Financial Accounting

Ratio Analysis Report Between PSO & SHELL

Presented to:

Sir Athar Ikram Khan

ACKNOWLEDGEMENT

First and foremost, we express our gratitude to Almighty Allah, the sources of knowledge and wisdom

endowed to mankind.

The team would like to thank Sir Athar Ikram Khan for the opportunity given us to do this

interesting project, which has become very beneficial for us and also helped us at every step by his

guidance.

Pakistan State Oil (PSO) is the oil market leader in Pakistan enjoying over 82% share of Black

Oil market and 61% share of White Oil market. It is engaged in import, storage, distribution and

marketing of various POL products, including Mogas, HSD, Fuel Oil, Jet Fuel, Kerosene, LPG,

CNG and petro-chemicals. This blue chip company, the winner of "Karachi Stock Exchange Top

Companies Award" and a member of World Economic Forum, has been a popular topic of case

studies in Pakistan and abroad based on its radical corporate turnaround over the last few years.

In order to progress, every country requires a proper source of energy, to strengthen and

energize all the sectors responsible for development.

Pakistan State Oil, the largest energy company of Pakistan, is fuelling all the major sectors

including automotive, aviation, railways, power projects, industries and agriculture sector, thus

steering the national economy towards progress and stability.With extensive reach from Karachi

to Khyber, PSO is effectively fulfilling the responsibility of driving the nation towards growth

and development.

Vision

To excel in delivering value to customers as an innovative and dynamic

Energy company that gets to the future first.

Mission

We are committed to leadership in the energy market through a

competitive advantage in providing the highest quality petroleum products

and services to our customers based on:

(1) A professionally trained, high-quality, motivated workforce that

works as a team in an environment which recognizes and rewards

performance, innovation and creativity and provides for personal

growth and development.

(2) The lowest-cost operations and assured access to

long-term and cost-effective supply sources.

(3) Sustained growth in earnings in real terms.

(4) Highly ethical, safe, environment-friendly and socially responsible

business practices.

Core Values

Excellence

We believe that excellence in ourore activities emerges from a passion

for satisfying our customers' needs in terms of total quality management.

Our foremost goal is to retain our corporate leadership.

Cohesiveness

We endeavor to achieve higher collective and individual goals through

Teamwork. This is inculcated in the organization through effective

Communication.

Respect

We are an Equal Opportunity Employer, attracting and recruiting the

finest people from around the country. We value contribution of individuals

And teams. Individual contributions are recognized through our reward

And recognition program.

Integrity

We uphold our values and Business Ethics principles in every action and

decision. Professional and personal honesty, dedication and commitment

are the landmarks of our success. Open and transparent business practices

are based on ethical values and respect for employees, communities and

the environment.

Innovation

We are committed to continuous improvement, both in new products

and processes as well as those existing already. We encourage creative

ideas from all stakeholders.

Corporate Responsibility

We promote Health, Safety and Environment culture both internally and

externally. We emphasize on Community Development and aspire to

make society a better place to live in.

PROVIDING: 

Excellence in Customer Service

Total Quality Control

Health, Safety and Environment

Total Quality Control

Corporate Social Responsibility

Reform of Corporate Governance

Chronology of Events leading to the formation of:

 

Pakistan State Oil Co. Ltd. (PSO)

 

01-01-

1974

Federal Government takes over management of PNO (Pakistan

National Oil) and DPL (Dawood Petroleum Limited), renamed into

POCL (Premier Oil Company Limited) under marketing of

Petroleum Products ( Federal Control ) Act, 1974.

   

03-06-

1974

Government incorporates "Petroleum Storage Development

Corporation" PSDC.

   

23-08-

1976 Name of PSDC changed to State Oil Company Limited (SOCL).

   

15-09-

1976

Government purchases ESSO Undertakings, vests their control in

SOCL.

   

30-12- Government merges PNO and POCL into SOCL (State Oil

1976 Company Limited) and names it as Pakistan State Oil Company

Limited (PSO).

