Oil price & GCC petrochemical companies 4Q18 outlook

MUSCAT: Oil prices have fared relatively well in 2018 compared to the previous year. Boosted in late 2016 by Opec and Non-opec member countries’ output cut, the pace continued in 2018 following the imposition of sanctions on Iran.

However, in October 2018, the US allowed selective countries to import oil from Iran, which resulted in oil (Brent) prices dropping to $58.7/bbl from a high of $86.29/bbl. Opec and non-opec members gathered again in the first week of December 2018 in an attempt to halt the falling oil prices and decided to adjust the overall production by 1.2 mb/d, effective as of January 2019 for an initial period of six months. The contributions from Opec and the voluntary contributions from non-opec member countries correspond to 0.8 mb/d, and 0.4 mb/d, respectively.

Overall, oil price (Brent) now average at $72.61/bbl in 2018 compared to 2017 average of $54.8/bbl. With higher oil prices, petrochemical companies have been able to do significantly well, compared to last year. Traditionally in developed market, rising crude oil prices drive up petrochemical costs but in GCC ethane continues to remain the main feed stock, prices of which are still subsidised for many companies. With product prices linked to international markets, the spread becomes higher in high oil price environment which raises the profitability of the local petrochemical companies.

In 9M18, earnings of GCC petrochemical companies stood at $7.57 bn compared to full year 2017 earnings of $7.45 bn, higher by 2 per cent. With one more quarter to go and current 4Q18 average oil price being higher than similar period last year at $72.3/bbl ($61.5/bbl in 4Q17), the petrochemical sector of GCC is set to benefit and is estimated to report net income growth of 48.0 per cent to $2.5 bn in 4Q18 ($1.7 bn in 4Q17).

Saudi Basic Industries Corporation (SABIC), the petrochemical giant within the GCC, over 2017-18 contributed 65 per cent to the total profit of the sector. In 4Q18, the company is estimated to report net income of SAR 6.08 bn compared to SAR 3.70 bn in 4Q17. Higher oil prices along with better earning expectation of its subsidiaries are expected to aid the company in posting higher earnings growth in the coming quarter.

SABIC’S subsidiary Saudi Arabia Fertilizers Co (SAFCO) is estimated to post earnings of SAR 487m in 4Q18 compared to SAR 63m in 4Q17. The reason for such exceptional numbers apart from better prices is that the company underwent shutdown and enhancement project for some of its product lines in 4Q17.

Advanced Petrochemical Company (APPC) is estimated to post earnings growth of over 100 per cent because of increase in Polypropylene prices and increase in share in profit on investment.

Industries Qatar has remained the best performing stock within the petrochemical sector of GCC. The company not only enjoyed higher product prices but also the overall rally in Qatar market also aided in the price appreciation. In 4Q18, earnings of IQCD are expected to go up by 35 per cent to QAR 1.29 bn compared to QAR 0.96 bn in 4Q17.

Sipchem and Sahara which were undergoing merger related talks, recently announced that the Parties have entered into a legally binding agreement governing the terms and conditions on which Sipchem and Sahara propose to implement a business merger of equals by way of

WITH NEXT YEAR EXPECTATION OF OIL PRICE BEING IN THE RANGE OF $60-70/ BBL FROM VARIOUS INTERNATIONAL BODIES, THE OUTLOOK OF GCC PETROCHEMICAL SECTOR LOOKS DECENT BUT COULD BE TAD LOWER THAN WHAT IS EXPECTED IN 2018.

Sipchem making a recommended offer to acquire all of the issued shares in Sahara in exchange for the issue of new shares in Sipchem. Upon completion of the transaction, all of the Sahara Shares will be delisted from the Tadawul and Sahara will become a wholly owned subsidiary of Sipchem. A combined Sipchem-sahara entity will move up the league table in the GCC petrochemical sector. Simple summation of net income would result in a fifth largest petrochemical company within the GCC.

With next year expectation of oil price being in the range of $60-70/ bbl from various international bodies, the outlook of GCC petrochemical sector looks decent but could be tad lower than what is expected in 2018. Companies are looking at investment opportunities in other markets, as a means to diversify geographically and capture market share globally as well as are also focusing their efforts on upgrading technology and diversifying product offerings, combined effect of which will reduce the impact of low oil price expectation in 2019.

[Courtesy: U Capital]