Petrochemical outlook: NCB Capital expects improvement in demand

Updated 30 June 2014
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Petrochemical outlook: NCB Capital expects improvement in demand

Despite the volatility in the global economy during the first half of 2014, NCB Capital, the GCC’s major wealth manager and the Kingdom’s largest asset manager, continues to believe that improvement in demand, mainly from advanced economies, and higher operational efficiencies will drive the sector’s 2014 and 2015 expected growth.
Iyad Ghulam, equity research analyst at NCB Capital, said: “We believe the anticipated improvement in the United States and the European economies will support growth in the second half of 2014. The increase in industrial production, auto sales and positive GDP growth outlook are set to increase petrochemical demand in the coming quarters.
“We expect the total net income of the ten stocks under coverage to increase by 11.7 percent YoY to SR38.3 billion in 2014 and 14.8 percent YoY to SR43.9 billion in 2015, against 2.9 percent growth in 2013. This growth will be driven by earnings from Petrochem and Kayan, and higher margins.
The sector margins are expected to increase by 50 bps YoY to 22.5 percent. “However, our 2014 estimates were revised lower by 6 percent due to weak Q1, 2014 results and delay in new startups.”
NCB Capital downgrades advanced petrochemicals to neutral from overweight with a revised PT of SR49.8. “The stock gained 59 percent since we upgraded it to overweight in March 2013, outperforming the TASI by 21.4 percent. It is currently trading at a 2015 P/E of 12.1x, in-line with the sector average,” explained Ghulam. “Although we remain positive on the company’s earnings and dividend outlook, we believe the stock offers limited upside at the current levels.”
NCB Capital remains overweight on SABIC, SIIG, Yansab and Tasnee, and neutral on the remaining stocks under coverage. “Our top picks are Tasnee and SIIG,” highlighted Ghulam. “Increasing operating margins of industrial and petrochemical segments, and the attractive valuation (2014 P/E of 11.7x vs. sector average of 14.7x) are Tasnee’s key positives. Also, Petrochem’s improving operational efficiency is expected to increase SIIG’s 2015 net income by 37.3 percent indicating, an attractive 2014 P/E of 11.9x.”
The global economy was mixed in H1, 2014. The US economy was impacted by severe winter conditions during Q1 2014 but started to improve in Q2, 2014. Slow growth, low inflation and the Ukrainian tension have impacted the performance of the European economy, which in turn forced the ECB to implement new monetary measures. NCB Capital expects the global economy to improve in H2, 2014 driven by the continuous support of the Fed and the ECB.
According to the IMF’s April 2014 report, the global GDP is expected to grow by 3.6 percent in 2014 and 3.9 percent in 2015, higher than 3 percent recorded in 2013.
Despite the reduction in the IMF growth estimates for 2014, NCB Capital says it believes that higher employment, credit policies easing, increasing home prices and improving capital market are expected to help the US economy to expand in the next quarters. Moreover, the euro zone economies are expected to recover supported by rising exports, investments and the recent measures implemented by the ECB.


Oil-rich South Sudan seeks investment in fragile new peace

Updated 22 November 2018
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Oil-rich South Sudan seeks investment in fragile new peace

  • The country is eager to make up for $4 billion in lost revenue caused by the five-year conflict
  • The government is offering prospective investors incentives such as a tax-free grace period of up to 10 years

JUBA, South Sudan: South Sudan is making its first big foreign investment pitch since declaring an end to civil war, but the oil-rich nation faces hesitation from some companies that want to make sure the fragile new peace deal holds.
The country is eager to make up for $4 billion in lost revenue caused by the five-year conflict after the government and armed opposition signed a power-sharing agreement two months ago.
Tapping 3.5 billion barrels of oil reserves, the third largest in Africa, is the fastest route for South Sudan, whose economy is almost entirely dependent on oil exports.
“Do business or get out,” South Sudan’s petroleum minister, Ezekiel Lol Gatkuoth, said in an interview with The Associated Press on Wednesday.
More than 400 international and local companies are attending this week’s Africa Oil & Power Conference in the capital, Juba, up from the 300 that attended the initial conference last year.
The government is offering prospective investors incentives such as a tax-free grace period of up to 10 years. It hopes to build on the momentum created in August when drilling resumed in key oil fields for the first time since 2013. The aim is to return to the pre-conflict production of 350,000 barrels per day.
Some at the investment conference expressed cautious optimism after preliminary signs of growth.
Earlier this year Russian oil company Zarubezhneft signed a memorandum of understanding with South Sudan’s oil ministry to explore the 10 oil blocks that remain open. The government is also speaking with Russia’s third largest oil producer, Gazprom Neft, and Rosneft.
Those already licensed to operate in the newly reopened oil fields in Unity State are China National Petroleum Corporation, India-based Oil and Natural Gas Corporation and Malaysia-based Petronas.
And early next year local oil marketing company Trinity Energy will begin building East Africa’s only oil refinery, a $350 million project that will take about 18 months to complete. It will be able to produce 25,000 barrels per day. Currently South Sudan exports its crude oil, only to buy it back.
“South Sudan is a fantastic blank canvas ... because we see that the demand is here,” said Pearl Uzokwe, director of governance and sustainability at the Sahara Group, a Nigerian energy and infrastructure company that recently signed a memorandum of understanding with the government.
However, she said, it’s important for South Sudan’s government to create an enabling environment.
Past peace deals, as well as power-sharing arrangements between President Salva Kiir and armed opposition leader Riek Machar, have collapsed amid fresh fighting.
One analyst said most of his clients, especially Western ones, are taking a “wait and see” approach even as the mood seems positive.
“They’re not willing to commit to anything right now,” Shawn Robert Duthie, senior analyst for Africa Risk Consulting, told the AP. Many are worried about their reputational risk, he said. South Sudan’s oil sector has faced scrutiny for allegedly using oil revenues to fuel the civil war.
If the new peace deal can last a year without any huge flare-ups and if Kiir and his returning deputy Machar can work together it might help in bringing more people to the table, Duthie said.