Shell Pakistan Limited

September 11, 2012 RECORDER REPORT 0 Comments Shell Pakistan is one of the oldest multinational companies in Pakistan and the history of the company in Indo-Pak subcontinent dates back to 1903 when Shell Transport and Trading Company and Royal Dutch Petroleum Company decided to merge and supply petroleum to Asia. The company came to be known as Burmah Shell Oil Storage and Distribution Company in 1928 in India with the merger of Royal Dutch Shell Plc and Burmah Oil Company.

Later in 1947, the company was named Burmah Shell Oil Distribution Company of Pakistan which became Pakistan Burmah Shell (PBS) Limited in 1970 when Pakistani investors gained 51 percent of the shareholding. In 1993, the Burmah Group divested from PBS and Shell Petroleum jumped in to raise its stake to 51 percent. Today, Shell Petroleum is a 76 percent majority stakeholder in Shell Pakistan Limited. The company is amongst the three oil marketing companies included in KSE100, the other two being PSO and Attock Petroleum Limited.

Business Activities & Highlight - 1HCY12 Shell Pakistan Limited operates in retail, aviation, lubricants and commercial fuels. Within the retail business, the company is the largest player in the foreign retail segment and provides fuel to over one million customers daily. With over 800 retail outlets, Shell Pakistan limited is the only petrol retailer in the country to offer premier fuel.

The company is a global leader in lubricants. The company has three major lubricant brands: Shell Helix, Shell Rimula and Shell Advance, which have gained prominence not only globally but also within the country. These lubricants are market leaders across passenger cars, bikes and heavy duty vehicles. The company also provides world-class domestic heating oils, commercial road transport, industrial and wholesale products to business customers. Shell Pakistan Limited is also one of the key suppliers of fuel to IPPs in Pakistan. The company has a significant representation in the aviation industry as well. The poor economic conditions in the country, coupled with outstanding receivables from the government are the most significant challenges for Shell Pakistan Limited. The first half of CY12 was no different as the company's performance subsided owing mostly to the abovementioned factors.

As far as the industry dynamics are concerned, the company blames the regulated and fixed petrol and diesel margins that they are unable to absorb the rising operating cost and the cost to finance investments and government receivables.

Financial Performance Shell Pakistan Limited gets 99 percent of its revenues from the fuel sales and exports and gets the remaining from the non fuel retail. Net sales, which include revenue from both fuel and non fuel segments, showcased a slowdown in the growth during 1HCY12 with net sales declining by

11

percent

YoY.

Shell Pakistan has continued to make significant investments in marketing activities in both the retail and lubricants businesses leading to significant growth in motor gasoline and consumer lubricants sales. However, the crunch in the top line during 1HCY12 could be attributed primarily to lower local fuel oil sales and somewhat to the ban on the export of petroleum products to Afghanistan along the Nato supply routes, during the beginning of the year.

Likewise, the bottom line during 1HCY12 also turned sour due to a multitude of reasons such as high inflation, increasing government receivables, volatile oil prices, security threats and growing cost of doing business. The gross profit incurred a major blow of 47 percent YoY during the period under review and gross margins moved from almost seven percent in 1HCY11 to 3.4 percent in 1HCY12. Even though the company was able to reduce overall costs by nine percent during 1HCY12 versus that of 1HCY11, the operating profits plunged in the wake of reduced sales revenues.

Adding to the agony, the net earnings were marred not only by the above mentioned reasons but also by the rising cost to finance the government receivables where a large part of them remained overdue. The profitability during 1HCY12 plunged to a loss of Rs 1.99 billion as against a profit of Rs 1.41 billion in the same period last year, and net margins turned negative.

Liquidity & Efficiency At a time when the oil prices are very unpredictable and the cost of doing business is galloping at a fast pace, the regulated margins on diesel and petrol in Pakistan remain the lowest in the region. This is a threatening situation for the operational efficiency of the company and hence the oil marketing segment.

Although Shell Pakistan Limited does not have any long term loans on its balance sheet as of 1HCY12, the financial soundness and short term solvency of the company attracts attention as the company has been trying to sort out its working capital issue through short term loans and financing. On the brighter side, through the collection of old debts, the company was able to improve its operational cash flows. However, the challenge of delayed receivables remains the most significant problem for the company as the OMC is on one extreme of the value chain. As on June 30, receivables of Shell Pakistan stood at Rs 7.9 billion and Rs 2.6 billion in terms of tax refunds and fuel price subsidies respectively. Outlook Shell Pakistan Limited has been facing dismal volumes underscored by lower fuel oil sales, especially locally. The margins on the regulated petroleum products like diesel and motor spirit stand around two percent of the selling price.