FINANCIAL HIGHTLIGHTS Recorded profit after tax of Rs 4.7 billion.

Recorded 46.2% market share in Mogas – highest in 10 years.

Increased CNG earning by 74% to Rs 355 million.

Maintained HSD share at 60.4% despite market fragmentation by 11 players.

Developed 150 New Vision retail Outlets (NVROs) bringing the total to

1,609.

“Green Station” concept introduced to give fresh look to New Vision retail

outlets

Commissioned 25 new CNG stations, raising their umber to 210

Introduced SSGC bills acceptance at PSO outlets

Completed the rehabilitation of Lubricant Manufacturing Terminal

ISO 9000 ACCREDITATION FOR Cards Division and Logistics

Department

Acquired 100% Defense Fuel Business for FY-08: PMG 13,000 metric tons,

HSD 18,000 metric tons and SKO 35,000 metric tons.

Acquired 2 million liters of Pakistan Railway Lubricant business

Managed uninterrupted POL supplies despite surge in off take by 21%

Supplied 6 million metric tons of FO; up by 50.4% over last year

Imported and supplied 200,000 metric tons LSFO to KAPCO, for the first

time after seven years

Imported about 9.6 million tons of HSD, HSFO, LSFO, JP-1, etc., (delivered

through 174 vessels)

Record supplies made to HUBCO in a month i.e., 255,000 metric tons in

May 2008(annual volumes about 1.70 million metric tons)

Report to Shareholders

The Board of Management of Pakistan State Oil Company Limited (PSO)

has reviewed the performance of the Company for the first half of financial

year 2010-11 and is pleased to present its report thereon.

During the period under review, your Company’s sales revenue touched

Rs. 427 billion as compared to Rs. 414 billion in the corresponding period

last year, representing a growth of 3.2%. Your Company was able to post

improved after tax earnings of Rs. 6.32 billion during the second quarter

as compared to Rs. 3.18 billion during the same period last year. Overall,

your Company posted after tax earnings of Rs. 7.13 billion during

as compared to Rs. 5.08 billion . Here it is worth mentioning

that on account of your management’s persistent efforts, the Federal

Board of Revenue and the Ministry of Finance agreed to revert the

turnover tax rate back to 0.5% from 1%.

Despite oil prices having remained relatively stable averaging around $79/bbl, the

country’s overall fuel consumption during the half declined by 2.7% as compared to the

corresponding period last year. This was primarily on account of the massive devastation

as well as the temporary closure of a few power generation companies caused by

the recent floods. In Black Oil, the industry declined by 3.2%, whereas

the White Oil industry declined by 2.2%. Your Company’s market share

in the Black Oil and White Oil segments stood at 79.2% and 55.0%,

respectively, thereby contributing to an overall market share of 66.3%.

The circular debt crisis continues to remain a serious problem with

receivables as at December 31, 2010 standing at Rs. 127 billion. The

resultant financial costs continue to depress the Company’s profitability.

Your management continues to make stringent efforts to reduce the

impact of the burdening financial costs through constant pursuit for

recovery of receivables from the power sector entities as well as from

the Government of Pakistan.

Based on this performance, the Board of Management has declared a

first interim cash dividend of Rs. 5 per share for the year ending June.

On account of the flood situation in the country, your Company served

as a national example by expeditiously deploying its resources and by

donating approximately Rs. 50 million was able to reach out to thousands

in need across the country. Despite all odds, your Company meticulously

ensured uninterrupted fuel supply to meet the energy needs of the

country by continuing operation of more than 90% of its retail network

whilst simultaneously working towards reviving its affected infrastructure.

Continuing along its tradition of providing for many diverse initiatives,

your Company recently partnered with The Citizens Foundation (TCF)

to establish a school campus in Tando Mohammed Khan, Sindh in respect

of which the Company will be providing for the costs of construction

and operation.

