Call us on +973 17549499 or email us at [email protected]Rabigh Refining & Petrochemical Co. (2380.SE) CMP SAR 33.00 Target SAR 37.56 Upside 13.8% MSCI GCC Index 418.93 Tadawul All Share Index 5,821.08 Key Stock Data Sector Oil & Gas Reuters Code 2380.SE Bloomberg Code PETROR AB Equity Net Out. Shares (bn) 0.876 Market Cap (SAR bn) 28.908 Market Cap (USD bn) 7.727 Avg. 12m Vol. (mn) 4.794 Volatility (30 day) 24.294 Volatility (180 day) 57.347 Stock Performance (%) 52 week high / low (SAR) 43.90 / 14.80 1M 3M 12M Absolute (%) -2.9 6.5 -24.3 Relative (%) -2.7 10.6 -5.7 Shareholding Pattern (%) Saudi Arabian Oil Company 37.50 Sumitomo Chemical Company 37.50 Public 25.00 Petro Rabigh and Tadawul All Share Index Executive Summary Established in 2005, Rabigh Refining & Petrochemical Company (Petro Rabigh) is engaged in the production of refined products such as naphtha, gasoline, jet fuel and diesel fuel oil and petrochemical products from its Rabigh complex. It has 17.2 million tonnes of refining capacity along with 2.4 million tonnes of petrochemicals production capacity. The company is equally owned (37.5% each) by Saudi Aramco and Sumitomo Chemical. Petro Rabigh reports SAR 11.78 billion revenues during 1H09 Petro Rabigh generated SAR 11,776.77 million as revenues from its refining activities. However, higher cost of sales (CoS) of SAR 11,408.85 million or 96.9% of the total revenues significantly impacted the company’s financial performance. The company reported a gross profit of SAR 367.93 million for 1H09 as opposed to a loss reported in 2008. However, depreciation charges for 1H09 stood at SAR 328.26 million and G&A expenses were up 35.1% at SAR 318.63 million, resulting in an operating loss of SAR 278.96 million compared to an operating loss of SAR 236.31 million in 1H08. The company also reported a 54.3% decline in interest & other income to SAR 15.36 million, while foreign exchange losses stood at SAR 1.04 million compared to a gain of SAR 5.16 million in 1H08. Accordingly, net loss for the first half of 2009 widened to SAR 264.65 million, up from the SAR 197.56 million reported for 1H08. Adjusted annualised loss per share (LPS) stood at SAR 0.60 compared to SAR 0.45 in 1H08. Outlook and valuation The petrochemicals and refined products sector was negatively impacted by weak demand and pricing due to the global economic crisis. However, on a positive note, there has been an improvement in demand and pricing of such products in anticipation of an economic recovery. Accordingly, we expect an improvement in the earnings of companies operating in this sector. Petro Rabigh has the advantages of access to uninterrupted supply of feedstock and the marketing channels of its founding shareholders. Besides, it also has the location advantage of being in close proximity with the end markets. The company’s future expansion plan involving the Rabigh II expansion also adds to the optimistic future outlook. Going forward, with the Rabigh complex gearing up to achieve optimum operational yield, we hold an optimistic outlook on the stock. To determine the fair value of Petro Rabigh, we have used the DCF valuation method. Currently, Petro Rabigh’s stock is trading at a P/E multiple of 26.67x and 11.71x on 2009E and 2010E earnings, and at a P/B multiple of 2.82x and 2.30x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has outperformed the index by more rising 112.2% since January as against a gain of 21.2% by the Tadawul All Share Index. Considering the above factors, we arrive at a price target of SAR 37.56, which exhibits a potential upside of 13.8% from its closing price of SAR 33.00 (as on Sep 14, 2009). Accordingly, we initiate our coverage on Rabigh Refining & Petrochemical Co. with an OVERWEIGHT recommendation. SAR Million 2007A 2008A 2009E 2010E 2011E Revenues NA 6,543 26,343 35,543 42,431 EBITDA -423 -1,029 1,476 2,921 4,579 Margin (%) NA -15.7 5.6 8.2 10.8 Net Profit -443 -1,256 1,084 2,470 4,102 Margin (%) NA -19.2 4.1 6.9 9.7 Adjusted EPS (SAR) -0.51 -1.43 1.24 2.82 4.68 Total Assets 26,960.61 47,910.94 52,411.50 56,327.39 60,919.66 RoAE NA -16.5 11.1 21.7 28.2 OVERWEIGHT
