Gas price changes to hit Saudi petchem firms
Riyadh, December 14, 2011
Saudi Arabia’s petrochemical producers Sipchem, Safco and Sabic will face the greatest impact by revisions to natural gas prices, while Tasnee and Sahara will face the least, said a report.
NCB Capital, Saudi Arabia’s leading wealth manager, analysed various scenarios of natural gas price hikes and its impact on the stocks under its coverage. The company has analysed changes in the price from a current $0.75/mmbtu to a possible $1/mmbtu to $2/mmbtu.
“Saudi Arabia’s petrochemical firms procure natural gas at one of the lowest prices globally,” said Tariq Al-Alaiwat, equity research analyst at NCB Capital.
“However they are facing difficulty in gaining new allocations of ethane at the current subsidised price of $0.75/mmbtu for their capacity expansion plans, due to increasing domestic consumption of gas.”
The current price of $0.75/mmbtu for natural gas was set in 1998 when the average price of oil was $13/bbl.
Saudi Aramco is undertaking aggressive capex in the Kingdom and is aiming to increase natural gas output to 15.5 billion scf (standard cubic feet) per day by 2015 from 9.4 billion scf per day in 2010.
However, consumption is expected to outpace supply growth and expand at a CAGR of 8.7 per cent during 2009-2020, according to Economist Intelligence Unit, hence, limiting the scale of the subsidy may be a measure to contain domestic demand, said the report.
“Our analysis shows that amongst the eight stocks under our coverage, Sipchem’s profitability would be impacted the most if the price of natural gas is increased to a level higher than we currently expect,” Al-Alaiwat added.
“Next, would be Safco due to its dependency on natural gas as its single feedstock. We expect the impact on Sabic to be lower than Sipchem due to its diversified feedstock and product mix. However, the impact of the increase in production cost for Tasnee is becoming diluted due to a favorable outlook for titanium dioxide prices and demand.”
NCB Capital believes that amongst the remaining three stocks under its coverage, Petrochem, Yansab and Saudi Kayan will not be impacted as these firms have secured feedstock at $0.75/mmbtu beyond 2012. Sahara’s exposure is limited and is only through its associate Saudi Ethylene and Polyethylene Company (SEPC).
The report indicates that if the price of gas is increased to $2/mmbtu (against the $1.5/mmbtu currently expected), on average NCB Capital’s fair value prices for stocks under coverage would fall by 1-11 per cent. Conversely, if the gas price is only raised to $1/mmbtu, then the fair value prices would increase by 1-11 per cent. – TradeArabia News Service