Financial Activities of Shell Pakistan Ltd

Submitted to: Mr. Sohail Sawani Course Facilitator Advance Financial Management

Submitted by: Syed Mohsin Student ID # 2009-3-43-9538 Institute of Business Management

July 29, 2012

Acknowledgement First of all I would like to thank Almighty God for giving me the strength, knowledge to accomplish all tasks big and small, the ability and patience in making this report possible.

I would like to thank our Teacher Mr. Sohail Sawani, who gave me all the guidance and knowledge to understand the requirements and in making this report possible. I am grateful for his help and co-operation.

I would also like to thank all the people for the information they provided me for my project, I could never have been completed it without their co-operation. Special thanks to Mr. Muneer Sehras (Financial Analyst, Lubes, Shell Pakistan) for providing the information overview. In the end I hope and pray that this report meets the criteria, which I was asked to adhere to.

SHELL PAKISTAN LTD

SHELL World Wide

Shell is a global group of energy and petrochemical companies. Our headquarters are in The Hague, the Netherlands, and our Chief Executive Officer is Peter Voser. The parent company of the Shell group is Royal Dutch Shell plc, which is incorporated in England and Wales. Our strategy seeks to reinforce our position as a leader in the oil and gas industry in order to provide a competitive shareholder return while helping to meet global energy demand in a responsible way. In Upstream we focus on exploring for new oil and gas reserves and developing major projects where our technology and know-how adds value to the resource holders. In Downstream our emphasis remains on sustained cash generation from our existing assets and selective investments in growth markets. Shell by numbers (figures for 2010): + 90 countries where we operate ~93,000 number of employees 48% of our production is natural gas 16.8 million tonnes of LNG sold in 2010 3.3 million barrels of gas and oil we produce every day 43,000 Shell service stations worldwide 145 billion litres of fuel sold in 2010 >30 refineries and chemical plants we run Our business Upstream explores for and extracts crude oil and natural gas. Downstream refines, supplies, trades and ships crude worldwide, manufactures and markets a range of products, and produces petrochemicals for industrial customers.

Projects & Technology manages delivery of Shells major projects and drives the research and innovation to create technology solutions. Financial performance 2010 Revenue: $368.1 billion Income: $20.5 billion Capital investment: $30.6 billion Investment in research and development: $1 billion Fast facts for sustainable development
o

$2.1 billion spent on developing alternative energies, carbon capture and storage, and on CO2 R&D over the past five years. $13 billion spent on goods and services in 2010 from companies in countries with lower incomes. >$121 million spent on voluntary social investments in 2010 Current Scenario (March 2012): During the first quarter of current year the Company incurred a net loss of Rs. 224 million as against a net profit of Rs. 758 million in the same quarter last year. This was mainly driven by lower overall margins, continued high financing costs on account of refunds due from the government and high effective tax rate of due to incidence of minimum turnover tax. Regulated margins for petrol and diesel in Pakistan remain one of the lowest in the region, at a time of both rising oil prices and increasing cost of doing business. In this high oil price and inflationary environment these margins allowed by the Government do not provide adequate returns to fully cover the cost of operations and the high cost of financing for the required investments in costlier stock. Government receivables at the end of the quarter stood in excess of Rs.12,600 million mainly related to refund of Sales and Indirect taxes and fuel subsidies outstanding. These are resulting in very high financing charges on the Company which for this quarter alone was Rs. 506 million. Since the inception of these receivables over the last three years, the delays in settlement have already cost the Company in excess of Rs. 5,000 million in interest costs. Your management is vigorously following up with concerned Government authorities for the speedy settlement of these receivables. On the positive side, the Company managed to recover Rs. 1,100 million in the current quarter in this respect and we hope that the Government will make payment of the remaining amount on an expedited basis. We continue to emphasise that it is imperative for the Government to urgently address the unfavorable