Saudi Arabian Oil Company 37.50 Sumitomo Chemical Company 37.50 Public 25.00
Petro Rabigh and Tadawul All Share Index
Executive Summary Established in 2005, Rabigh Refining & Petrochemical Company (Petro Rabigh) is engaged in the production of refined products such as naphtha, gasoline, jet fuel and diesel fuel oil and petrochemical products from its Rabigh complex. It has 17.2 million tonnes of refining capacity along with 2.4 million tonnes of petrochemicals production capacity. The company is equally owned (37.5% each) by Saudi Aramco and Sumitomo Chemical. Petro Rabigh reports SAR 11.78 billion revenues during 1H09 Petro Rabigh generated SAR 11,776.77 million as revenues from its refining activities. However, higher cost of sales (CoS) of SAR 11,408.85 million or 96.9% of the total revenues significantly impacted the company’s financial performance. The company reported a gross profit of SAR 367.93 million for 1H09 as opposed to a loss reported in 2008. However, depreciation charges for 1H09 stood at SAR 328.26 million and G&A expenses were up 35.1% at SAR 318.63 million, resulting in an operating loss of SAR 278.96 million compared to an operating loss of SAR 236.31 million in 1H08. The company also reported a 54.3% decline in interest & other income to SAR 15.36 million, while foreign exchange losses stood at SAR 1.04 million compared to a gain of SAR 5.16 million in 1H08. Accordingly, net loss for the first half of 2009 widened to SAR 264.65 million, up from the SAR 197.56 million reported for 1H08. Adjusted annualised loss per share (LPS) stood at SAR 0.60 compared to SAR 0.45 in 1H08. Outlook and valuation The petrochemicals and refined products sector was negatively impacted by weak demand and pricing due to the global economic crisis. However, on a positive note, there has been an improvement in demand and pricing of such products in anticipation of an economic recovery. Accordingly, we expect an improvement in the earnings of companies operating in this sector. Petro Rabigh has the advantages of access to uninterrupted supply of feedstock and the marketing channels of its founding shareholders. Besides, it also has the location advantage of being in close proximity with the end markets. The company’s future expansion plan involving the Rabigh II expansion also adds to the optimistic future outlook. Going forward, with the Rabigh complex gearing up to achieve optimum operational yield, we hold an optimistic outlook on the stock. To determine the fair value of Petro Rabigh, we have used the DCF valuation method. Currently, Petro Rabigh’s stock is trading at a P/E multiple of 26.67x and 11.71x on 2009E and 2010E earnings, and at a P/B multiple of 2.82x and 2.30x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has outperformed the index by more rising 112.2% since January as against a gain of 21.2% by the Tadawul All Share Index. Considering the above factors, we arrive at a price target of SAR 37.56, which exhibits a potential upside of 13.8% from its closing price of SAR 33.00 (as on Sep 14, 2009). Accordingly, we initiate our coverage on Rabigh Refining & Petrochemical Co. with an OVERWEIGHT recommendation.