One challenge that the company and the OMC sector deters to is the impact of minimum tax on turnover. The minimum tax regime charges incomes tax to the company on selling price basis. In a rising price scenario, this practice increases the tax liability, and amid no foreseeable lift to the margins, the industry has been asking for some equality with other industries. Moving forward, the situation is clamouring for a

recovery in the circular debt crisis, and attention towards the corporate taxation, and a quick resolution of delayed government receivables more than any thing else.

SHELL PAKISTAN LIMITED ============================================================= mn (Rs) 1HCY10 1HCY11 1HCY12

============================================================= Net Sales Gross Profit Operating Profit Net Profit 90,152 5,730 2,036 720 116,318 7,559 3,249 1,407 103,835 3,999 116

(1,988)

------------------------------------------------------------Profitability ------------------------------------------------------------Gross margin Operating margin Net margin ROA ROE 6.4% 2.3% 0.8% 2.0% 9.9% 6.5% 2.8% 1.2% 2.8% 16.1% 3.9% 0.1% -1.9% -4.6% -31.7%

------------------------------------------------------------Liquidity and Efficiency ------------------------------------------------------------Current ratio 0.79 0.91 1.15 2.45 0.86 2.13 2.31 2.11 2.42

Short term debt to equity Total asset turnover

-------------------------------------------------------------

Market ------------------------------------------------------------EPS 10.52 16.44 -23.23

Business Segments

We support our infrastructure customers throughout the world. Our effective paving solutions can help you keep communities on the move to improve trade and access to services, and to build safer and more attractive places to live.

Main Roads
Effective paving solutions help keep commercial vehicle and car drivers safe and on the road and withstand the demands of high volume inter-city road networks and highways

Main roads

Main roads and highways usually extend from one state or province to another and also serve as the main routes for the commercial transportation of goods over long distances.

Challenges

With the heavy traffic demands, a pavement solution which is durable and quick to lay is essential. They are often high-speed networks - effective paving solutions are essential in helping to keep commercial vehicles and car drivers safe on the road. Safety is paramount in the design and laying of main roads, with features such as skid resistance, water spray management, and luminescence key in helping reduce the potential for high-speed accidents. Main roads come with their own set of demands and challenges, including:

Increased speeds and traffic intensity, as well as elevated vehicle weights; Severe climate conditions leading to potential for cracking and high-speed skidding; Air and noise pollution; Maintenance and repair work during peak times; and Cost-efficiency in budget-restricted times.

Solutions
Our solutions are designed to withstand the demands of high volume inter-city road networks and highways. With heavy traffic demands, a pavement solution which is durable and quick to lay thus reducing maintenance downtime is essential to keeping the traffic flow moving and keeping the roads open. The volume and intensity of traffic on main roads creates the ideal opportunities to fully utilise Shell Bitumens technical innovations such as premium binders for porous asphalt to help increase road safety and efficiency. With improved workability to reduce the paving window and increased durability, the lifecycle cost of main roads is considerably reduced. With higher adhesion rates, there can be a reduced risk of water ingress and associated maintenance costs. Speed is a key factor not only the speed of the traffic on the road but responsiveness to our customers needs; a reliable supply of bitumen from a sustainable source, delivered on time, using a first class delivery network. This all helps our main roads remain open, minimising disruption to road users.

Urban Roads
Pavement solutions to withstand the needs of busy urban areas, as well as adding a splash of colour to neighbourhoods bringing towns and cities to life

Urban roads

In the hustle and bustle of a modern urban environment, effective paving solutions help keep large communities safely on the move. Surfaces within cities, towns and villages include cycle and bus lanes, pedestrian and recreational areas, heritage spaces and of course roads. All need to withstand the rigours of modern-day urban life, including increasingly heavy traffic flows.

Challenges

Shell Bitumen's extensive product portfolio provide innovative solutions to the challenges of urban roads. The demands placed on our urban roads are tough: Intense traffic flows; Increasing static loads due to traffic congestion and at junctions; Variable speeds and uses; Changeable climate conditions that can cause cracking, rutting and skidding; and Air and noise pollution. For town planners and highway maintenance engineers, there are additional challenges:

Balancing aesthetic appeal with a durable solution; providing pavements that are sympathetic to the local environment, for example heritage sites; Minimizing disruption and road closures for surfacing or resurfacing and maintenance works; and Ensuring a competitive life-time maintenance cost.

Solutions
Our solutions are designed to meet the needs of busy urban areas and to provide durable, innovative and long-life solutions which are both quick to lay and to cool. We also offer the flexibility to adapt the look and feel of the road to the local environment; by adding a splash of colour it is possible manage traffic flow more effectively through the creation of bus and cycle lanes, helping to enhance road safety and bring towns and cities to life. Shell Bitumen has created an extensive product portfolio to bring fast setting solutions to road surfacing contractors across the globe. Given the heavy volumes of traffic in urban areas, we work hard to ensure that the disruption caused by road maintenance is kept to a minimum; by increasing the durability of our products, future maintenance needs are reduced; by improving the workability of our products, we can help to shorten your paving window. Urban roads have a wide variety of uses and our technical teams are experienced in creating solutions that fit individual pavement needs.