impacts of delay in settlement of Government receivables, with a longer term view to create an environment conducive to business continuity and growth in this key sector of the economy. Your Company continues to bear the impact of minimum tax on turnover which has adversely impacted our bottom line. In a rising price environment as seen during this quarter, this has led to increased tax liability with no corresponding increase in margin resulting in effective rate of corporate tax of more than 600% and unfairly eroding our operating profit growth. We are in continuous discussions with the tax authorities to remove this anomaly for our industry and bring us in line with exemptions and allowance on turnover tax already given to other sectors with similar challenges. During 2011 the company earned a profit after tax of Rs. 906 million against a profit after tax of Rs 1616 million in 2010. Shell switched from making profits to a loss in the first quarter of 2012 amid unpaid and swelling government dues and lower profit margins. All the hopes expressed by the CEOin 2011 financial statements falls flat. The government does not provide adequate returns to fully cover the cost of operations and financing, Shell Pakistan Chairman Sarim Sheikh wrote in a post-result review note sent to the Karachi Stock Exchange on Wednesday. Margins of diesel and petrol are regulated and fixed by the government. Shell, which is Pakistans second largest oil marketing company posted a net loss of Rs 22 Crore in January to March 2012 against net profit of Rs 76 Crore in the same period an year ago. Government receivables decreased during the quarter but still stood at a massive Rs12.6 billion on account of tax refunds and outstanding fuel subsidies. The company recovered Rs 110 Crore during the period under review. Sales declined 11% to Rs 5,708 Crore in the three months ended March 31. The company also cited minimum tax on turnover as another reason for the poor performance. The current rising price environment has led to increased tax liability with no corresponding increase in margin resulting in effective rate of corporate tax of more than 600% and unfairly eroding profit growth, said Sheikh.

SHELL In PAKISTAN Shell has a rich legacy and long association with Pakistan. As one of the oldest multinational companies in the country, Shell has been a partner in the regions growth and development for over a century, dating back to 1898 when Royal Dutch Petroleum Company began supplying oil products to the subcontinent.

With this distinguished heritage, Shell Pakistan Limited leads the industry when it comes to the introduction of new technology and services that make us a world renowned provider of energy. Shell is the largest international player in retail outlets in Pakistan and it provides fuel to around 1 million customers daily.

The goal of shell is to constantly improve on our customers experience, and in an increasingly competitive environment, Shells commitment to providing top quality, right quantity and superior service has been the driving strength of our business in Pakistan. Shell believes winning hearts and minds is as important as winning markets. As a choice, Shell cares for the environment around us, and the impact our business can make in the community. They believe strongly that business has a fundamental role in delivering societys goals be it economic, social or environmental. In line with this pledge, Shell Pakistan Limited leads the oil industry through a structured social investment programme that focuses on education, health and sustainable development.

Being at Shell Pakistan Limited is about values, our core values of honesty, integrity and respect for people are at the heart of the way we manage our business. These principles embody our commitment to society and to our country. Shell Retail With over 800 retail stations, Shell has the leading market share among foreign petroleum retail businesses in Pakistan. Their fuels are tailored to improve engine and environmental performance, while our close technical relationships with Ferrari mean they can transfer fuel technologies developed for the racetrack to road fuels for customers. Shell is the only petrol retailer in the country to offer premium fuels.

Shell Lubricants Shell lubricants are global market leaders and our three major Lubricant brands Shell Helix, Shell Rimula, and Shell Advance, have all earned the super brand status not just globally but also in Pakistan where they are currently market leaders across passenger cars, heavy duty vehicles and bikes. The Shell Lubricants business prides itself in being the market leader in introducing innovative, technically superior products such as Shell Helix Ultra - the oil that is recommended by Ferrari, to give consumers the ultimate motoring experience. Shell Commercial Fuels Shell provides world-class domestic heating oils, commercial road transport and industrial and wholesale products to business customers, aimed at helping our customers find all the resources quickly and efficiently. They are one of the biggest suppliers of fuel to Independent Power Plants in Pakistan, which will be a major source of energy for the country in the coming decade. Shell Aviation Shell is the world leader in the marketing of aviation fuel and in the operation of airport fuelling facilities. Their Aviation business has positioned itself as the supplier of first choice for all major foreign airlines visiting Pakistan. Shell Aviation has embarked on a program of change. By globally standardizing the way we work, we aim to improve our quality of service to you. During the tragic floods in 2010, our Aviation business ensured smooth supplies to relief efforts across Pakistan by timely refueling more than 2000 humanitarian flights across the country.

Supply & Distribution At Shell, safety is at the heart of the way we do business. They were the every first oil company to offer Safe driving lessons to our tank lorry drivers. They were the very first oil company in the country to enforce seat-belt wearing for our staff and contractors. Shell not only pioneered safe transportation of oil products in the country, it sought to provide a better quality of on-the-job experience for its drivers. They provide our drivers with rest facilities at installations and along main highway routes where drivers are instructed to stop, rest, and freshen up in accordance with our maximum driving hours rule and road safety compliance.