SAR Million 2007A 2008A 2009E 2010E 2011E Revenues NA 6,543 26,343 35,543 42,431 EBITDA -423 -1,029 1,476 2,921 4,579 Margin (%) NA -15.7 5.6 8.2 10.8 Net Profit -443 -1,256 1,084 2,470 4,102 Margin (%) NA -19.2 4.1 6.9 9.7 Adjusted EPS (SAR) -0.51 -1.43 1.24 2.82 4.68 Total Assets 26,960.61 47,910.94 52,411.50 56,327.39 60,919.66 RoAE NA -16.5 11.1 21.7 28.2
OVERWEIGHT
Background Rabigh Refining & Petrochemical Company (Petro Rabigh) was incorporated on September 19, 2005 in Saudi Arabia as a limited liability company with the objective of developing an integrated refinery and petrochemical complex at the Rabigh Refinery site with an estimated capital cost of USD 9.87 billion. The company was converted into a joint stock entity and launched an IPO of 219 million shares in January 2008 to raise SAR 2.19 billion towards its operations and construction activities. The company is equally owned (37.5% each) by Saudi Aramco and Sumitomo Chemical. The integrated refinery and petrochemical complex will produce refined products such as naphtha, gasoline, jet fuel, and diesel fuel oil, and petrochemical products such as polyethylene, polypropylene, mono ethylene glycol and propylene oxide. The project is expected to reap benefits from economies of scale and considerable savings through integration of the refinery owned by Saudi Aramco and associated facilities and infrastructure. The existing infrastructure will be supported by the already in place expansion activities and the development of an independent water, steam & power project (IWSPP) currently underway. The project also has a feedstock cost advantage given its access to abundant and uninterrupted supply of crude oil, ethane and butane from Saudi Aramco. Furthermore, the complex is strategically located on the west coast of Saudi Arabia with convenient access to European and Asian markets. Upon completion, the Rabigh complex will be one of the world’s largest refining & petrochemical complex, annually producing 17.2 million tonnes of refined petroleum products and 2.4 million tonnes of ethylene and propylene-based petrochemical products.
Rabigh Complex – Annual Production Capacities (Product-wise) - (in tonnes)
Source: Petro Rabigh On October 01, 2008, in accordance with the agreements entered into at the time of incorporation, Petro Rabigh acquired the assets and hydrocarbon inventories of Saudi Aramco’s Rabigh Refinery. The refinery comprised a 400,000 bbls/ day atmospheric distillation unit, a 47,000 bbls/ day hydro-desulphurisation unit, a 12 million scf/d hydrogen plant, a 75,000 bbls/day naphtha unit and a 50,000 bbls/ day kerosene unit. With a crude processing capacity of 400,000 bbls/ day, the refinery is the largest single train crude distillation unit in the world. The starting of the company’s petrochemical complex, initially scheduled for 4Q08, was delayed till 1Q09. Construction activity was completed by end-2008 and the project is in its start-up and commissioning phase. The ethane and butane gas pipelines from Yanbu to Rabigh that will provide the plant with feedstock are also fully operational. Petro Rabigh has entered into marketing agreements with both founding shareholders (Saudi Aramco and Sumitomo Chemical) to market and sell its refined and petrochemical products. This is expected to support the company’s operations as it can leverage already established marketing channels. While Saudi Aramco will market and sell all refined products within the Middle East, while Sumitomo Chemical Asia, a fully owned subsidiary of Sumitomo Chemical, will market the company’s petrochemical products outside the Middle East. The sale of petrochemical products within the Middle East will be undertaken directly by the company.
Rabigh has 17.2 million tonnes of refined product capacity and 2.4 million tonnes of petrochemical production capacity Marketing channels of founding shareholders - a key positive
Board of Directors • Chaired by Mr. Abdulaziz Fahad Al Khayyal
• Mr. Hiromasa Yonekura – Vice Chairman
• Mr. Motassim A Maashouq • Mr. Assamu Ishitobi • Mr. Ziad Al Labban • Mr. Noryaki Takichita • Mr. Ahmad Saleh Al
Humaid • Mr. Saud Al Ashkar • Mr. Nabil Al Amoudi Source: Zawya Global economy expected to witness negative growth of 1.4% in 2009
Business Model
