PSO: resilient 1H, weak 2Q

Pakistan State Oil’s (PSX: PSO) 1HFY26 results reflect a familiar PSO pattern: earnings resilience supported by finance-cost relief, while core operating performance remains under pressure from weaker volumes, thinner margins, and intensifying competition. On an unconsolidated basis, the company reported profit after tax of Rs12 billion, up 8.5 percent year-on-year. However, the headline growth masks a sharp deterioration in the second quarter, where earnings fell to Rs2.7 billion, down 62 percent year-on-year and 71 percent quarter-on-quarter, driven primarily by inventory losses, margin compression, and a higher effective tax rate.

PSO’s topline remained under pressure throughout the half-year. Net sales declined 8 percent year-on-year to Rs1.5 trillion, while 2QFY26 net sales fell 9 percent to Rs761 billion. The weakness was largely volume-led. Market sources indicates MS volumes declined 11 percent year-on-year, and HSD volumes fell 16 percent year-on-year, reflecting both softer demand and market-share pressure. While there was some sequential improvement in HSD volumes during the quarter, it was not enough to offset the broader slowdown in white-oil throughput.Beyond volumes, the RLNG segment also contributed to the topline drag.

Margins held up at the half-year level but deteriorated sharply in the second quarter. Gross margins in 1HFY26 came in at 3.14 percent, broadly flat versus 3.12 percent in the same period last year. The stability at the half-year level, however, was largely a function of a stronger first quarter. In 2QFY26, gross margins dropped to 2.24 percent from 2.99 percent last year and 4.08 percent in 1QFY26. The decline is largely attributed to higher-than-expected inventory losses amid falling fuel prices, coupled with higher dealer discounts as PSO defended volumes in an increasingly competitive market. One broker estimate places inventory losses at around Rs6 billion, which explains why the quarter’s earnings landed below expectations.

Operating leverage also moved in the wrong direction. While gross profit declined 7 percent year-on-year in 1HFY26, operating costs increased materially. Distribution and marketing expenses rose 14 percent year-on-year, administrative expenses were up 20 percent, and other income declined 16 percent. This pushed EBIT down 14 percent year-on-year for the half-year, and the quarterly picture was more severe, with EBIT falling 47 percent year-on-year in 2QFY26. In effect, PSO faced a double hit: weaker gross profitability and rising cost intensity, which amplified the margin squeeze.

The most important offset came from finance cost. Finance costs declined 41 percent year-on-year in 1HFY26 and 38 percent year-on-year in 2QFY26, as short-term borrowings declined and the interest-rate environment softened. This finance-cost relief effectively “saved” the half-year earnings profile, allowing PSO to post year-on-year bottom-line growth despite weaker operating momentum. Without the decline in finance costs, the earnings trajectory would have looked materially weaker.

Operationally, PSO’s half-year performance reflects a market that is becoming more difficult to dominate. Analysts have flagged that PSO’s core operations remain under pressure as competition from smaller OMCs continues to threaten market share. This competitive intensity matters because it tends to translate directly into higher dealer incentives and discounting, which is already visible in the second-quarter margin performance. On top of that, border disruptions, especially related to Afghanistan, also hurt volumes during the period.

Overall, PSO’s 1HFY26 result shows a mixed picture. The company stayed profitable and benefited from a sharp drop in finance costs. However, the weak second quarter highlights how quickly earnings can fall when inventory losses rise, prices move against the company, and competition forces higher discounts. Going into 2HFY26, the key things to watch are margins, market share, and fuel price stability.