Pakistan State Oil (PSX: PSO) has reported a hefty improvement in its earnings for 1HFY16, something that this column highlighted when the OMC announced its 1QFY16 financial performance. The trigger factors in 1QFY16 despite a drop in core earnings were the stable margins, and decrease in finance cost that led to improvement in cash flows.

Since the appearance of circular debt eleven years ago, operating cash flows of PSO have been under a lot of pressure. Roughly in the first half of the past decade or so, PSO remained sort of immune to the circular debt, evident from the profits and the share of operating cash flows. It was in the second half when the oil company saw tougher times when the circular debt menace was in its full swing; first the operating cash flows dropped massively even amid the cash injection by the government in office back in 2013, and then the profits followed suit.

From the 1HFY16 financial performance it can be seen that the firm has registered a notable increase in earnings, improvement in margins, and a continuous fall in financial charges. A key growth factor for the firm has been the slowdown in circular debt build-up due to settling in of lower crude oil prices, and timely payment against supplies by the oil company.

PSO continued to face a decline in its revenues in 1HFY16. Though the volumetric sales have increased by around 15 percent for the firm in the period, furnace oil margins have fallen; furnace oil makes up a significant portion of PSO’s revenue mix. However, the inventory losses are likely to have remained muted due to increase in prices of petrol.

With 1HFY16 performance, strong rebound in earning for the rest of FY16 and beyond is expected. Growth in earnings is likely to come from rising volumetric sales of petrol and diesel along with improvement in furnace oil margins due to stabilising crude oil prices. And since the LNG is being imported by PSO, the fall in furnace oil volumes will eventually be offset by increase in gas volumes sold.

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Pakistan State Oil


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Rs (mn)              1HFY16    1HFY15    YoY    2QFY16    2QFY15     YoY


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Net sales           353,965   508,287   -30%   168,691   217,853    -23%


Cost of good sold   339,942   496,135   -31%   162,075   217,143    -25%


Gross profit         14,023    12,152    15%     6,616       710    832%


Other income          5,304     6,722   -21%     2,564     3,349    -23%


Operating exp         6,119     7,427   -18%     2,908     3,228    -10%


Operating profits    13,209    11,446    15%     6,272       830    655%


Finance cost          3,601     5,941   -39%     1,715     3,267    -48%


Profit after tax      6,726     4,283    57%     3,473     (960)


EPS                   24.76     15.76    57%     12.78    (3.53)


Gross margin          3.96%     2.39%            3.92%     0.33%


Operating  margin     3.73%     2.25%            3.72%     0.38%


Net margin            1.90%     0.84%            2.06%    -0.44%


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