Investments of Petro Rabigh Petro Rabigh has no subsidiaries and associates. It has only one investment in the form of a 1% holding in Rabigh Arabian Water & Electricity Co. in Saudi Arabia. INDUSTRY SCENARIO According to estimates by the International Monetary Fund (IMF), the world economy will recede 1.4% during 2009 as a result of the continued economic slowdown. This is contrary to the growth rates of 5.1% and 3.1% registered for 2007 and 2008, respectively. However, the trend is likely to reverse with growth rebounding to 2.5% in 2010. The Middle East region’s GDP, which registered a healthy real growth of 5.7% and 6.3% during 2006 and 2007, respectively, is anticipated to come down from 5.2% in 2008 to 2.0% for 2009 before expanding back to 3.7% in 2010. Within the region, the GCC countries witnessed GDP growth of 6.4% in 2008, but are likely to grow at a mere 1.3% during 2009 owing to multiple factors that include weak oil prices, contraction of global demand and trade-related activity, squeezed liquidity, lower tourism and reduced remittances. However, the GCC’s growth is expected to normalize to 4.2% in 2010 on improving market dynamics. Saudi Arabia’s real GDP grew at an average 4.4% over the period 2004-08, on the back of high oil prices and subsequent economic development. However, unlike the overall GCC region, Saudi Arabia’s real GDP is expected to contract 0.9% during 2009 before bouncing back to a positive 2.9% in 2010. As per preliminary estimates, Saudi Arabia’s nominal GDP increased 22.0% YoY to reach SAR 1,753.50 billion in 2008 from SAR 1,437.68 billion in 2007, driven by record oil prices during the first half of the year. Average oil prices jumped to USD 95.0 per barrel (bbl) in 2008 from USD 67.6 per bbl in 2007. The mining & quarrying sector (up 37.2% to SAR 1,005.20 billion) was the largest contributor to the GDP at 57.3%. Meanwhile, recording a YoY growth of 9.2%, the construction sector logged in revenues worth SAR 71.03 billion during 2008 accounting for 4.1%. The finance, insurance, real estate and business services sectors together contributed 6.6%. In light of the financial turmoil and economic slowdown along with falling oil prices, the IMF forecasts a 22.3% decline in nominal GDP for 2009. However, a reversal is expected, as economic growth is likely to rebound to 13.3% in 2010. The country is estimated to run a budget deficit of SAR 65 billion (USD 16 billion) in 2009 – the first in six years. However, massive fiscal surpluses registered during 2003-2008 have allowed Saudi Arabia to boost its foreign assets, which supported higher spending and offset the pressure due to the global crisis.
Engaged in production of petrochemical products such as polyethylene, polypropylene, mono ethylene glycol and propylene oxide
Petro Rabigh
Petro Rabigh is engaged in the production of refined petroleum products like naphtha, gasoline, jet fuel and diesel fuel oil
Benefits derived from secure feedstock supply and well-established marketing channels – the bases for long-term growth
Focus on expanding production capacity through projects such as Rabigh Phase II to positively impact earnings in the long run
In 2008, Saudi Arabia saw the largest production increase, with output rising 397,000 bpd Global oil consumption declined in 2008 led by weak demand from the US
Saudi Arabia's Nominal GDP
0
400
800
1,200
1,600
2,000
2004 2005 2006 2007 2008E0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Nominal GDP (SAR Billions) Nominal GDP Grow th (%)
Contribution to GDP (%)
0.0%
14.0%
28.0%
42.0%
56.0%
70.0%
2004 2005 2006 2007 2008E
Oil to GDP Non-oil to GDP
Source: SAMA, Central Department of Statistics & Information According to BP Statistical Review of World Energy 2009, global oil production increased from 76.99 million barrels per day (bpd) in 2003 to 81.82 million bpd in 2008. Despite production cuts instituted late in the year, production from Organization of the Petroleum Exporting Countries (OPEC) increased 991,000 bpd led by a 4.0% increase in production from the Middle East. Among the OPEC members, Saudi Arabia saw the largest production increase of 397,000 bpd followed by Iraq, which witnessed a 279,000 bpd rise. Oil production outside OPEC however fell 1.4% during the year. Organisation for Economic Co-operation and Development (OECD) production fell by 748,000 bpd, with Mexico witnessing the world’s largest decline (314,000 bpd). Russian oil production fell by 92,000 bpd - the first decline since 1998. As per data from the US Energy Information Administration (EIA), Saudi Arabia (8.41 million bpd) was the largest oil exporter in 2008, followed by Russia (6.88 million bpd) and the UAE (2.58 million bpd).