Health, Safety, Security and Environment (HSSE) At Shell, safety is at the heart of the way they do business. They believe in a policy of no harm to people - be it our customers, employees, retailers, contractors or suppliers. A systematic approach to Health, Safety, Security and Environment (HSSE) management, underpinned by a rigorous focus on embedding an HSSE culture through the Hearts and Minds approach, is designed to not only ensure compliance with the law but also to help achieve continuous improvement in safety performance.

Shell contribution to Pakistan Shell in Pakistan is committed to the principle of sustainable development that can meet the needs of the present generation without compromising the ability of future generations to meet their own needs. Their actions are therefore guided by the need to make business decisions that demonstrate economic, social and environmental responsibility for which our stakeholders and society at large can hold us accountable. Through sustainable development, they integrate the economic, environmental and societal aspects of our business to achieve sustained financial success, safeguard our environment and develop our reputation as partner and provider of first choice for all of our shareholders, customers, employees, those with whom they do business, society and future generations - all of whom expect us to engage with them, listen to them and evolve to meet their changing

SWOC Analysis Strength

Shells current investments in exploration will help ensure continued activity over coming decades. Research into biofuels, solar power, wind power and energy from hydrogen helps the organization diversify in a market where ecological issues are of increasing concern, and also addresses issues of the longevity of fossil fuel reserves. Diversification into products such as fuel cards and credit cards helps Shell maintain a wider portfolio of products, spreading risk Shell pioneered the use of scenarios, a planning tool where a range of possible future situations are explored and strategy adapted to ensure future demands can be met The organization has worked hard to improve its general reputation and believes it is now seen more positively than it used to be Shell has utilized opportunities to develop strategic partnerships; for example, supplying

CO2, which is a by-product of its refinery process, to Dutch tomato farmers who had previously used heaters (higher CO2 concentration in greenhouses accelerates tomato growth).

Weakness
Shells strong focus on oil and gas requires it to search continually for replacement supplies, and exploration is a high-cost element of its operations. Shell still uses the technique of flaring and burning gas from oil extracting sites as a way of dealing with unwanted by-products of its operations: this is considered to be environmentally unacceptable by many. System driven - Internal Focus Depot inventory management High Pricing as compared to competition

Opportunities
Specialty Product in Textile and Cement Sector New Projects - Heat Recovery Project Market Space in absence of BP Castrol brands High Quality Diesel Supply for Quarry New Product portfolio launch DP Promise Long Term Contracts for sustained business growth Going for long term contracts Huge Power demand supply Gap - Several new IPPs with above 5 Mln ltrs lube Potential identified over the next 2 years Fast track rental Projects under installation and several more bidding No binding on FSA for new IPPs. Open competition Establishing Bulk Storage at Machike and make quick supplies in bulk, saving customers' drum cost as well as reducing lead time PSO's decreasing aggression due to severe financial crunch on PSO and decreasing focus to promote Castrol's products PSO's non-professional image in the Power Sector

Challenges
Low cost non-branded imported oils Chevron aggressive pricing Customer linking Lubricants with fuel supplies Recession in Export market Increase in cost of capital

Security situation in the country Economic slowdown in the Financial sector causing delay in Govt's bank guarantees to New IPPs / Rental Projects - Some projects already delayed by 1 year. Cash crunch at WAPDA - Irregular payments to IPPs causing partial operations and shut downs Serious business loss - SEPCOL and JPGL gone into litigation and completely closed down for several months PSO's ability to cross subsidize and do serious price war for new IPPs and hold prices for the existing IPPs - exerting pressure on us through customers/prospects Probability that payments to newly commissioned IPPs will also be irregular and they might operate very irregularly Chevron as a new and very aggressive entrant in the Power Sector

SHELL LUBRICANTS
Shell works closely with customers to develop a deep understanding of the challenges they face. This e enables us to advise our customers on the most effective products and services to meet their needs today and work closely with them to develop solutions for tomorrow. Shell Lubricants have the largest sales team and the most direct customer relationships of any global lubricants suppliers.

