Press Release

VIS assigns initial entity ratings to Pakistan State Oil Company Limited (PSO)

Karachi, June 19, 2019: VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of ‘AA+/A-1+’ (Double A Plus /A-One Plus) to Pakistan State Oil Company Limited (PSO). Outlook on the assigned ratings is ‘Stable’. 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.

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 an adequate support structure. Despite persistence of circular debt, liquidity profile remains sound due to presence of state owned/controlled counterparties. Moreover, comfort may be drawn from company’s stable cash flows, sizeable retail cash transactions and propensity of state support in distressed situations. The ratings are dependent on maintaining sound financial profile, retaining market share in the back drop of rising competition and focused management of trade debts and exchange rate risk.

Industry sales volumes decreased by ~22% in 9MFY19 primarily on account of decrease in sales of furnace oil (FO) and high speed diesel. Availability of cheaper substitutes such as re-gasified LNG and coal contributed to this trend. Excluding FO, volumes witnessed a reduction of ~9%, with second largest decline observed in HSD due to slower economic growth and increased smuggling. Going forward, industry sales are expected to remain under pressure due to further reduction expected in FO off-take in FY20 and pressure on HSD volumes due to slower economic growth. Pressure in industry off-take along with existing and new players competing for market share (over the last 2 years top 5 OMCs have lost market share to smaller OMCs) is expected to result in higher competitive intensity in the OMC sector. Government regulations requiring higher minimum capital investment by new OMCs and well-established storage infrastructure of large OMCs can dilute threat of increasing competition from new entrants.

Business risk profile of PSO has remained sound given that market leadership has been maintained despite overall decline in OMC volumes, increasing competitive intensity and decline in FO sales (historically PSO’s forte). Going forward, PSO has embarked on undertaking significant investment in storage, marketing and refining infrastructure in order to retain market share given the increasingly competitive landscape. Further, company has taken other initiatives in the non-fuel retail sector to strengthen market leadership. Overall profitability is expected to remain a function of quantum of inventory and exchange gain/loss and markup income on delayed payments.

For further information on this rating announcement, please contact the undersigned (Ext: 201) at (021)35311861-70 or Talha Iqbal (Ext: 213) or fax to (021)35311872-3.

Javed Callea

Applicable Rating Criteria:
Oil & Gas Industry (November 2016)
Industrial Corporates (May 2016)

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2019 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

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