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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.
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
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
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
• 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%.
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
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,
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.
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
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