It would not be a stretch of the imagination to say Hascol had a bit of a touch-and-go moment back in 2019. It was the story of a dizzying high followed by what can only be described as an abysmal low.
Up until 2018, Hascol was the second largest Oil Marketing Company (OMC) in Pakistan, trailing only the state owned Pakistan State Oil (PSO). In less than a decade from 2009 to 2018, they had grown their revenue from Rs 9 billion to Rs 254 billion. But the growth had come at a price. Hascol had been borrowing to make this growth happen, and in 2019 it turned out they did not quite have the means to pay back their creditors.
Behind this glittery rise and dramatic fall were a host of reasons. Exchange losses, the nature of the OMC business in Pakistan, and Hascol’s unique supply chain all contributed to the company’s crisis of 2019.
But what about now?
Well, it seems we have a recovery on our hands. For the first time in three years, Hascol’s share price has breached the Rs 10 mark after a wait of more than 3 years. In just a month, the company’s stock price has gone up 92% and the word in the market is that it will continue to increase. What compels a company that was in hot water with its creditors a few years ago suddenly to turn around? The recent rally is ascribed to a successful restructuring plan being passed which will help it get back on its feet.
It seems the restructuring has been enough to at least convince the market that the restructuring will help it to become profitable again. The only question is whether this restructuring will be enough to address the deep rooted issues that brought the company to this brink in the first place.
Understanding the OMC business
The first thing you need to know about Hascol Petroleum is that it is an oil marketing company (OMC). This means it operates its own petrol stations, licences franchisee stations and sells petroleum products throughout the country. It was granted its oil marketing licence in 2005 and saw a meteoric rise as it became the second largest OMC behind Pakistan State Oil by 2018. Guided by Saleem Butt, a veteran energy executive who was its COO and later CEO, the company was able to become the second biggest player in the market. Based on earliest accounts available, it was seen that it was earning net revenues of Rs 9 billion in 2009 which had increased to Rs 234 billion by 2018.
Now, the OMC business is interesting in Pakistan. In many countries around the world, prices of petroleum products are pegged to the price of oil. As the price of oil changes on a daily basis, the rates of the products are changed regularly. In Pakistan, petroleum prices are determined and set by the Oil & Gas Regulatory Authority (OGRA) on a 15 day basis. This means that oil marketing companies have little to no control over the prices at which they sell. The problem is compounded in bearish markets when companies have bought the oil at a higher price and the local petroleum prices are revised downwards owing to oil markets receding.
In addition to that, oil is imported in its raw form by oil refineries who then sell the refined product to the marketing companies. As oil is traded in dollars, any depreciation of rupee means that even if oil prices remain the same, they cost more to the local companies. Hascol added another layer of complexity to the whole system. Not only were they limited by price increases and were exposed to dollar appreciations, the company was buying most of its fuel from foreign sources. Other OMCs were buying their product from local refinery companies which means their cost is mostly immune to dollar changes. Hascol was following the same model up till 2015 where it was buying most of its fuel from Pakistan Refinery Limited.
You see, in 2015, Hascol changed its model. Vitol, a Dutch energy giant, collaborated with the company to set up a storage facility which added 232,000 cubic metres of capacity. As this partnership developed, Hascol started to import its fuel rather than sourcing it from local refineries. In 2016, records show that it bought 77% of its fuel as import from Vitol Bahrain. By 2017, this had increased to 79%. In 2012, Hascol had bought 70% of its fuel from Pakistan Refinery which started to decrease and in a space of 6 years, imported fuel made up a bulk of its purchases. Vitol also ended up investing as it bought 25% of the shares by 2016. There was also a joint venture for Liquified Natural Gas (LNG) between the two companies as well.
Shifting its source of fuel did not prove to be a problem initially as profits continued to grow. It was only in 2018 that Hascol started to see the impact of its decision. As the rupee started to depreciate, exchange losses jumped from Rs 4 crores to Rs 4 billion in a space of two years alone. Hascol could not increase its margins due to price restriction and as the rupee started to depreciate, the profits started to take a hit.
