PSO EARNING FUTURE OUTLOOK

Break down in supply chain, fuel shortages and nationwide loading shedding
are becoming major sources of concern as PSO receivables reach a daunting
Rs155bn of which, around Rs131bn is the circular debt.
It appears that this famous bubble of circular debt is on the verge of bursting. It
has reached its limit and is creating enormous amount of problems for Pakistan
State Oil as well as for other refineries. It has hurt PSO’s liquidity massively
causing it to default on local refineries payments in this month, as a result of
Rs131bn to PSO by the power sector. In fact the companies have continuously
defaulted on its payment obligations hence hampering PSO’s ability to meet its
creditors’ payments.
This delay in payments to refineries has, in turn, affected local production
which is a sign that if not taken drastic measures immediately, our country
would suffer severe shortage of fuel causing prices of petroleum products to
reach sky high.
Moreover, the deteriorating liquidity of PSO is making it difficult for it to meet
its international obligations, for which the company is struggling very
assiduously as any default on this end would disturb supplies which would then
take months to resume, thus creating a gap in imports as well.
Hence, it is a dire need for the company to receive its payments as any further
delays in the near future would cause fuel cargoes to be deferred, as PSO has
utilized all its resources for financing future product supplies. As far as the local
production of fuel oil is concerned, it is already in melancholy and imports are
needed to curb the supply shortages to avoid increased load shedding.
In a nutshell, PSO needs to receive its rightful share of cash in the nearest
future to avoid further hindrances in local production and import of fuel oil, to
evade the severe scarcity of the concerned product, rising prices and intense
load shedding; before it gets bankrupt.
We have a ‘Sell’ stance on PSO with FY12 expected EPS in the range of
Rs57/sh‐Rs60/sh.