VIS reaffirms Entity Ratings of PSO

December 12, 2024 (MLN): VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Pakistan State Oil Company Limited (PSX: PSO) at 'AA+/A1+', according to the press release issued today.

A medium to long-term rating of 'AA+' indicates high credit quality, and protection factors are strong, it added. 

Risk is modest but may vary slightly from time to time because of economic conditions.

 A short-term rating of 'A1+' suggests the strongest likelihood of timely repayment of short-term obligations with outstanding liquidity factors.

Outlook on the assigned ratings remains ‘Stable’. The previous ratings action was announced on January 19, 2024.

PSO, incorporated in Pakistan in 1976 and listed on the Pakistan Stock Exchange, operates as the largest oil marketing company in the country, the presser further stated. 

Its core activities include the procurement, storage, and marketing of petroleum and other products, alongside blending and marketing lubricants.

The Government of Pakistan holds a 51% controlling interest, appointing the Board of Management and Managing Director.

PSO's investments include strategic stakes in Asia Petroleum Limited (49%) Pakistan Refinery Limited (63.56%), and others the company’s vertically integrated supply chain infrastructure underpins its market positioning and operational risk management.

Assigned ratings consider the business risk profile of the Company which is shaped by its operations in the petroleum products marketing and lubricant sectors.

The petroleum products marketing sector faces high business risk due to regulatory oversight, macroeconomic challenges, and exposure to currency volatility.

Competition within the sector necessitates substantial capital outlays, while delays in payment mechanisms and pricing adjustments add to the risk.

The lubricant sector exhibits medium business risk, with stable demand drivers and exposure to economic conditions.

Challenges stem from exchange rate volatility and high competition, alongside risks related to counterfeit products.

Ratings are supported by PSO’s status as a state-owned entity, government guarantees associated with its receivables and payables, and its importance as a strategic national asset.

Assigned ratings also incorporate the financial risk profile of the Company.

The profitability profile reflects improvement in gross and net margins, supported by increased selling prices and income from financial assets.

Liquidity metrics and coverage profiles have demonstrated resilience, benefiting from improved cash flow generation and reduced tax obligations.

 However, exposure to circular debt presents a challenge for which PSO is actively engaged with concerned authorities.

Capitalization indicators show improvement, with growth in equity and reduced leverage levels.

The absence of any significant planned CAPEX, apart from routine retail and operational investments funded through internal cash generation, supports the capitalization profile.

Going forward, the ratings remain sensitive to the Company’s ability to address circular debt challenges and improve recovery mechanisms for LNG-related costs.

Profitability will depend on maintaining competitive market positioning and achieving diversification through subsidiaries.

Continued improvement in capitalization, coverage, and liquidity metrics will also remain key ratings considerations.

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