On top of this, as Hascol started to grow in size, the company started to take loans in order to fund much of its expansion as well. Hascol was able to see gross profits of Rs 10 billion, operating profit of Rs 6 billion due to increased revenues. As the revenues were increasing, Hascol was seeing improved profits, however, net profits actually fell from Rs 2.7 billion in 2017 to Rs 65 crores in 2018. This was primarily caused by exchange losses experienced due to rupee depreciation. To understand the internal workings of Hascol, a deeper understanding of the OMC industry in Pakistan needs to be gained.
It seemed like the worst had already happened but then 2019 rolled around.
The disaster of 2019
The depreciating currency and increasing costs of the companies are a legitimate reason that could lead to a fall in profitability of an OMC. Most of the other companies operating in this space saw losses in 2019 primarily caused by the exchange losses. But the performance at Hascol showed a completely different picture. Companies making losses can be considered to be part and parcel of the industry but Hascol saw losses of Rs 26 billion in 2019 where they had earned a profit of Rs 21 crores just a year ago. It ended up making a gross loss in 2019 of Rs 2 billion which meant that the company sold its products at a lower price which could not even cover its basic costs. In addition to that, additional losses of Rs 6 billion were recorded due to volatility in the oil market. This did not include exchange losses which were Rs 2.4 billion in a separate account and finance costs increased from Rs 1.3 billion to Rs 7.5 billion. The company had been pursuing an aggressive strategy of expanding by borrowing from banks which led to such a huge interest expense. All of these factors contributed to losses of Rs 26 billion being recorded.
The figure of Rs 6 billion in import losses is something that raised concern initially. The fact that the company is stating that it had to bear this loss due to volatility in the market holds little water as none of the other OMCs suffered losses to the same magnitude. Something else that needs to be considered here is that Hascol also restated their accounts for 2018 and 2017 as it felt that it had not transferred complete losses in the previous years. Restatements are normal, however, occurrence of them after the company making huge losses can be considered a red flag as they can be used to spread losses of current years into past years. Rumours of a scam or a deceptionary scheme were rampant at the company and one way to hide such scams is to record losses. It was uncovered later that some company insiders had allegedly stolen from the company.
Seeing the magnitude of the losses, the creditors of Hascol started to get concerned. Most of the growth was fueled through the use of bank loans and borrowings had increased from Rs 59 crores in 2009 to Rs 92 billion in 2019. Even in the face of losses, more loans were taken in order to finance the working capital needs. As the lenders started to get antsy, there was little that could be done to pay back the loans. The management decided to issue right shares in order to shore up some capital. Vitol also showed trust in the company as they took their shareholding from 28% to 40% as a show of strength.
With things looking bleak, the company was dealt the final blow in the form of the pandemic as demand for petroleum products plummeted further. Net revenues fell from Rs 154 billion to Rs 113 billion and the company started to see a sustained period of net losses on its books that has not stopped. As the losses had piled up, the company has seen its equity go into the red while its liabilities have ballooned out of control. In 2018, accumulated profits were at Rs 6.2 billion which have plummeted to Rs -107 billion while current liabilities have risen from Rs 56 billion to Rs 120 billion. In total, the liabilities of the company clocked in at Rs 129 billion while its total assets are worth Rs 42 billion.
The fundamental flaw that has persisted at the company is that the company started to buy its fuel from foreign sources compared to other OMCs relying on local refineries. As Vitol started to sell to Hascol, the cost of the fuel was much higher compared to the remaining market. From 2009 to 2023, Hascol earned a gross profit margin of 2.96%. At the same time, companies like Shell and Attock Petroleum earned 6.64% and 4.57% respectively. The situation becomes bleaker when the period before Vitol’s investment is considered. From 2009 to 2015, Hascol earned a gross profit margin of 3.27% while in the later part it fell to 2.68%. In the same period, Shell saw a return of 5.33% before 2016 and 7.79% after 2016. Attock Petroleum also saw improved performance as its gross profit margin increased from 3.66% before 2016 to 5.29% after 2016. The only company that is earning similar gross margins as Hascol is Pakistan State Oil (PSO) which saw a similar ratio, however, the net revenues of PSO for 2023 came around Rs 3.6 trillion compared to Rs 162 billion for Hascol. Even if PSO is earning similar margins, the volume of its sales more than makes up for its lower margins. Hascol does not have any similar saving grace.
