November 1, 2018 (MLN): Pakistan Credit Rating Agency (PACRA) has maintained entity ratings of Pakistan State Oil Company Limited at ‘AA‘ for long term and ‘A1+’ for short term, with a ‘stable’ outlook forecast.
According to the rating agency, the ratings reflect strong ownership structure of PSO, with control resting with the Government of Pakistan (GoP), and the high propensity of state support in distressed situations, considering the strategic nature of the company.
With leading market share in the OMC sector, PSO retains a pivotal position in the energy supply chain of the country, supplemented by an extensive distribution network and the largest storage capacity in Pakistan, the report said.
However, competition is increasing where PSO is being challenged to hold its system share, particularly in white oils.
Meanwhile, forte of PSO – is constrained, because of plummeting FO sales owing to the changing energy mix in the country. On the other side of the fence, increasing volume of LNG to the total revenue mix has compensated the lost volume.
On the flip side, the increase in the price of POL products (as well as cost) resulted in an increase in the top line, though gross margins are reduced, on account of fixed OMC margin (on major POL products).
“Increase in the magnitude of circular debt is of concern, the company has sustained its operations based on cash transactions with retail customers and utilizing significant quantum of short-term borrowings. Increasing circular debt has also impacted the liquidity position of the company; wherein, the company is in dialogue with GoP for timely settlement of overdue,” the report added.
The company is also embroiled in multiple lawsuits. The trend in PSO’s leveraging remains volatile as the company’s entire debt comprises of short-term financing facilities for managing liquidity needs.
Currently, a significant portion of the receivables, from power generation companies, comprise those that are past due, but not impaired (PKR ~182bln). Debt servicing ability is strong due to high cash generation. Meanwhile, the networking capital cycle remains manageable at 73days.
The ratings are dependent on efforts, along with timely materialization, to settle the circular debt, in turn, efficient working capital management.
Meanwhile, financial and business metrics need to remain aligned with the current risk profile of the company. Upholding of governance framework including independence and continuity of management is important over the coming years.
PSO is listed on Pakistan Stock Exchange and is 22% owned by Government of Pakistan, 15% by NBP, and 3% by PSOCL Employee Empowerment Trust. Other major shareholders comprise financial institutions (45%) and the general public (15%).
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