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The Pakistan Credit Rating Agency Limited

Rai Umar Zafar

Haider Imran

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PACRA Maintains Entity Ratings of Pakistan State Oil
 Rating Type Entity
 Action. Maintain Maintain
 Long Term AA AA
 Short Term A1+ A1+
 Outlook Stable Positive
 Rating Watch - -

The ratings reflect the strong ownership structure of the company, with controlling interest vested in Government of Pakistan (GoP), and high propensity of state support in distressed situations, considering the strategic nature of the company. With leading status 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. Meanwhile, volume accretion, led by buoyant economy, has supported profits, in turn, cash flows. However, competition is getting fierce with PSO challenged to hold its system share particularly in white oils.

Though an increase in the magnitude of circular debt is of concern, the company has sustained its operations based on cash transactions with few strategic customers and utilizing significant quantum of short-term borrowings. Comfort can be drawn from restrain in accumulation of circular debt; wherein, the company is in dialogue with GoP for timely settlement of overdues. The trend in PSO’s leveraging remains volatile as the company’s entire debt (~PKR 139bln at end-Mar17) comprises short-term financing facilities for managing liquidity needs. Currently, 67% of total receivables comprise those due for more than 3 months. Debt servicing ability is strong due to high cash generation. Meanwhile, despite stretching, the net working capital cycle remains manageable, around ~2 months.

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.
About the Entity
PSO is listed on Pakistan Stock Exchange (PSX). Though GoP owns only ~51% shareholding in the company through direct and indirect holdings, the Marketing of Petroleum Products (Federal Control) Act 1974 authorizes GoP complete control in terms of appointment of the Board of Management and Managing Director (MD). The company is engaged in import, storage, distribution and marketing of various petroleum products. Being the oil market leader and one of the largest Pakistani companies in terms of revenue, PSO offers its products through a vast network of 3,482 retail outlets across the country.

PSO ventured into procuring LNG for the country during FY15, but post recent restructuring of Pakistan’s LNG business, the company’s role as importer will be transferred to a state-owned entity, going forward. Furthermore, PSO is currently in the process of acquiring majority stake in one of its associated companies (Pakistan Refinery Limited) and implementation of capacity expansion.

The current Board of Management was appointed in Nov’15. It comprises five members, including the Managing Director (MD), all of whom are GoP nominees. Mr. Sheikh Imran ul Haque, the MD, was previously associated with Engro Group. He is a seasoned professional, carrying nearly three decades of experience, and is supported by core management team comprising qualified and experienced professionals.
The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.