2015

Pakistan State Oil

RISK AND RETURN ANALYSIS

SAUD SHAKEEL, HAFSA UMAIR, SYEDA KHUSHBAKHT FARRUKH
Pakistan State Oil
Risk and Return Analysis
Muhammad Saud Shakeel, Syeda Khushbakht Farrukh, Hafsa Umair

PSO belongs to the Oil and Gas sector of the Karachi Stock Exchange. It is thereby liable to face all the
risks which are faced by the Oil and Gas Industry. The whole industry has been affected in the past few
years by the circular debt crisis which keeps prevailing due to Government of Pakistan and the Power
Sector not paying up its debt. All financials of PSO and other companies in the Oil and Gas Sector are
being influenced by the outlandish amount of outstanding receivable.

The average daily return and average annualized return from year 2011 to 2015 have indicated an
encouraging value. Despite the year 2011 and 2015 displaying a negative figure of return, the overall
result has been positive.

The calculated Beta is greater than 1, which means that the PSO stock is more volatile than the market,
and hence, a riskier investment but on the other hand, it cultivates more return. Fluctuation of a stock
with respect to the overall changes in the market which is termed as Beta, signifies that the stock of PSO
is aggressive (the Beta value is greater than 1). This Beta of 1.24 indicates that it has a large positive
correlation with the stock market. It tends to move up and down with the market and performs well
when the economy expands or at a boom and performs poorly when the economy is in the recession
phase or at a slump. Moreover, the returns vary more than the market return over a period of time. As a
result, when there is an increase in the market return, PSO returns are predicted to increase more than
that of market.

The adjusted market price has increased by 69.7% in the last five years indicating the high returns
associated with the PSO stock. This increase in the adjusted prices is not only because of the rise in the
market rates of the stocks, but also the Rs. 4/ share interim dividend declared in 2014 in addition to the
Rs. 4 per share cash dividend. A 10% interim bonus was also paid to common shareholders. Therefore,
the PSO stock may be well suited to risk takers, hoping to earn high returns rather the risk averse and the
risk avoiders.

Due to the overall positive figure for the 5 years and despite the minimal negative return in two
particular years, the PSO stock has traded off more return for its volatility per unit. The highest return is
seen in the year 2013 and is equal to 0.2261 or (22.61%). Consequently, it can be said that PSO has
maintained its attractiveness in the market.

The PSO stocks are 1.867 times more volatile than other stocks in the market, which shows that relative
to the other KSE 100 stocks, PSO is a riskier stock to be invested in. The highest volatility has been seen
in the year 2013 which is equal to 1.95. For the investors, risk will be comprised of systematic and
unsystematic risk. When the market is unstable and poorly performing, the company will be affected by
a high risk as a result of the positive correlation, meaning that stock will move with the market trend.
Moreover, there are other firm specific risks existing as well that are adding to the PSO stocks
unpredictability, the most major of which is the circular debt crisis which leads to PSOs cash being tied
up and inability to pay debt. In a well-diversified portfolio, PSO stocks can be an acceptable investment
because during periods of flourishing economy, PSO will be earning higher returns.