Shell Lubricant Finance

Global Finance Global Finance is Shells organisation that reports directly to the Chief Financial Officer, Simon Henry, and incorporates the Finance Functional Areas, Finance in the Business, and Finance Operations as well as colleagues who work in functions like HR, IT and communications focused on supporting Finance. It also includes those individuals from the Finance skill pool who are currently working outside Finance. At end 2010, there were more than 10,000 people working in Global Finance in over 120 countries all around the world. Finance Functional Areas This structure was designed to increase personal accountability and strengthen the operation of the Groups control frameworks, improve the efficiency of key finance operations, encourage simplification and standardisation and continue to build on functional skills.

Corporate Controllers, Group Reporting, Business Performance Appraisal, Governance Risk & Assurance and SOX 404 Central Team who report to the EVP Controller Martin ten Brink Treasury Operations, Mergers & Acquisitions and Financing, Pension Investment Policy & Advice and Risk & Insurance who report to the EVP Treasury & Corporate Finance Andy Longden Investor Relations who report to EVP JJ Traynor Global Tax Planning team who report to the EVP Tax Alan McLean Strategy & Planning is lead by EVP Harry Brekelmans Shell Internal Audit with Armand Lumens as Chief Internal Auditor

Finance Operations

Finance Operations brings together accountability for design, operation, standardisation and continuous improvement of key Finance processes in a single organisation, led by Ian Robertson, EVP Finance Operations. Finance Operations has five key process groups - Record-to-Report, Expenditure, Revenue, Management Information, and Data with VP roles heading each of these teams. Support areas have been strengthened with the appointment of VPs for Migration, Process Integration and Controllers. As Finance Operations will work within the matrix of process and location, one of the key enablers will be the network of Centre Finance Leaders, one based at each Shell Business Service Centre (SBSC) location, led by the VP Service Network Manager. SBSC locations are Chennai, Glasgow, Kuala Lumpur, Krakow and Manila. Human Resources for Finance Global Finance is supported by a dedicated Human Resources team reporting to EVP HR, Global Functions Carol Cameron

THE ORGANOGRAM
Cluster Finance Manager

Cluster Finance Analyst

LSC F&A Manager

Cluster Pricing Analyst

Cluster Finance Manager

Job Description
Areas of responsibility

Responsible for Finance activities for all countries and companies within the cluster To provide financial information and services to enable cluster management to execute the Lubricant business effectively To manage and optimize the working capital and cash management strategies To ensure that local finance and control are optimal, accurate and timely in line with global guidelines and local laws and regulations To develop a competent finance organization and to be a strategic business partner to the Cluster Top. Co-ordination with Regional Finance, Centre Finance and other functions. To manage the local implementation of off-shoring suitable activities/tasks. Negotiate lease agreements etc. with local authorities Reduction of General and Administrative costs Risk Management

Key Deliverables:

Optimized liquidity management and favorable cash flow status Local statutory accounts in accordance with local regulation Accurate and timely execution of all financial transactions Reporting of actuals, estimates and budgets in line with global requirements

Submission of relevant local statutory requirements and interaction with local authorities Systems - proactively support initiatives for implementation of new systems and propose changes/new implementations as required. Audits - coordinate internal and external audits An optimal cluster-wide control environment across functions Optimized management of lease and concession agreements Preparation of business cases and investment proposal

Daily Activities of CFM

Providing and interpreting financial information Monitoring and interpreting cash flows and predicting future trends Analyzing change and advising accordingly Formulating strategic and long-term business plans Researching and reporting on factors influencing business performance Analyzing competitors and market trends Developing financial management mechanisms that minimize financial risk Conducting reviews and evaluations for cost-reduction opportunities Managing a company's financial accounting, monitoring and reporting systems Liaising with auditors to ensure annual monitoring is carried out developing external relationships with appropriate contacts e.g. auditors, solicitors, bankers and statutory organizations such as the Inland Revenue Producing accurate financial reports to specific deadlines Managing budgets Arranging new sources of finance for a company's debt facilities Supervising staff Keeping abreast of changes in financial regulations and legislation

Cluster Finance Analyst

Job Description 1- Build and maintain effective relationships with Finance Operations. 2- Be a key contributor as part of the Cluster Finance team. 3- Build and maintain effective working relationships with the CoB business managers as well as contacts in B2B and Supply Chain as appropriate. Strategy and Planning (long term/annual cycle) Operational Plan: Participate in the planning process as required with special focus on the operationalisation of the agreed plan at local level, including setting detailed KPI targets. Consolidate and reconcile the operational plan and ensure it is correctly captured in the systems.

