With seemingly no end in sight to the sliding global oil prices, oil marketing companies in Pakistan are facing the grim prospect of huge inventory losses, going forward.

“The sharp deterioration in oil prices by around 12pc during the quarter ending September 30 (1QFY15) over the previous year and the consequent reduction in petroleum prices were the prime reasons for the realisation of inventory losses for Attock Petroleum Limited (APL) in the three-month period,” said Muhammad Affan Ismail, oil and gas analyst at BMA Capital.

In a research report last Thursday, Hassan Raza, who follows the energy sector for Taurus Securities, asserted that “the significant drop of 35pc in global oil prices from the recent peak and the resulting reduction in POL product prices, especially of high speed diesel (HSD) and furnace oil, has unnerved investors, depicted by the 18pc slide in the market capitalisation of the oil and gas stocks in recent weeks”.

He says investors are concerned about reduced margins on furnace oil sales, together with sizeable inventory losses expected in the quarter ending December 31. Analysts at BMA estimate these losses to be around Rs550m, while those at Azee Securities (Pvt) Ltd put them at a possible Rs323m. Whatever the sum, it would compound the losses from the first quarter.

HSD is APL’s core product and contributed Rs26bn in 1QFY15. It was followed by furnace oil with Rs23.1bn and premier motor gasoline with Rs10.3bn.

The significant drop of 35pc in global oil prices from the recent peak has unnerved investors as depicted by the 18pc slide in the market capitalisation of the oil and gas stocks in recent weeks

The decrease in furnace oil margins is believed to be the second big worry for oil market companies (OMCs). But Hassan Raza believes that the decline in furnace oil margins for APL would be more than offset by the improvement in earnings of non-fuel products like bitumen and lubricants. During the period under review, the company established 12 new retail outlets, bringing the total number of commissioned sites to 480 by end-September.

The chief executive of APL, Shuaib A. Malik, blamed “stiff competition in the market, inventory losses and increased cost of doing business” for the drop in the after-tax profit for 1QFY15 to Rs1.258bn from Rs1.341bn in 1QFY14. Net sales, however, rose 17pc to Rs55.3bn.

JS Global analyst Syed Atif Zafar contended that the rise in sales was “owing to expansion in retail outlets, resulting in a higher market share of 10.1pc in 1QFY15 against 9.1pc in 1QFY14”.

APL’s liquidity seemed to be in some stress, as cash and cash equivalents stood at Rs5.9bn by end-September, down Rs1.76bn over the previous three months. Yet, the company has the benefit of the immunity from the biggest worry that is plaguing other OMCs — the mounting circular debt. By 1QFY15, its trade debts amounted to Rs16.9bn, but these were dues from its subsidiary companies, mainly ‘Attock Gen Limited,’ which owed it Rs6.4bn.

BMA’s Ismail built up a favourable case for APL “on the premise of increasing market share in cash-based products; healthy cash generation amid immunity to circular debt; and the highest dividend yield of 10pc in the downstream oil sector”.

However, the company’s CEO cautioned in his 1QFY15 report that “the intensity of competition in the oil market has increased with aggressive participation from new entrants”. He was possibly alluding to Total Parco, which KASB Securities’ Muhammad Saad Ali believed would take over about 500 pumps of Caltex, which is set to quit the retail fuel market next year.

“Total Parco will have more or about the same number of pumps as APL, but with a stronger brand name and better penetration in Sindh, and the competition is likely to get tougher,” he wrote. The analyst added that APL had also aimed at increasing its market share in Sindh to continue the strong sales growth achieved in the past.

However, an oil industry expert argued that APL’s market share was unlikely to come under threat, given its strong customer base in the industrial sector as well as in the armed forces.

The APL stock closed Thursday at Rs537.68 per share. The company has 83m outstanding shares, each of par value Rs10. The Pharaon Investment Group Limited Holdings has a 34.38pc controlling stake 38pc in the company. The group also has interests in National Refinery and Attock Refinery, among others.

By September 30, APL had a huge sum of Rs11.7bn in ‘unappropriated profit’. That could be an argument for shareholders’ demands for higher dividends, despite the company’s already big payouts — it had paid a 450pc cash dividend along with a bonus issue of 20pc in 2013.

Yet, the company’s board may feel the need for retention. Its CEO observed that “the development of bulk oil storage terminals at strategic locations across the country was underway”. The company may be retaining earnings for expanding its retail network, besides for investment in the storage terminals.

Published in Dawn, Economic & Business, December 8th , 2014