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 FY06
with 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 steady
profitability and cash flows
PSO 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 share
Locally. 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 facilities
PSO achieved 30% share of JP-1 export to Afghanistan during FY06
Lubricants have historically been a deregulated high margin business in
Pakistan. It has Alliance with Castrol for blending and marketing Castrol grades in
Pakistan
PSO 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 name
The 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 Analysis
2. 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% 12.61% 13.61% -6.34% -1.04% 25.96% 33.08%

increase/(decrease)

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

(decrease)

NP% increase/ 12.24% -9.52% 11.58% 19.56% 8.19% 15.89%

(decrease)

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

(decrease)

CGS increase/ 11.71% 13.30% -6.82% -1.74% 25.33% 33.23%

(decrease)

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.