Business Decision Support (medium term/ad hoc) Investment/Divestment/New Business Development/Business Model Conversion (Opportunity Realization Process). Provide operational Finance support to the preparation of proposals pertaining to the ORP lifecycle. Projects: Implement the Streamline process and MI standards consistently. Participate in and support ad-hoc projects in the Cluster as required.

Business Appraisal (short term/monthly) Financial performance (actuals) : Review integrity of financial data provided by Finance Operations. Track and reconcile adjustments. Assist Finance Operations in continuously improving data quality of OpexBay, CapexBay etc. Act as a focal point [from a user perspective] for standard MI tools, e.g. OPSM, Opexbay, Capexbay and any other required. Latest estimates: Input into the Cluster LE at local level. Variance analysis (opex, Capex, volume, margin): Deliver analysis of volume/proceeds performance, pricing, margin, SP&A cost, overheads, FOREX etc. through engagement with the business, based on standard MI provided by Finance Operations. Collect and consolidate business KPI actuals. Lead the cost challenge sessions with the relevant functional business leads in preparation for monthly engagement sessions. Calculate Sales bonus (quarterly) Value chain/trend analysis (complex, multidimensional analysis): Deliver analysis of channel profitability, exposure, value chain etc through engagement with the business. Commentaries and action plan: Produce management commentary on key business performance indicators utilizing standard reports provided by Finance Operations.

Daily Activities Reply to queries from account managers about the products COGS and C3. Investigate the base oil prices from all the suppliers. MI on product profitability, price and volume vice. Preparation of management reports as assigned. These include: daily revenue reports, monthly revenue/expense variances, budget summaries, productivity. Coordinate flow of financial data including collection, maintenance and updating of data to support the development, analyses and monitoring of various departmental processes or functions. Perform required financial analyses utilizing this data as assigned. Support departmental leadership in the process of developing the annual operating/capital budget, the long-term financial plan, the periodic reforecast, etc. Performs other related duties as assigned.

LSC F&A Manager

Job Description In charge of all purchasing activities for manufacturing, engineering and distribution. Handle supplier relationship management of key suppliers and establish an indepartment understanding of the complex supply chain flow and its cost structure. Lead in supplier-related tender activities, for example supplier tender, bid evaluation, supplier selection, negotiation and award (contract / purchase order). Manager suppliers to meet HSE, quality, delivery and service targets. Inventory control management based on demand plan, maintain and optimize purchase forecast in an accurate and timely manner. Conduct day-to-day import and export logistics related affairs; maintain supply chain database and submission of reports on a timely basis as required. Operational Excellence Lead the identification, design, implementation, management and improvement of robust, cross-functional business processes that significantly improve management and execution. Lead the development of continuous improvement, process oriented thinking and complex problem solving capability throughout the organization through training, mentoring, and knowledge transfer and shared experiences. Partner with employees and various other functions to ensure customer satisfaction, quality, reliability, safety, and efficiency in the work environment.

Daily Activities

Daily production and distribution planning, including all nodes in the supply chain. Production scheduling for each manufacturing facility in the supply chain (minute by minute) Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers. Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers. Inbound operations, including transportation from suppliers and receiving inventory. Production operations, including the consumption of materials and flow of finished goods. Outbound operations, including all fulfillment activities and transportation to customers. Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities. Distribution centers and other customers. Performance tracking of all activities.

Do lubricants product costing on SKU levels. Keeping track on following items cost 1. 2. 3. 4. Packing Base oil Additives Transportation

Cluster Pricing Analyst Job Description Build and maintain effective relationships with Finance Operations. Be a key contributor as part of the Cluster Finance team. Build and maintain effective working relationships with the CoB business managers as well as contacts in B2B and Supply Chain as appropriate. Be a key contributor to the Plant Leadership team. Operational Plan: Manage the LOBP business planning cycle (incl. capital budget). Participate in the planning process as required with special focus on the operationalisation of the agreed plan at local level, including setting detailed KPI targets. LPC Coordinator for the MECAS/Pakistan envelope. Ensuring compliance with LPC/LTP principles across envelope.- Lubricants transfer pricing and cost recoveries in Pakistan/UAE - Fiscal compliance (e.g. local land taxes, product duty classifications and VAT compliance) Investment/Divestment/New Business Development/Business Model Conversion (Opportunity Realization Process): Provide operational Finance support to the preparation of proposals pertaining to the ORP lifecycle and provide business decision support for capital projects < 1 mln USD. Prepare and perform quality control of Capex proposals. Contract Management: Support the governance of 3rd party contracts. Perform contract commercial assurance. Projects: Implement GSAP and Streamline processes and MI standards consistently. Participate in and support ad-hoc projects in the Cluster as required. Financial performance (actuals): Sense check accuracy and reliability of the LOBP reporting. Review integrity of financial data provided by Finance Operations. Track and reconcile adjustments. Assist Finance Operations in continuously improving data quality of OpexBay, CapexBay etc. Act as a focal point [from a user perspective] for standard MI tools, eg OPSM, Opexbay, Capexbay and any other required. Execute/support working capital and inventory analysis/management. Perform plant costing, LOBP Activity rate compilation and implementation. Latest estimates: Input into the Cluster LE at local level. Prepare envelope/OU-level COGS forecast and latest estimate for proceeds / unit C3 margin basis input from global base oil supply / finance teams.

