KARACHI: Oil marketing companies (OMCs) are currently confronted with several challenges that are unlikely to abate anytime soon.
Analysts at Insight Research said that these challenges included: import constraints; increased L/C confirmation charges; significant PKR devaluation; and higher cost of working capital.
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OMCs have recently encountered a situation where their exchange losses are not fully adjusted, leading to a cash crunch.
OMC’s exchange losses are included in the fortnightly price adjustment set by OGRA, but recovery of these losses is sometimes delayed (Max: 3-4 months).
This leaves companies with no choice but to borrow from commercial banks in order to maintain a minimum inventory of 20 days.
In this rising interest rates environment, OMCs are facing an uphill challenge of maintaining profitability due to the escalating finance cost.
However, on the flip side, recent decrease in oil prices may provide some relief to OMCs on liquidity front, but this will result in higher inventory losses in fourth quarter of fiscal year 2022-2023 since the ex-refinery prices of Motor Spirit/High Speed Diesel are expected to decline by 13 per cent/15 per cent from current levels, assuming crude oil price $72/bbl and exchange rate of PKR282.
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The analysts said that Pakistan State Oil (PSO) is encountering an additional obstacle in the shape of circular debt.
As per latest financial accounts, company’s receivables have surged exponentially from PKR 220 billion in June 2021 to PKR 469 billion in December 2022 where SNGPL remains the biggest debtor with receivables of PKR 334 billion as of December 2022, followed by GENCO/CPPA (PKR 72 billion), HUBCO (PKR 18 billion).
To bridge the gap, PSO resorted to short-term borrowing which increased from PKR 56 billion in June 2021 to PKR 272 billion in December 2022.
Reportedly, PSO’s financial situation is deteriorating with its receivables reaching an all-time high of PKR 773 billion (SNGPL receivables: PKR 498 billion).
Similarly, short term borrowing has also increased to PKR 411 billion. Thus, with rising interest rates, finance cost is expected to reach PKR 29 billion. That said, increasing finance cost is likely to wipe out the thin bottom line.
In recent development, ECC has approved extending sovereign guarantee for PKR 50 billion to SNGPL whose payment will be made to PSO. However, PSO has reported that even with the PKR 50 billion commercial borrowing, its liquidity requirements will not improve as their requirement is PKR 156 billion.
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The analysts further said recently, Brent oil prices have come down to US$72.6, from average of $88.4/bbl in 2QFY23. This will double the trouble for OMCs particularly PSO which is already struggling with higher finance charges.