Pakistan State Oil Company (KA:PSO) is the biggest oil marketing company in Pakistan, valued at almost Rs100 billion, or $850 million. The Karachi-based company operates through a network of almost 3,500 petrol stations that are backed by more than 1 million tonnes of storage capacity. There are a number of oil marketing companies that operate in Pakistan, such as Shell (LON:RDSa) Pakistan and Hascol Petroleum (KA:HASC), but no one comes even close to PSO in terms of size and scale of operations. PSO alone accounts for almost half of the total number of petrol stations and almost 70% of the total oil marketing storage capacity in the country.
On paper, it seems that PSO should be doing really well. It has an enviable asset base in Pakistan – a country where the consumption of petroleum products, such as diesel and gasoline, has been climbing by almost 10%. But in reality, PSO is struggling since it is caught up in the circular debt that has plagued Pakistan’s energy sector.
According to official figures, the total amount of circular debt in Pakistan stood at above Rs922 billion ($7.9Bn) by late-2017, which includes Rs473 billion ($4.1Bn) reported by the Ministry of Finance and Rs450 billion ($3.9BN) parked at the power division’s subsidiary Power Holding Private Limited (PHPL). This debt has hurt a number of energy and power companies in Pakistan but PSO has been one of the biggest victims.
It’s not like PSO is generating losses. On the contrary, the company has been reporting strong levels of profits. In fact, PSO has recently reported financial results for the last six months of 2017 in which it reported a 25% increase in gross sales from the corresponding period in the prior year to Rs649 billion ($5.6Bn). Its profits, however, fell by 15% to Rs8.5 billion ($73.7Mn). The drop in profit was driven by higher levels of operating costs, such as administrative expenses. The company’s gross profits, which exclude the impact of operating costs, climbed 5% to Rs18.7 billion ($162Mn).
However, a closer look at PSO’s financial results reveals that the above-mentioned gains are largely paper profits that are not backed by strong levels of cash flows. In other words, PSO is generating profits but it is not generating cash because a number of its key customers – such as the independent power producers, PIA, and Sui Northern Gas Pipelines – have held back payments. As a result, its receivables have climbed to Rs313 billion ($2.7Bn) at the end of last year from Rs277 billion ($2.4Bn) in mid-2017.
A look at PSO’s cash flow statement shows that it is burning cash at an alarming rate. Normally, most companies generate positive levels of cash from operating activities which is then used to fund the maintenance or acquisition of fixed assets. But PSO reported negative Rs26 billion ($225Mn) of cash from operating activities for the last six months of 2017. In other words, PSO isn’t generating any cash at all from its core business. On the contrary, it is actually using up cash. And this has been going on for more than three years. This has seriously hurt the company’s cash reserves. At the end of 2017, PSO had Rs6.63 billion ($57.3Mn) of cash balance but when taken together with short-term loans of Rs14.2 billion ($123Mn), its cash reserves were actually negative Rs 7.5 billion ($65Mn).
The good news, however, is that the government has finally moved to partially resolve the circular debt crisis. Recently, the cabinet’s Economic Coordination Committee approved a plan to repay Rs80 billion of the circular debt. Around Rs15 to Rs20 billion of this amount has been earmarked for PSO. In addition to this, the government has also indicated that it might approve another payment in the near future, ahead of the general elections, in order to ease pressure on energy companies as they prepare for the summer season when electricity demand typically climbs. This may fuel an improvement in PSO’s financial health, particularly its cash reserves and receivables, in the near future.
That being said, the one-off payment from the government is just a small step in the right direction. Although it will provide some relief to PSO, it won’t make a big impact on the company. That’s because only a small portion of the approved sum will actually go to PSO. But if PSO ends up getting the entire Rs20 billion and, on top of that, receives some of the delayed payments from its customers, then even this can’t significantly improve PSO’s financial health since its receivables are much higher. The Rs20 billion represents just 6% of the company’s total receivables.
Although the government has come forward to ease the circular debt crisis, PSO needs more support. The government should consider approving funds that are significantly larger than Rs80 billion in the near future to provide relief to PSO and other companies.
About the author: Sarfaraz A. Khan is an economics and finance expert whose work is featured in various investment websites, including TheStreet, Yahoo! (NASDAQ:AABA) Finance, Seeking Alpha, and Investing.com.
sarfarazis@yahoo.com