GCC petrochemical companies reported a good set of earnings in the first quarter of 2017 (Q1, 2017) with seven out of eleven major companies in the region reporting in line or higher than estimates. However, Q2 could be a weak quarter, led by lower product prices and multiple shutdown across the sector, investment bank SICO noted in its ‘GCC Petrochemical’ sector report.
The companies that SICO analysts covered included Industries Qatar (IQ). According to SICO, earnings at the region's petrochemical majors Yansab, Sipchem, Petrochem, SIIG and Alujain will be impacted by shutdowns during the quarter. Moreover, product prices are in a down trend, and QTD average/median petrochemical product prices for a basket of major products declined 10 percent/ 7 percent QoQ but gained 8 percent / 6 percent YoY.
“We believe spreads in 2017 will sustain current levels as we expect supply growth to be a modest 1.8 percent mainly coming from a ramp up of three green field crackers which started in 2016. We expect supply growth to peak in 2018 at 4.8 percent, causing a softening of spreads. Urea markets continue to remain oversupplied, and we expect supply growth to exceed demand growth in 2017 before moderating in 2018”, the analysts said.
In the first quarter GCC petrochemicals reported a good set of earnings with four names (Alujain, SAFCO, Saudi Kayan and SIIG) beating estimates, and three names (SABIC, YANSAB and IQ) coming in line, out of our coverage universe of eleven stocks. The remaining four names (APC, Petrochem, Sipchem and Tasnee) missed estimates. The second quarter could be impacted by lower product prices and volumes
“We expect 2Q to be a weak quarter, led by lower product prices and multiple shutdowns across the sector. Earnings at YANSAB, Sipchem, Petrochem, SIIG and Alujain will be impacted by shutdowns during the quarter. Moreover, product prices are in a down trend, and QTD (19 May) average/median petrochemical product prices for a basket of major products declined 9 percent / 7 percent QoQ but gained 9 percent / 7 percent YoY”, the report said.”
SICO expects commodity chemical prices to remain a function of global crude prices and industry supply-demand balances. It keeps its crude price assumptions unchanged for 2017/18 at $ 55/60 per bbl, and consequently keep our product price estimates also unchanged with the exception of methanol. SICO analysts cut thier methanol price estimate from $ 350/357 to $300/325 for 2017/18. IQ has a strong cash flow generation story but valuation restricts upside. It’s first quarter earnings were up 33 percent YoY in line with estimates .The company benefited from better product prices together with reduced operating costs during the quarter. Sequential improvement was driven by the absence of one-off expenses in the current quarter, together with marginal improvement in its product prices.
SICO believes IQ is a relatively defensive play, with a solid balance sheet and limited downside risk. “We expect IQ to continue to generate strong cash flow despite depressed commodity process due to low feedstock costs and limited capex needs. However, the deployment of cash pile remains an open question.”