Your Company has recently been awarded the PCP Corporate Philanthropy

Award on the basis of being one of the top 5 public listed companies

that donated to social causes. In addition, your Company was also

recognized for its excellent performance at the 27th Corporate Excellence

Awards organized by the Marketing Association of Pakistan whereby PSO

was the recipient of the MAP Corporate Excellence Certificate in the

Oil and Gas sector.

The Board is confident that with the numerous brand building, marketing

activities and capacity building initiatives that are in progress, your

Company is fully geared to meet all future challenges.

Shell Helix has an over 100 years presence in the Subcontinent.

 

The Shell brand name enjoys a 100-year history in this part of the world, dating back to 1899 when

Asiatic Petroleum, the far eastern marketing arm of two companies: Shell Transport Company and

Royal Dutch Petroleum Company, began importing kerosene oil from Azerbaijan into the subcontinent.

Even today, the legacy of the past is visible in a storage tank carrying the date - 1898.

  The documented history of Royal Dutch Shell plc. in Indo_Pakistan subcontinent dates back to 1903

when partnership was struck between The Shell Transport & Trading Company and the Royal Dutch

Petroleum Company to supply petroleum to Asia.

 

In 1928, to enhance their distribution capabilities, the marketing interest of Royal Dutch Shell plc and

the Burmah Oil Company Limited in India were merged and Burmah Shell Oil Storage & Distribution

company of India was born. After the independence of Pakistan in 1947, the name was changed to the

Burmah Shell Oil Distribution Company of Pakistan. In 1970, when 51% of the shareholding was

transferred to Pakistani investors, the name of changed to Pakistan Burmah Shell (PBS) Limited. The

Shell and the BurmahGroups, retained the remaining 49% in equal propostions. In February of 1993, as

economic liberalization began to take root and the Burmah divested from PBS, Shell Petroleum stepped

into raise its stake to 51%. The years 2001-2 have seen the Shell Petroleum Company successively

increasing its share, with the Group now having a 76% stake in Shell Pakistan Ltd (SPL)- an expression

of confidence.

Shell at a glance

Currently Shell in Pakistan is headed by Mr. Zaiviji Ismail bin Abdullah, Chairman and Managing

Director of Shell Pakistan Limited (SPL) and Chairman of Shell Companies in Pakistan.

Shell has over 100 years of experience in developing the technology and services that make us a

leading provider of innovative and new fuels today. We were the first to introduce retail visual identity

on its forecourts.  We strive to meet and exceed customer expectations by delivering the best fuels and

service to our customers at every site, every visit, everyday. With a dynamic portfolio and a fast-

growing retail network, the Shell Brand is the most preferred brand amongst motorists across Pakistan.

Shell has always placed great importance on the health, safety and environment aspect of the society it

does business in. Safety is one of our top priorities, and we base our policies on the belief that all

accidents are preventable.

Over the last decade, SPL has developed a robust program of social investment, which supports

organizations and initiatives in the areas of health, education, welfare, community development,

heritage and environment. 

In an increasingly competitive business environment, we at Shell Pakistan strive ever harder to

maintain operational excellence. We strengthen standardized and simplified business processes and

systems, and ensure top quality, right quantity and superior service to all customers across the country.

Innovation:

Energy efficient fuels and lubricants ;

Lubricants

Energy-efficient lubricants for vehicles improve fuel economy. Shell Rimula R6 LE is our latest

lubricant. It reduces friction in the engines of trucks and buses, leaving a protective coating on engine

parts. Our other energy efficient lubricants include Shell Helix Ultra for better car efficiency and Shell

Omala HD for the smoother running of machinery. 

Fuels

Cleaner engines with less friction are more fuel efficient. Our scientists have developed an advanced

fuel economy that better prevents the build-up of engine dirt, reducing friction and raising fuel

efficiency.

Meeting demand

Drilling

New drilling technologies and techniques have extended the reach  of wells to more than 10 kilometres.

