Global consumption of petroleum products is on the decline mainly due to economic meltdown in the backdrop of worst financial crisis and recession worries. The situation is not different in Pakistan where the petroleum industry’s sales of petroleum products including oil and lubricant registered a decline of 3 percent year of year YoY to 4.58 million metric ton MT during first quarter of current fiscal year 1QFY09. The latest figures issued by Federal Bureau of Statistics show that the production of petroleum products has also declined by 5.4 percent while Large scale Manufacturing LSM sector growth was 6.20 percent in first quarter.
Black oil volumes slid by 4 percent as circular debt continue to choke supply. Despite the lifting of domestic subsidies, white oil products registered a marginal decline of 1 percent. However, on monthly basis, petroleum off-take surged by 12 percent due to a marginal seasonal uptick as well as a low base recorded in August 2008.
One of the main reason of low consumption of petroleum products in Pakistan is the higher prices despite reduction in the international market. Government has recently slashed prices of petroleum products but consumers and analysts say that the international price impact has not been fully passed on to the end consumers. Besides, the financial crisis has restricted the global lending cycle that is risking the real economy and dovetailing a decline in global oil consumption. The double whammy of plunging international oil prices and run on the domestic currency has beset earnings for oil marketing companies in 1QFY09.
Going forward, analysts believe that the volume outlook will depend largely on resolution of the circular debt quandary. Risk to incremental debt has contracted with the withdrawal of subsidies and on a positive note the Government has started collecting Petroleum Development Levy (PDL) at current domestic POL prices. If the government considers riding out the circular debt issue through PDL collection, POL consumption could continue with its overall declining trend. Pakistan State Oil (PSO) and Shell Pakistan are major oil marketing companies. Overall market share of PSO in total domestic petroleum consumption stands at 69 percent.
During the 1QFY09 the overall volumes of PSO declined by 3 percent to 3.15 million MT. With restricted supplies to the power sector, black oil volumes declined by 3 percent while white oil volumes declined by a similar percentage. On monthly basis, PSO has outperformed with sales volumes surging by 20 percent against 12 percent of sector’s volume growth. Black oil volumes increased by 32 percent on resuming furnace oil supplies to power companies while white oil volumes recorded an increase of 8 percent due to a lower base in Aug 2008.
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Government is expected to release funds for oil marketing companies. Petroleum consumption is likely to pick up if the funds are released and there is a reduction in circular debt plus the domestic POL prices reflect the decline in international oil prices.
Moreover, PSO continues to leverage its distribution network with management stating that 3-4 new fuel supply agreements have been signed with upcoming Independent Power Producers IPPs. This should continue providing impetus to black oil sales going forward. Furthermore, the Oil Marketing Advisory Committee OCAC has recommended a reduction in petroleum cover to 14-15 days which analysts say is positive in the view of current liquidity issues and volatility in international oil prices.
The PSO has reported Net Loss after tax NLAT of Rs 8.38 billion resulting in a loss per share LPS of Rs 48.88 for 1QFY09. Despite top line growth of 80 percent year on year to Rs 188 billion backed by higher domestic oil prices, the company recorded a loss at the gross level due to storage losses. Dearth of foreign exchange led the central bank to revoke foreign exchange covers in July 2008 with rupee depreciating against the dollar by almost 15 percent in 1QFY09. PSO's share of the circular debt and PDC claim stands at Rs 74 billion (Rs 62.4 billion from the power sector and Rs 11.8 billion in PDC). Going forward PSO is expected to show a marked improvement in sequential earnings due to realizing an NRV adjustment on inventory and expected stability in the rupee, expected after the FIA came in action.
The another major player, Shell has outperformed sector sales volumes during 1QFY09 by posting a marginal growth of 1%YoY in offtake. This performance is due to limited exposure to the power sector and relatively lower burden sharing in circular debt, limiting interruption within the supply chain. On monthly basis, Shell underperformed with volumes declining by 5 percent versus growth in sector volumes. During 1QFY09, Shell has maintained market share at 13 percent.
Shell has reported net loss after tax (NLAT) of Rs1.19 billion for 1QFY09 resulting the loss per share of Rs 17.46. The oil marketing company recorded a top line growth of 60 percent mainly driven by higher domestic oil prices. However, the decline in crude oil prices and narrowing of product spreads resulted in inventory losses on NRV adjustments during the quarter. Rampant rupee depreciation compounded pressure on earnings creating exchange loss. However, given limited exposure to the power sector, the company carries a smaller quantum of circular debt relative to PSO. As a result financial charges increased by a comparatively lower 31 percent in first quarter.
In the wake of limited exposure, the volume growth of shell should marginalize. Earnings should improve sequentially given expected rupee and crude oil price stability as well as lower financial charges with zero incremental debt. Analysts who keep eye on the oil marketing companies are positive on the future performance of the sector and believe that core business earnings would improve in future, once the economy picks up pace.
