were for 2005 where the net increase for the company was 0.63% while for the

industry it decreased by 0.16%.Thats why the increase in GP ratio in both years for the

company is better than industry (in 2003 increase in GP ratio of the company is by

17.32% while for the industry it decreased by10.86% in 2005increase for the company by

8% while for the industry it is by 1%) The whole story reverses in the year 2004 when

there was overall decrease in the industry gross profit and when the decrease in cost is at

the lower rate than that of sales .Here the net difference for the industry is 0.70% while

for the company it is only by 0.48%.

Almost same pattern can be seen in ROE & EPS i.e. it is increasing all the time but at

decreasing pace and was better in 2003 than from the industry.

Liquidity:

As it can be seen from the table that company liquidity position is stable as it’s current

assets can cover it’s current liabilities by approximately 1.2 times over the four year’s of

comparison. And also the company’s current ratio remained better than from that of

industry’s. The main contributions in current assets of the industry are due to Trade debts

and stock in trade .But for the company additional contribution comes from Loans &

advances and short term investments which are the big factors in achieving good liquidity

ratio. Additionally the debtor’s collection period was better between than year’s and was

also better from that of industry. This also removes the alarm that the company is holding

its cash in debtor’s for greater periods and maintains good liquidity ratio. On the other

hand company’s Inventory turn over period remain getting worst during the four periods

and it also remained worst than that of industry. which shows that company is holding its

inventory for larger period of time in stores and converting it in cash after longer

period .Due to this reason the company’s Acid test ratio gets lower than that of industry

in 2004 and 2005.From liability side the liquidity of the company was mainly hit by short

term financing.

Gearing:

As shown by the table gearing of the company is better than industry. This means that

company is financing its projects more through equity finance and avoiding debt finance

as compared to industry. Even in debt finance the company is mainly relying on short

term finance rather than long term. This shows that the company’s profit is going lesser

to debt holders as interest and more to share holder’s as dividend. On the other hand the

company is not using the cheap finance.

Though the gearing of the company is at better side which should mean that interest

should be cover by the profit with ease. But inversely shown by the table because the

company is not make good profit as compared to the industry as discussed above in

profitability section.

Asset turns over:

The asset turn over of the company is better than that of industry which shows that

company is utilizing its assets more efficiently for production. This ratio moves

downwards in 2004 due to the facts discuses above that 2003 was the best year for the

company.

CHAPTER # 5

CONCLUSION AND RECOMMENDATIONS

CONCLUSION AND RECOMMENDATIONS

Company’s GP ratio and Net profit ratio is lower than that of industry’s ratio from last few years, which is due to the higher cost of production .As the table (attached) shows that ratio of cost of sales to net sales is always higher than from that of industry’s while operating cost to net sales is always lower than that of industry.

The main contributions in current assets of the industry are due to Trade debts and stock in trade .But for the company additional contribution comes from Loans & advances and short term investments which are the big factors in achieving good liquidity ratio.

As shown by the table gearing of the company is better than industry. This means that company is financing its projects more through equity finance and avoiding debt finance as compared to industry. Even in debt finance the company is mainly relying on short term finance rather than long term.

The asset turn over of the company is better than that of industry which shows that company is utilizing its assets more efficiently for production

Following are the recommendations:PSO should maintain its sales market and keep on bringing changes according to the customers needs.They should always keep on providing the high quality products.They should extend its distribution channels to Northern Areas as well.They should try to payout all of its debts along with investment in new projects. Company should maintain a good level of EBIT because CGS is quite higher than industry average.