Oil Production (in thousand bpd)
-
6,000
12,000
18,000
24,000
30,000
North America South &CentralAmerica
Europe &Eurasia
Middle East Africa Asia Pacific
2007 2008
Top 5 Oil Producing Countries in Middle East (in thousand bpd)
-
2,400
4,800
7,200
9,600
12,000
Saudi Arabia Iran United ArabEmirates
Kuw ait Iraq
2007 2008
Source: BP Statistical Review Source: BP Statistical Review Global oil consumption declined 0.6% (or 423,000 bpd) in 2008 - the first decline since 1993 and the largest since 1982. Consumption in OECD countries dropped 3.2% (or 1.53 million bpd) for the third consecutive year of decline. This was mainly led by a 6.4% or 1.26 million bpd drop in consumption in the US. Countries outside the OECD also witnessed a slowdown in consumption growth by 1.10 million bpd. However, on a positive note, according to OPEC, the demand for oil is expected to rise by 4.6 million bpd over 2008-15 and by 10 million bpd by 2020. At the same time, the increasing attractiveness of non-crude products is likely to negatively impact demand for refined products to some extent.
Oil Consumption (in thousand bpd)
-
6,000
12,000
18,000
24,000
30,000
North America South &Central
America
Europe &Eurasia
Middle East Africa Asia Pacif ic
2007 2008
Top 5 Oil Cosuming Countries (in thousand bpd)
-
4,400
8,800
13,200
17,600
22,000
US China Japan India RussianFederation
2007 2008
Source: BP Statistical Review Source: BP Statistical Review
OPEC earnings expected to decline 42.7% in 2009 on weak oil prices Throughput declines on lower consumption Capacity utilisation rates go down to 84.8% in 2008
EIA reported that the sharp decline in crude prices coupled with heavy production cuts led to OPEC’s oil export earnings plummeting 56% (or USD 363 billion) to USD 282 billion for the first seven months of 2009 compared to USD 645 billion for the same period last year. The price of OPEC’s basket averaged USD 52.77 in the first seven months of 2009 compared with as high as USD 109.11 in the same period last year. Going forward, the agency forecasts OPEC’s earnings at about USD 555 billion for 2009, sharply lower than the record high income of USD 968 billion in 2008 because of high prices and production. But it projects a strong recovery in income to about USD 667 billion in 2010 thanks to rising prices amid a mild recovery in the global economy and resurgent oil demand.
Source: Bloomberg Source: Bloomberg The refining segment witnessed healthy growth over 2003-08 led by rising demand for refined products supported by sound economic growth across the world. Moreover, rising demand led to tighter refining capacity leading to high utilisation rates and record high refining margins. Global refining capacity expanded from 83.64 million bpd in 2003 to 88.63 million bpd in 2008. Refining capacity additions in 2008 totalled 833,000 bpd, most of which were concentrated in the Asia-Pacific region, especially China where capacity grew by 2.9% (221,000 bpd). However, global crude throughput fell by approximately 252,000 bpd to 75.18 million bpd in 2008 due to the dip in consumption. The biggest throughput decline was reported in the US, where a 3.4% (or 511,000 bpd) fall was witnessed. However, this was partially offset by a 4.4% growth of 288,000 bpd reported by China.
Worldwide Refining capacity (million bpd)
80
82
84
86
88
90
2003 2004 2005 2006 2007 2008
Total Global Refining Throughput (million bpd)
60
64
68
72
76
80
2003 2004 2005 2006 2007 2008
Source: BP Statistical Review Source: BP Statistical Review Capacity utilisation for refineries, which once stood high on healthy demand for refined products and relatively lower available capacity, dipped as demand declined following the global economic crisis. Global refinery utilisation rates fell for a third year in succession to 84.8% in 2008 - the lowest level since 2003. Refining margins also exhibited a similar trend in 2008, with US Gulf Coast West Texas Sour Coking refining margin falling to its lowest level of USD 2.49 per bbl in 4Q08 compared to USD 9.87 per bbl in 3Q08. The Singapore Dubai Hydrocracking refining margin also declined to USD 5.16 per bbl in 4Q08 as against USD 5.90 per bbl in 3Q08.