Rural Roads
Creating and maintaining an effective road network for rural areas, particularly in developing countries, is essential to support rural economies. The benefits are social as well as economic giving communities access to health and educational facilities

Rural roads

In rural areas, particularly in developing countries, the road network may not be highly developed roads could be paved, gravel or even completely unpaved dust tracks. Whatever the structure, these roads are key economic drivers, providing essential links between villages and farms and their local and regional markets. Roads also provide wider social benefits, giving rural and often isolated communities vital access to schools and hospitals.

Challenges

Shell Bitumen's product portfolio provides cost-effective, durable solutions for rural roads. Creating and maintaining an effective road network for rural areas is essential in supporting rural economies. The challenges faced by rural roads include:

Improving durability, particularly under intense rainfall and monsoon conditions; Reducing or eliminating the dust that gravel/earth roads produce; Providing a system that can be operated easily without complex machinery, using locally sourced aggregate; Providing an affordable paving system that can be financed by local government and communities; and Delivering materials to remote areas.

Solutions
We provide sustainable solutions to improve the quality of life for local rural communities. We have developed solutions such as Shell Instapave, manufactured on site, using binder that can be transported cold in drums. And, being fully mobile and not needing the batch plant, it can be used in remote areas. It has been used successfully in the Philippines, India and El Salvador. We recognise that a strong road network is a lifeline to rural communities, especially in countries

where budgets are considerably restrained. We offer durability and quality whilst recognising that the roads often see relatively low volumes of traffic. We do not over-engineer products but offer fit-for-purpose solutions that provide value-for-money.

Heavy Duty
Airports, ports and railways require paving solutions that can withstand extremely heavy loads and high pavement stress

Heavy Duty

Airports, ports and railways require paving solutions that can withstand extremely heavy loads and high pavement stress. These pavements are subject to sustained loads, often in channels such as loading bays which can lead to rutting.

Challenges

Extreme conditions involved in heavy-duty applications challenge paving solutions to their limits. The extreme demands on heavy duty pavements present their own challenges. In airports, in particular, safety is of paramount importance and the surface must be able to withstand:

Elevated weight loads; High and varying speeds; Severe weather conditions; and Increasing traffic frequency. Whats more, it has become more important than ever to keep operation down-time to a minimum due to increases in airport traffic. Paving windows are becoming shorter.

Solutions

Shell Bitumen operate the highest standards of HSSE to ensure all deliveries are as safe as possible We have developed technical and operational solutions to meet these challenges. For example, Shell Bitumen S-Grade binders are used in airfield applications being designed to deliver, compared to conventional bitumens: Improved asphalt performance through increased stiffness, better rutting resistance and improved adhesion performance; Improved workability of hot mix asphalt which makes it quicker to lay; Better asphalt compaction to help runways to be laid quicker; Extended laying window and transportation time and distance when asphalt manufactured at conventional temperatures; and Reduced energy costs and emissions with asphalt manufactured at lower temperatures. We offer end-to-end solutions, from the development of bespoke mixes to meet individual specifications to the delivery of bitumen on site. We work in close collaboration with contractors and airport owners to develop proven pavement systems that are both safe and offer the best possible long term cost over the life cycle of the runway. Our in depth knowledge and experience of the bitumen market enables us to pass on our expertise to contractors, creating durable products with increased workability to help minimize the paving window and reduce its impact on operations.

Industry
Industrial applications for bitumen are extremely varied but the core applications include roofing, flooring and sealing

Industry

Industrial applications for bitumen are extremely varied; core applications include roofing, flooring and sealing on both an industrial and DIY level. The waterproofing properties of bitumen make it an ideal sealant, filler or adhesive, whatever the scale of the project from dams, reservoirs and canals to domestic roofs and floors.

Challenges
The waterproofing properties of bitumen have been recognised for thousands of years and used for a range of hydraulic applications including:

canal lining; reservoir lining; dam construction; sea wall construction; coastal groynes; and lining leisure lakes.

Solutions
Large-scale The two principal properties that make bitumen ideal for industrial applications are its impermeability and the fact that it is chemically inert. One great advantage of asphalt is that it can be laid on a dam or reservoir face in a continuous manner, thus eliminating joints which can become points of weakness and cause leaks. Small-scale Shell Bitumen is applied in the form of mastic asphalt for roofing, flooring, paving or tanking and is capable of out-performing and outlasting all other comparable materials used in such applications. In the DIY market, a variety of bitumen based sealants, fillers and adhesives are available to householders from the roof to the basement.