We have developed snake wells that are horizontal and can turn corners to access small pockets of oil.

We have also designed special metal casings called expandable tubulars that help us to build longer

wells.

Our Smart Fields® technology integrates digital information systems with the latest drilling, seismic

and reservoir monitoring techniques to better manage our operations.

Enhanced oil recovery

When an oil field reaches the end of its normal life, up to two-thirds of its oil can be left in the ground

because it is too difficult or too expensive to produce. Enhanced oil recovery (EOR) involves injecting

steam, gas or chemicals to bring more oil to the surface. Boosting production in this way could unlock

around 300 billion barrels of oil, according to the International Energy Agency.

Current Asset

Current Liabilities

RATIO ANALYSIS

A tool used by individuals to conduct a quantitative analysis of information in a company's financial

statements. Ratios are calculated from current year numbers and are then compared to previous years,

other companies, the industry, or even the economy to judge the performance of the company. Ratio

analysis is predominately used by proponents of fundamental analysis. There are many ratios that can

be calculated from the financial statements pertaining to a company's performance, activity, financing

and liquidity. We are Analyzing “PSO” and “Shell” according the ratios.

Note: Amounts are taken in Thousands

(000) in PKR

1. CURRENT RATIO

A liquidity ratio that measures a company's ability to pay short-term

obligations.

Calculated as:

 

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities

(debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current

ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the

company would be unable to pay off its obligations if they came due at that point. While this shows the

company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there

are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to

turn its product into cash. Companies that have trouble getting paid on their receivables or have long

inventory turnover can run into liquidity problems because they are 0unable to alleviate their

obligations. Because business operations differ in each industry, it is always more useful to compare

companies within the same industry.

=62,513,273

51,385,727

PSO Vs SHELL

=20,041,859

19,612,115

RATIOS:

1.02 1.22

ANALYSIS:

Turn over

PSO is in a better position to pay off its current obligations than Shell.

GRAPHICAL REPRESENTATION:

Liquid assets

Current Liabilities

PSO Shell0.9

0.95

1

1.05

1.1

1.15

1.2

1.251.22 Times

1.02 Times

PSOShell

2.QUICK RATIO

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to

meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the

position of the company.

calculated as:

Also known as the "acid-test ratio" or the "quick assets ratio". 

The quick ratio is more conservative than the current ratio, a more well-known liquidity measure,

because it excludes inventory from current assets. Inventory is excluded because some companies

have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid

off immediately, there are situations in which the current ratio would overestimate a company's short-

term financial strength.

.61

Analysis

PSO Vs SHELL

RATIOS:

=62,513,237-(29,562,055+1,583,913)

51,385,727

20,041,859-(8,244,054+140,239)

19,612,115

.60.61

=Sales

Net Assets

PSO and Shell are both in a same position to meet emergency needs.

Graphical Representation:

PSO Shell0

0.1

0.2

0.3

0.4

0.5

0.6

0.7 0.6 Times

0.6 Times

PSOShell

4 NET ASSET RATIO

Ratio shows how efficiently company is using its net assets in order to generate sales

Calculated as:

=3,49,706,326

20,939,217

PSOVs SHELL

=1,15,045,434

9,460,771

RATIOS:

12.16 16.7

ANALYSIS:

PSO is utilizing its assets 27.2% more efficiently than shell.

GRAPHICAL REPRESENTATION

PSO Shell0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.016.7

12.16

PSOShell

5.FIXED ASSET TURNOVER RATIO

Shows how much fixed assets are involved in generating revenue

Calculated as:

= TimesCredit Sales

Fixed Assets

=3,49,706,326

8.138,529

PSOVs SHELL

=1,15,045,434

6,579,993

RATIOS:

17.4842.96

ANALYSIS:

PSO is utilizing its fixed assets 59.3% more efficiently than shell.

