PSO earning to plunge due to inventory losses

Pakistan’s largest oil marketing company, operating in the public sector, Pakistan State Oil (PSO) is expected to announce its 2QFY23 financial result. The Company is expected to post profit after tax of PKR2.4 billion (EPS: PKR5.1). The said increase can be attributed to increase in HSD offtakes (up 53%QoQ), owed to the sowing demand in the rabi season during October and November 2022.

Recovery in offtakes was imminent as compared to the severely dampened fuel demand (floods/price hikes) during 1QFY23, resulting in total offtakes rising by 26%QoQ during 2QFY23.

The company’s revenue is expected to rise to PKR880.6 billion, changing by 2.1%QoQ/69%YoY, mainly on the back of the rise in fuel prices as compared to the last year (2QFY22: PKR140/124 per liter for MS/HSD).

The company is anticipated to record inventory losses of PKR12.2 billion (PKR26/share) for 2QFY23, as ex-refinery prices for MS/HSD fell by 18%/11% during the period as compared to the previous quarter.

Subsequently resulting in gross margins for the quarter to end at 0.7% as compared to 0.2% 1QFY23.

The effective tax is expected to rise to 56% for the period (vs 1QFY23: 70% ET), as minimum turnover tax (0.5% on gross POL sales) hampers the already beat-down bottom-line.

At a normalized tax rate of 33%, the earnings per share would have clocked in at PKR7.76/share.

Finally, analysts expect the topline from LNG segment to clock in at PKR232 billion, majorly on the back of rising LNG prices globally (energy crunch in Europe/ Asia) coupled with increased volumes (new LNG deal with Qatar @ 10.2% slope, signed last year).

To note, PSO’s average DES price for the quarter stood at US$11.39/mmbtu as against US$13.43/mmbtu in the previous quarter.

The liking for PSO is due to: 1) gas & power tariff adjustments may prove to be cash-positive, 2) modernization plans in refinery subsidiary (PRL) to enhance productivity, and 3) phasing out of RFO coupled with increasing share of retail fuels, resulting in stable margins to drive unhampered future cash flow.

For this reason, our December 2023 price of PKR215/share provides a total return of 53%, with forward dividend yields of 7% for FY23 and /10%for FY24.