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.