Variance analysis (opex, capex, volume, margin): Deliver analysis of Plant costs, logistics costs, fixed assets and inventory. Continuously challenge the business on all KPIs and ESSA, including non-financial indicators such as OTIF. Deliver analysis of volume/proceeds performance, pricing, margin, SP&A cost, overheads, FOREX etc. through engagement with the business, based on standard MI provided by Finance Operations. Collect and consolidate business KPI actuals. Lead the cost challenge sessions with the relevant functional business leads in preparation for monthly engagement sessions. Value chain/trend analysis (complex, multidimensional analysis): Deliver analysis of channel profitability, exposure, value chain etc through engagement with the business. Commentaries and action plan: Produce management commentary on key business performance indicators utilizing standard reports provided by Finance Operations. Post reviews (PIR etc): Conduct "post" reviews in collaboration with the business. Compliance (Finance Standards): Ensure an appropriate control framework is in place for stocks, fixed assets, local taxes. Ensure LOBP compliance with MoA and other Group procedures. Support the LOBP governance of JVs and/or subsidiary companies. Self assessment (Business Assurance Process, RCSA): Monitor, propose and implement appropriate risk responses at all times. Audits (external/internal) and Business Control Reviews: Co-ordinate the LOBP's Business Assurance Cycle. Follow up on LOBP actions from audits, BCI and BAL. Maintain Fountain action list. Summarize BCI findings.

Daily Activities Reply to queries from account managers about the products COGS and C3. Investigate the base oil prices from all the suppliers. MI on product profitability, price and volume vice. Preparation of management reports as assigned. These include: daily revenue reports, monthly revenue/expense variances, budget summaries, productivity. Coordinate flow of financial data including collection, maintenance and updating of data to support the development, analyses and monitoring of various departmental processes or functions. Perform required financial analyses utilizing this data as assigned. Support departmental leadership in the process of developing the annual operating/capital budget, the long-term financial plan, the periodic reforecast, etc. Performs other related duties as assigned.

IMPACT OF 2010-11 BUDGET ON OIL & GAS SECTOR OIL& GAS MARKETING - Neutral Downstream oil & Gas companies mostly remained limelight in during the previous years due to change in oil formula and margins & circular debt issues. PL to continue Government has continued to generate revenue through petroleum levy and targeted around 135 billion in the current fiscal year. As per the detail of Finance Bill 2010-11, the government will charge Rs 8/ liter development levy on high speed diesel (HSD), Rs 10/liter on motor spirit (MS), Rs 14/liter on HOBC, Rs 6/liter on kerosene, Rs 3/liter on light diesel oil (LDO), and Rs 6/ kg on CNG. GST increased to 17% Government has increased sales tax from 16% to 17%. No major impact would be seen as it will pass on to consumer. FED increase to Rs10/mmbu Government hike FED on gas to Rs10/mmbu to generate around Rs 20 billion which have no impact on gas marketing companies as it would be passed on to consumer. Dividend expectation Government has estimated dividends of Rs12, Rs3.4 and Rs0.5 per share from PSO, SNGP and SSGC, respectively.

