VIS assigns initial entity ratings to Pakistan State Oil Company Limited

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VIS assigns initial entity ratings to Pakistan State Oil Company Limited

June 19, 2019

Karachi, June 19, 2019 (PPI-OT): 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 and 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 more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873

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