This analysis shows that when other companies were seeing better gross margins, Hascol was seeing its gross margins actually fall which raises questions at the business model that the company has been following. While other companies have been able to earn greater gross profits on their margins, Hascol is lagging behind the industry as its gross margins are much lower than the market.
The basic flaw already existed at the company and then the performance of 2019 and the pandemic only made things worse. With debt piling up, even when the revenues have rebounded in 2023, the company is still being buried under higher finance costs resulting from its earlier decision making. The recent depreciation of the currency and the record high interest rates have hit Hascol like a perfect storm.
The rupee has depreciated further from Rs 150 to Rs 280 where it stands now and the interest rates that are being applied by the creditors have hit a record high of 22%. The company has been able to earn gross profits in the last 5 years, however, due to the costs associated, it has made consistent operating and net losses.
The business model chosen seems to be stuck between a rock and a hard place. At one end, Vitol has made a conscious decision to invest in Hascol and to sell oil refined at its subsidiaries to be sold to Hascol which bodes well for its subsidiary in Bahrain. While it does that, it is forcing Hascol to absorb huge losses that cannot be recovered based on the pricing structure that has been put into place. It seems Vitol is fine with maintaining losses on the books of Hascol while it allows its Bahrain subsidiary to earn.
What about all the other stakeholders?
At one end of the spectrum are the lenders who have lent to Hascol and want a path where they can expect to see these funds returned to them. With losses becoming part of the history on a consistent basis, the best course of action for them was to file petitions against Hascol to recover their funds. The company was looking to restructure the loans of the banks to some extent back in 2019 and had even presented their plan to the courts in 2022 which are under consideration.
The options that have been given to the creditors seem lopsided in favour of the company to say the least. The first option was to convert the short term loan into a long term loan to be paid back in 10 years with a grace period of 2 years. This option would not accrue any markup or interest and that all the loan will be paid off in 12 years. The second option is to allow the company to use the short term funds for working capital needs and they will be treated like running finance facilities which will be paid back in a minimum period of 10 years as well. The last option available is to take a 70% cut and to get the remaining 30% in order to waive off all the rest of the liability that is owed.
While this has been going on, the Federal Investigation Agency (FIA) and Securities and Exchange Commission of Pakistan (SECP) have also tried to carry out an investigation against the company to uncover whether something other than normal had taken place. FIA launched a probe into an alleged Rs 54 billion scam that had taken place at the company. The investigation stated that Hascol, Byco Petroleum and management at National Bank of Pakistan had conspired to gain loans in violation of risk controls and banking practices. The SECP also wanted to launch their own investigation by carrying out a forensic audit which was thwarted by Hascol when it approached the Sindh High Court.
Some recent developments have come to light which might show that the situation at the company might be changing. First, Taj Petroleum stated that they were interested in taking over the company in 2023 and, a few months back, Millat Global Holdings showed an interest to buy the major shareholding from the substantial shareholder of the company. Neither of these negotiations amounted to anything but now it seems that there is interest in the company. For the first time in three years, the share price of the company has crossed the Rs 10 mark after languishing in single digits.
The restructuring gambit
The rise in the share price does signal towards the fact that some sort of restructuring will take place in the coming days, however, considering that as the cure to all the ills will be premature. The financial turmoil the company has faced is still persisting with losses being suffered and there is little in the way of better margins being earned by the company. Even if the courts and creditors accept the restructuring plan presented, it is evident that Hascol needs to address the Dutch elephant in the room. Banks waiving off any future interest will help the company earn some profits in the future and conditions can improve to some extent. However, the problem for the company is based on the fact that its business model is broken and cannot sustain itself. Importing fuel when cheaper local options are available is the primary reason the company is suffering losses in its recent past. Restructuring can be a band-aid for the situation but the gaping gunshot wound of haemorrhaging profits needs to be addressed as well before any recovery can be seen.
