PSO to fund $1.5-2 billion investment with debt

Pakistan State Oil (PSO) has announced plans to raise foreign debt to finance a significant portion of its planned $1.5-2 billion investment in Pakistan Refinery Limited (PRL). Meanwhile, its receivables have surged to Rs810 billion, largely due to circular debt, including late payment surcharges.

At an analyst briefing on the financial accounts for the first nine months of FY24, officials from the state-owned oil marketing company revealed that PSO is diversifying its business. The company is setting up electric charging stations and venturing into the financial and renewable energy sectors to boost economic activities and increase earnings.

PSO also plans to expand its oil storage capacity from the current 20-day reservoirs and enhance its oil pipeline network in northern Pakistan to reduce road transportation of oil. However, demand for premium petroleum products dropped significantly in the outgoing fiscal year due to price increases and an overall industrial slowdown.

Following the briefing, Fabeeha Ali Khan, Energy Analyst at Optimus Capital Management, reported that PSO has announced the $1.5-2 billion investment needed for refinery upgrades, which will be largely financed through foreign borrowing. The cost of PRL’s front-end engineering design (FEED) study is quoted at Rs12 billion, with completion expected by October 2024.

PRL, a subsidiary of PSO, has initiated the refinery expansion and upgrade project (REUP) to double its crude processing capacity to 100,000 barrels per day and increase the production of premium products, including Euro-V petrol and diesel. The project is slated for completion by the end of 2028.

Myesha Sohail, Energy Analyst at Topline Research, noted that 60% of PSO’s total borrowing is currently denominated in US dollars. The company borrows dollars from banks and pays an interest cost, with exchange gains or losses borne by the government of Pakistan, not the company. She stated that 60% of PSO’s total borrowing is FE-25 borrowing.

Khan further explained that PSO’s trade debts, including late payment surcharges, currently stand at Rs810 billion, with over Rs500 billion owed by Sui Northern Gas Pipeline Limited (SNGPL). PSO does not expect any further debt accumulation from SNGPL, following discussions in February 2024, indicating that PSO will not allow further debt to accrue on RLNG provided moving forward.

Sohail added that other receivables include Rs150 billion from power generation companies (GENCO) and Rs27 billion from The Hub Power Company (HUBCO) and Pakistan International Airlines (PIA). However, PSO’s liquidity condition is expected to improve due to timely payments of LNG receivables amid a sharp increase in consumer gas prices.

PSO’s diversification and expansion plans include automation and digitization at its locations and retail outlets. Liquid oil consumption in Pakistan has dropped from 13 million tonnes in the first nine months of FY23 to 11.48 million tonnes in the same period of FY24, an 11.7% fall. HSD volumes declined by 249,000 tonnes, and PMG volumes fell by 302,000 tonnes, mainly due to lower industrial demand and smuggling.

Furnace oil (FO) usage also saw a decline of 982,000 tonnes as its usage in electricity generation has significantly reduced. Management expects a slight year-on-year increase in oil consumption in FY25.

PSO reported a 6% rise in sales to Rs2.67 trillion and a 30% increase in profit to Rs13.4 billion in the first nine months of FY24. In the third quarter of FY24, earnings per share (EPS) clocked in at Rs12.03/share, bringing the nine-month EPS to Rs28.54/share. Management described inventory losses as a ‘zero-sum game,’ with a minimum stock of 20 days leading to inventory gains or losses.