Capacity Utilisation Rates (%)
82%
83%
84%
85%
86%
87%
88%
2003 2004 2005 2006 2007 2008
Regional Refining Margins (in USD per bbl)
0
6
12
18
24
30
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
USGC West Texas Sour Coking NWE Brent Cracking
Singapore Dubai Hydrocracking
Source: BP Statistical Review Source: BP Statistical Review
Huge investments lined up for the sector promises healthy outlook Overcapacity building up might negatively impact margins
The prices of key refined products have collapsed following weak demand. Naphtha, a major feedstock for the petrochemcals sector has reached levels even lower than the spot price of crude oil. Although the prices for refined products including gasoline, heat oil and diesel have started showing an uptrend starting 2009, but are still much lower than the levels attained in 2008. According to EIA, gasoline prices are expected to decline to USD 233.27 per gallon in 2009 from USD 325.17 per gallon in 2008 on continued weak demand. Similar trends are expected in the prices of heating oil and diesel, which are anticipated to go down 32.3% and 35.3% to USD 236.21 per gallon and USD 246.46 per gallon in 2009, respectively.
Price of Key Refined Products (in cents per gallon)
100
160
220
280
340
400
2003A 2004A 2005A 2006A 2007A 2008A 2009E 2010E
Gasoline Heating Oil Diesel
Monthly Naphtha Prices (USD/bbl)
-
28
56
84
112
140
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-0
8
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-0
9
Aug-09
Source: EIA Source: Bloomberg Going forward, the oil & gas sector will remain a very important economic driver for both the GCC countries and the global economy. Despite recent economic challenges, the region is continuing with investments in the sector, particularly in exploration and development projects to replenish declining reserves, replace and upgrade deteriorating assets and ensure long-term supply. According to Proleads, the region recorded a 10.9% increase in upstream oil & gas investments with 265 projects as of January 2009 from just 239 in June 2008. The UAE accounts for the highest increase in upstream oil & gas investments, pushing expenditure by 30% to USD 55 billion from USD 42 billion. Also, Qatar increased its oil & gas investments to USD 10 billion from USD 7 billion, including an 11% increase in upstream gas investments. Moreover, the GCC national oil companies (NOCs) hope to make the best of the 30% drop in costs across both upstream and downstream. NOCs in Saudi Arabia, Qatar and Kuwait announced going ahead with plans to establish major refineries. As of early 2007, there were around 14 million bpd of refinery projects underway at various stages of completion. The figure rose to 20 million bpd at the beginning of 2008 and 35 mllion bpd by 1Q09. Furthermore, according to a recent report by Ernst & Young (E&Y), the world’s largest NOCs and international oil companies (IOCs) are planning investments worth more than USD 375 billion. Of these, nearly USD 100 billion will be allocated towards investments in oil & gas activities this year. Favourable investments and healthy demand for oil indicate a healthy outlook for the refining sector in the long run. However, at the same time, overcapacity building up may become a hurdle for overall margins. In addition, the sector also faces issues of project cancellations/delays following the rise in construction costs and shortage of financing. Some of the US projects already under construction have been experiencing delays. This includes the Motiva expansion project of 325,000 bpd in Port Arthur, Texas, which has been delayed from 2010 to 2012. In the Middle East, plans for the single biggest global project, the 625,000 bpd Al-Zour refinery, have also been deferred following issues related to costs. Besides this, the industry also suffers from challenges in the form of mandates for biofuel supply, transport fleet efficiency/emissions and carbon regimes in developed countries.