GRAPHICAL REPRESENTATION

PSO Shell0

5

10

15

20

25

30

35

40

45

50

42.96 Times

17.48 Times

PSOShell

6.Stock ratio:

A ratio showing how many times a company's inventory is sold and replaced over a period.

=C g s

Avg. Stock

=Cost of Sales

Avg. Stock

Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted

because sales are recorded at market value, while inventories are usually recorded at cost. Also,

average inventory may be used instead of the ending inventory level to minimize seasonal factors.

 

A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong

sales or ineffective buying.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero.

It also opens the company up to trouble should prices begin to fall.

A ratio showing how many times a company's inventory is sold and replaced over a period.

Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted

because sales are recorded at market value, while inventories are usually recorded at cost. Also,

average inventory may be used instead of the ending inventory level to minimize seasonal factors.

 

A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong

sales or ineffective buying.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero.

It also opens the company up to trouble should prices begin to fall.

.

=3,37,446,896

28,865,344

PSO Vs SHELL

=1,08,664,932

91,11,970

RATIOS:

11.9 11.7

ANALYSIS:

Both Companies are converting Stock into sales at the same pace.

GRAPHICAL REPRESENTATION

PSO Shell11.55

11.6

11.65

11.7

11.75

11.8

11.85

11.9

11.95

11.7 Times

11.9 Times

PSOShell

=4,689,798

1,71,519

PSOVs SHELL

=706,659

54,790

RATIOS:

12.90 27.3

ANALYSIS:

7. EARNINGS PER SHARE – EPS

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as

an indicator of a company's profitability.

Calculated as:

PSO‘s shareholders are getting more profits as comparison with Shell.

Graphical Representation

PSO ShellPKR 0.00

PKR 5.00

PKR 10.00

PKR 15.00

PKR 20.00

PKR 25.00

PKR 30.00 Rs 27.30

Rs 12.90 PSOShell

= x 100Profit After Tax

Credit Sales

= x 1004,689,798

3,49,706,326

PSOVs SHELL

= x 100706,659

1,15,045,434

RATIOS:

0.61%1.34%

ANALYSIS:

8. Net Income Ratio

The ratio of net income to revenues for a company or business segment - typically expressed as a

percentage – that shows how much of each dollar earned by the company is translated into profits.  Net

margins can generally be calculated as:

PSO generates 55% more profit from its revenues as compared to Shell.

GRAPHICAL REPRESENTATION

98.66%

1.34%

PSO

SalesProfit

99.39%

0.61%

Shell

SalesProfit

PSO Shell0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

0.0134

0.61%

PSOShell

NET WORKING CAPITAL

Net Working Capital

PSO is in a good position by polling fewer resources in working capital and generating more Net profit

ratio 1.34% hence using a Balanced Approach. Due to which the return on capital employed is 22.39%,

interest cover 7.15 and dividend cover 1.3 times which is a good indication for the company.

Shell is in an overtrading position and polling more resources in working capital and generating less

Net profit 0.60% hence using Aggressive approach. Due to which the return on capital employed is

only 7.46%, interest cover 1.41 and dividend cover 0.8 times which is itself a threat for the company

= Current Assets – Current

= 62,513,217– 51,385,727

=11,127,546

= Current Assets – Current

= 20,041,859 – 19,612,115

= 4,29,744

NEW INVESTMENT OPPORTUNITY

PSO being a blue chip company has a great opportunity with overall good performance while in

Pakistan having great opportunity of petroleum products PSO is in a better position to go for new

projects like importing, storage, distribution and marketing of various POL products, including Mogas,

HSD, Fuel Oil, Jet Fuel, Kerosene, LPG, CNG and petro-chemicals. It can raise capital from number

one giving new shares or number two taking loans but as the interest rate is going up and price level

are rising number one option is best.

Shell although having not a bad performance but due to due to investors lack of interest having a low

dividend cover and low interest cover new projects can’t be taken at the moment in the current scenario

Shell needs to stabilize its position increase its market share.