VIS revises PSO’s rating outlook to 'Stable' from 'Developing’ following improved 1QFY21 performance

December 18, 2020: VIS Credit Rating Company Limited (VIS) has maintained entity ratings of ‘AA+/A-1+’ (Double A Plus /A-One Plus) to Pakistan State Oil Company Limited (PSO).

The 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. The short-term rating of ‘A-1+’ signifies 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 (GoP) short-term obligations.

Outlook on the assigned rating has been revised to Stable from ‘Rating Watch - Developing’ following improved 1QFY21 performance and healthy volumetric sales growth during 5MFY21 despite the corona virus pandemic. Previous rating action was announced on May 04, 2020.

The assigned ratings derive strength from PSO’s majority and controlling interest vested with GoP and the company’s strategic & nationally important position in Pakistan’s energy sector. Ratings also derive strength from PSO’s position as the largest oil marketing company (OMC) in terms of market share, supported by the largest storage capacity and marketing network in the country alongside a diversified product portfolio.

Moreover, comfort is drawn from company’s healthy cash flows, sizeable retail cash transactions and propensity of state support in distressed situations. However, persistence of circular debt (pertaining to LNG business in particular) has resulted in liquidity challenges for PSO. Historically, sharp volatility in oil prices and fluctuation in exchange rates have also be key challenges for the OMC sector.

Despite the impact of corona virus pandemic, industry sales recorded double digit growth during 5MFY21. PSO’s overall volumetric growth performance has remained in line with industry trend but was significantly higher than other large industry players.

Given projected recovery in economic growth in the ongoing fiscal year along with stabilization in exchange rate and increasing international oil prices, financial performance of the Company is expected to remain robust in FY21. Financial performance will also be facilitated by significant decline in borrowing levels and lower average interest rates resulting in sharply lower finance cost as compared to the preceding year. Key risk to performance in FY21 will be from a prolonged 2nd wave of the corona virus pandemic although risk of the same is considered manageable given that vaccine rollout is expected in the upcoming months.

VIS