IMPACT OF 2010-11 BUDGET ON THE COMPANY

1) Impact due to increase of Turnover Tax The major impact on the company in the current budget is that the turnover tax percentage has been increased. The increase in turnover tax is 100% as it has been increased from 0.5 % to 1%. It is to be made clear over here that the turnover tax is the tax from the government on the net sales of any company. The loss to the company is in the sense while looking at the condition of payment of turnover tax is that, if the amount of turnover tax is greater than the amount of income tax, than the company is liable to pay turnover tax. Following are the details to show clearly what impact of increased turnover on the company. Turnover tax @ Turnover tax @ 0.5% 1.0% Before Budget After Budget ----------PKR---------Gross Turnover Minimum Tax (Turnover Tax) 177,110,208,000 885,551,040 177,110,208,000 1,771,102,080

Increase in tax liability due to Budget Amendments 885,551,040 Note: The figures are taken from companys 2009 financial report. It is quite visible from the results that the increase in amount of turnover tax amount is quite high. As we take the example of year 2008 when the company was facing losses due to reasons of sudden drop in oil products, if a similar condition arises again, it is certain that the company would have to pay an extra amount of Rs 885,551,040/-.
Income tax @ 35% Income tax @ 35% 2008 2009 ----------PKR---------Profit / (loss) before Tax Tax Rate Taxation Profit / (loss) after Tax (8,426,884,000) 35% (3,255,887,000) (5,164,467,000) 3,910,009,000 35% 1,347,061,000 2,562,948,000

2) Impact due to increase of withholding tax The second direct impact on the company is that the Advance Income tax (WHT) has been increased from 4% to 5%. Now Shell Pakistan Ltd is an oil company and it heavily relies on the imports of the oil products, for example fuels, base oils, additives and packing materials. The increase of WHT on imported items will put the cash flow of the company under stress as hefty sums of cash

will be paid to government in terms WHT. This can be understood by looking at the following details. Advance WHT on Advance WHT on imports @ 4% imports @ 5% Before Budget After Budget ----------PKR---------Cost of products sold Imports component (approximately)* Cost of imported items Advance WHT on imports 143,097,916,000 20% 28,619,583,200 1,144,783,328 143,097,916,000 20% 28,619,583,200 1,430,979,160

Increase in advance WHT due to Budget Amendments

286,195,832

*The imports have taken as an assumption of the total cost, because the import figures are not mentioned in the financial statement and are kept secret. Looking at the above details that increase in WHT by 1% will cause the short fall of cash to company by an amount of Rs 286,195,832/- which the company has to generate through other sources of cash generation in order to run the cycle of the company. If the company do not generate enough cash to run her cycle, following consequences will be obvious. 1. Due to short at cash, the company cannot pay its suppliers on time or simply cannot pay off its debit to them, in turn the name company earns bad reputation in market and could face interrupted or discontinuation of supplies. 2. Due to interrupted or discontinued supplies, the sales of the company are affected and when sales figures go down, the net profit reduces. The company faces dual loss in this case as less sales means less profits and less net profits Means Company has to pay higher turnover tax. In order to cover this, the company has to generate cash using different resources. The cash can be generated through following resources. a) Take Loan from bank b) Issue Bonds c) Issue shares. It is also to be considered that if the company takes the loan from an investor (bank), the investor will have paid with the interest with the principle amount. For example if the company takes the options of taking the loan bank, following will be observed.

Principle Amount Interest / annum Interest amount Total amount to be paid in one year

286,195,832 12% 34,343,500

320,539,332

The company will to pay Rs 34,343,500/- extra at end of every year which is also burden on the company as it reduces net profit of the company and hence the share holder will be provided with lesser dividends. 3) In-direct Impact company The indirect impact of the current budget on the company is the impact on the salaries of the employees, as the tax percentages and salary tax slabs has been revised, and an increase in GST by 1%. From one point of view employees are the end users and on which there is an impact of increase in GST by 1%. The daily use commodities will be expensive than before and they will have to spend more on the commodities and hence will have less to save from. This will indirectly impact on the companys expenses as the employees will ask for increased salary. From the other point of view the tax percentages has been increased. The increased tax percentages will impact on the employees as their take home amount will be reduced. This will also indirectly impact on the companys expenses as the employees will ask for increased salary.

