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)

01-011974

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.

03-061974

Government incorporates "Petroleum Storage Development Corporation" PSDC.

23-081976

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

15-091976

Government purchases ESSO Undertakings, vests their control in SOCL.

30-121976

Government merges PNO and POCL into SOCL (State Oil 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 Companys 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 managements 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 countrys 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 Companys 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 Companys 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 fastgrowing 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.

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:

Current Asset Current Liabilities

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.

Turn over

PSO

Vs

SHELL

62,513,273 51,385,727

20,041,859 19,612,115

RATIOS:
1.02

1.22

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

GRAPHICAL REPRESENTATION:

1.25 1.2 1.15 1.1

1.22 Times

PSO 1.05 1 0.95 0.9 1.02 Times Shell

PSO

Shell

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:
Liquid assets Current Liabilities

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 shortterm financial strength.

PSO

Vs

SHELL

62,513,237-(29,562,055+1,583,913) 51,385,727

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

19,612,115

RATIOS:

.61

.61

.60

Analysis PSO and Shell are both in a same position to meet emergency needs. Graphical Representation:

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

0.6 Times

0.6 Times

PSO Shell

PSO

Shell

4 NET ASSET RATIO

Ratio shows how efficiently company is using its net assets in order to generate sales Calculated as:
Sales Net Assets

PSO

Vs

SHELL

3,49,706,326

=
20,939,217

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

18.0 16.7 16.0 14.0 12.16 12.0 10.0 PSO 8.0 6.0 4.0 2.0 0.0 PSO Shell Shell

5.FIXED ASSET TURNOVER RATIO

Shows how much fixed assets are involved in generating revenue Calculated as:

Credit Sales Fixed Assets

Times

PSO

Vs

SHELL

3,49,706,326

=
8.138,529

1,15,045,434

=
6,579,993

RATIOS:

17.48 42.96

ANALYSIS:

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

GRAPHICAL REPRESENTATION
50 45 40 35 30 25 20 15 10 5 0 PSO Shell 17.48 Times PSO Shell 42.96 Times

6.Stock ratio:
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.

Cgs Avg. Stock

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.

Cost of Sales Avg. Stock

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.

PSO

Vs

SHEL L
1,08,664,932 91,11,970

3,37,446,896 28,865,344

RATIOS:
11.7 11.9

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

GRAPHICAL REPRESENTATION

11.95 11.9 11.85 11.8 PSO 11.9 Times

11.75
11.7 11.65 11.6 PSO Shell

Shell

11.7 Times

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

Vs

SHEL L

4,689,798

=
1,71,519

706,659 54,790

RATIOS:
12.90

27.3

ANALYSIS :
PSOs shareholders are getting more profits as comparison with Shell.

Graphical Representation

PKR 30.00 Rs 27.30 PKR 25.00

PKR 20.00

PKR 15.00

Rs 12.90

PSO Shell

PKR 10.00

PKR 5.00

PKR 0.00 PSO Shell

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

Profit After Tax Credit Sales

x 100

Vs

SHELL

4,689,798

=
3,49,706,326

706,659 x 100

=
1,15,045,434

x 100

RATIOS:

1.34%

0.61%

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

GRAPHICAL REPRESENTATION

PSO
1.34%

Shell
0.61%

Sales Profit 98.66% 99.39%

Sales Profit

1.60%

1.40%

1.34%

1.20%

1.00%

0.80% 0.61% 0.60%

PSO
Shell

0.40%

0.20%

0.00% PSO Shell

NET WORKING CAPITAL

= Current Assets Current Liabilities = 62,513,217 51,385,727 =11,127,546

Net Working Capital

= Current Assets Current Liabilities = 20,041,859 19,612,115 = 4,29,744

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

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 cant be taken at the moment in the current scenario Shell needs to stabilize its position increase its market share.