PACRA reaffirms entity ratings of PSO at 'AA+'

January 22, 2024 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has reaffirmed entity ratings of Pakistan State Oil Company Limited (PSX: PSO) at “AA+” for long term and “A-1+” for short term with a stable outlook forecast, the latest press release issued by PACRA showed.

A medium to long-term rating of 'AA+' indicates high credit quality; Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions.

While, a short-term rating of 'A-1+' indicates the highest certainty of timely payment; Short-term liquidity, including internal operating factors and /or access to alternative sources of funds, is outstanding and safety is just below risk-free Government of Pakistan’s short-term obligations.

To note, the previous rating action was announced on December 13, 2022.

PSO, Pakistan's largest oil marketing company, is actively involved in petroleum, oil, and lubricant (POL) product storage, distribution, and marketing. Its extensive network includes 3,528 retail outlets, 9 installations, 19 depots, 14 airport refueling facilities, and operations at 2 seaports.

Recent expansions include an increase in storage capacity to 1.14 million tons, 49 new retail outlets, and the establishment of 2 electric vehicle charging stations.

With lubricant plants blending capacity of 70 thousand tons annually, 13 LPG facilities and over 200 convenience stores, PSO serves customers nationwide.

Assigned ratings incorporate the government of Pakistan's predominant ownership and acknowledge the Company's crucial national role in the domestic energy sector.

The company, being a strategic asset in the national energy landscape, possesses considerable influence owing to its substantial oil storage capacity, which constitutes nearly half of the nation's total.

Ratings factor in the pivotal responsibility of ensuring the seamless supply of petroleum products to the domestic market and key stakeholders, underscoring its strategic importance for the country.

Assigned ratings further consider the company's financial performance amid internal and external economic challenges.

While FY23 witnessed a dip in sales volumes, the company's revenue growth was primarily driven by elevated selling prices of petroleum products.

The dip in volumes was attributed to various factors, including sluggish industrial activity, reduced local transport fuel consumption, weak auto sales, and high inflation. Margins remained constrained by volatility in international oil prices.

However, in 1QFY24, gross profits recorded a sizeable uptick due to significant inventory gains on the back of substantial and continued hikes in fuel prices. PSO reported a significant quarterly profit of Rs21.9 billion.

The rising trend in trade debts has been a concern, nevertheless, ratings draw comfort from the fact that most receivables are related to circular debt, which is backed by the government, with very low credit risk.

In addition to this, a sizeable retail sales proportion provides support to the liquidity profile of the company.

 The capitalization profile reflects increased short-term borrowings in FY23 for working capital, resulting in a deterioration in gearing and leverage ratios.

However, short-term borrowings are on account of circular debt only. Going forward, the resolution of circular debt remains important.

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