Financial Highlights The company gets 99 percent of its revenues from the fuel sales and exports and gets the remaining from the non fuel retail. Gross sales, which include sales from both fuel and non fuel segments, witnessed a growth of 11 percent during CY11 over corresponding year. The mere 11 percent growth in the top line during CY11 came from higher oil prices and the better performance of the export sales particularly during the first half of the year. However, the bottom line during CY11 remained tepid due to a multitude of reasons such as high inflation, increasing government receivables, spiking oil prices, security threats and growing cost of doing business. Most significantly, the profitability during CY11 plunged versus that of last year due to a spiky increase in the finance cost. The government receivables on account of price differential claims, sales tax and petroleum development levy touched the sky during CY11 at RS13.9 billion versus Rs 9 billion in CY10, turning gains into losses. The company continued its endeavour in recovering the receivables but due to the hold-up in the process, the company suffered additional Rs 1.15 billion in the financing cost as working capital requirement. Another massive challenge that the company and the OMC sector deter to is the impact of minimum tax on turnover. At 68 percent during CY11, the 68 percent rate increases the income tax liability of the company and a limited increase in the margins of diesel and motor gasoline as they are regulated. During the said period, the company was unable to payout cash dividends due to restraining cash flows primarily due to the circular debt. In exchange the company issued one bonus share for every four held during Y11. Liquidity & Efficiency At a time when the oil prices as well as the cost of doing business are galloping at a fast pace, the regulated margins for diesel and petrol in Pakistan remain the lowest in the region. This poses a threatening situation for the operational efficiency of the company and hence the oil marketing segment. With inflationary pressure boggling the economy down to a crucial precipice, the regulated margins allowed by the government are not adequate to absorb the cost of operations, government receivables and high cost of financing. Although the company does not have any long term liability on its balance sheet CY11, the financial soundness and short term solvency of the company attracts attention as the company has availed short term loans and financing. These highlight loans taken for working capital requirement which show that the company is facing cash flow problems. Outlook Shell Pakistan Limited has been facing declining 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. However, the minimum tax regime that's charges incomes tax to the company on selling price basis. In a rising price scenario, this practice increases the tax liability with little lift to

the margins. The industry has been asking for brining this rate in line with the other industries where income tax rates are as low as 35 percent. Moving forward, with the resumption of Nato supply will bode well for the export side, especially for jet fuel and high speed diesel (HSD). At the moment the situation is clamouring for a recovery in the circular debt crisis, and attention towards the corporate taxation and delayed government receivables. Shell Pakistan Limited CY08 CY09 CY10 CY11 ======================================================== Profitability -------------------------------------------------------Gross margin 4.0% 8.3% 6.1% 5.7% Operating margin -1.0% 3.1% 1.9% 2.0% Net margin -1.1% 1.6% 0.8% 0.4% ROA -4.4% 7.6% 4.2% 1.8% ROE -27.6% 31.0% 20.5% 11.0% Liquidity and Solvency Current ratio 0.88 0.85 0.84 0.90 Liabilities to assets 0.84 0.75 0.79 0.83 Debt to equity 0.40 -------------------------------------------------------Efficiency -------------------------------------------------------Total asset turnover 4.15 4.64 5.13 4.46 No of days stock 22 26 23 25 No of days trade debts 6 3 3 4 -------------------------------------------------------Market -------------------------------------------------------EPS (25.20) 37.42 23.59 13.23 The cost of goods sold may be the too high of Shell Pakistan or they have huge investment in the assets. The concerned of Shell Pakistan is toward the equity financing as compared to the industry. The cost of goods sold may be the too high of Shell Pakistan or they have huge operating cost ie taxes etc. as compared to the industry. The net profit of Shell Pakistan is not satisfactorily and they have huge investment in assets as compared to the industry. The net profit after taxes of Shell Pakistan is not satisfactorily and they have huge investment in equity financing as compared to the industry.

RECOMMENDATION
1. Increase in turnover tax to 1.0% (from 0.5% earlier) will however be negative for companies posting losses on the back of excess depreciation and amortization expenses. Government should decrease or rather simply eliminate the turnover tax in order to facilitate the companies which are going in loss. It is rather better to relax out the tax than giving hefty amounts in bell outs. 2. Given the current scenario, companies such as Gharibwal Cement, Javedan Cement and Maple Leaf Cement might have increased tax consequences potentially having a negative impact on their cash flow position. 3. The increased WHT will force the companies to pay the government huge sums on imports which will defiantly have a bad impact on the cash flows of the importing companies. Government should relax the tax policy on WHT in order to prevent the dry out situations in these companies. 4. The government should improve the ways of detecting tax evasion. 5. The Income tax department must be well equipped with efficient staff required for proper documentation. 6. Tax collection system should be simple and comprehensive for the masses. 7. Reducing the size of the underground economy can enhance the economic growth of Pakistan through increased tax revenues.