Increased demand from Asian economies drives growth in the petrochemical industry Access to cheap feedstock instrumental to the emergence of Middle East as a petrochemical hub
PETROCHEMICALS The global petrochemical industry witnessed a healthy growth scenario in the years prior to the global economic crisis on rising demand from emerging Asian economies. Rising population coupled with unparalleled growth witnessed by these economies over the last few years resulted in a rise in demand for petrochemicals from these regions. The demand for petrochemical products increased at a CAGR of 4% during the 2002-07 period. With demand being the key driver for any increase in capacity and utilisation rates, global petrochemical capacity increased at a CAGR of 3.3% to 128.4 million tonnes over this period and capacity utilisation rates reached 91.7% in 2007 compared to 87% in 2002. Consequently, petrochemical production has increased at a CAGR of 3.9% to 117.7 million tonnes over 2002-07. The year 2008 continued to benefit from soaring oil and gas prices, which contributed significantly to the top-line and bottom-line growth of the companies operating within the industry. Further, on the cost front, the Middle East & North Africa (MENA) region holds the advantage of lower feedstock costs owing to its rich oil fields and gas reserves. According to a study by the Association of Petrochemicals Producers in Europe (APPE), Middle Eastern producers enjoy the highest profit margins when compared to producers in Eastern European, American, and South East Asian. The trend is likely to continue as the region holds approximately 65% of the world oil reserves and 49% of the world gas reserves. Additionally, the willingness of the region to diversify its economy beyond oil and gas is adding up to an increased interest in the petrochemicals sector. The MENA region accounts for approximately 66% of the global petrochemical capacity of which the Gulf region (comprising the six GCC countries and Iran) contributes about 86%, while the rest is contributed by North African countries like Egypt, Libya, and Algeria. Saudi Arabia has the maximum share in the petrochemical capacity amongst the Gulf countries, accounting for approximately 43% of the total capacity. Saudi Basic Industries Corp. accounts for approximately 54% and 28% of the total production capacity of Saudi Arabia and MENA respectively, and is the biggest petrochemical company in the region. During the last few years, there has been a major shift in the petrochemical production base from the US and Europe to MENA and China, which have emerged as the hub for new capacities and expansions. The North American region, which once used to be the hub of petrochemical facilities, has been on a downturn due to high feedstock costs that have hurt margins across the industry. The marginal returns earned by companies in the US petrochemical industry coupled with stiff competition from the Chinese and MENA regions on account of feedstock cost advantage have directly impacted capacity expansion plans. Even the European petrochemicals industry has suffered on account of higher feedstock costs, which has stalled growth for the industry. Further, the European industry has witnessed subdued growth due to various regulations including the Kyoto protocol - the European Union’s directive on chemicals and environmental campaigns. Ethylene is the most important feedstock in the production of a number of derivatives apart from being used as a raw material for a variety of inputs for plastics, fibres and elastomers. According to Chemical Market Associates Inc. (CMAI), the global ethylene industry operating rates are projected to fall from 92% in early 2008 to below 90% throughout 2012 in the wake of current economic situation. The massive build-up of ethylene capacity in the Middle East and Asia might be detrimental to the demand-supply dynamics of the sector. Historically, from 1995 to 2008, ethylene capacity increased by more than 22 million metric tonnes (mmt) in the Asia-Pacific region and approximately 13 mmt in the Middle East. CMAI projects that these regions are projected to add another 41 mmt of capacity by 2015. With investments to the tune of USD 80 billion planned over the next 5 years, Saudi Arabia is expected to double its ethylene capacity from the levels achieved in 2008 to18.2 million tonnes per annum by the end of 2013.
Major Petrochemical Projects in Middle East
Country/Company Product Targeted completion Status
Saudi Arabia Arabian Industrial Fibers (Ibn Rushd) Propylene and derivatives 2012 Planned
Saudi Kayan Olefins, aromatics and derivatives 1Q11 Under construction
National Chevron Phillips Ethylene and derivatives 4Q11 Under construction
Petro Rabigh II Olefins, aromatics and derivatives Under study
Saudi Aramco/Dow Chemical Ethylene, aromatics and derivatives 2014 FEED stage
Saudi Aramco/Total Propylene and aromatics Post 2012 NA * FEED – Front-End Engineering Design Source: Chemical Industry News & Intelligence
Benzene prices improve on increased demand from Asian producers India, China contribute to the rise in demand for polypropylene
Major Petrochemical Projects in Middle East
Country/Company Product Targeted completion Status
Abu Dhabi Borouge II Olefins and derivatives 2H10 Under construction
Borouge III Polyolefins 2014 Feasibility study stage
ChemaWEyaat Olefins, aromatics and derivatives 2014 Under preliminary
engineering Qatar
ExxonMobil/Qatar Petroleum Ethylene Post 2012 FEED award delayed
Honam Petrochemical/Qatar Petroleum Olefins and derivatives Post 2012 Decision on project
deferred to 2H12 Oman Duqm Refining & Petrochemical
Refinery, olefins and derivatives Post 2012 Delayed
* FEED – Front-End Engineering Design Source: Chemical Industry News & Intelligence
Benzene is the basic raw material for a number of petrochemical intermediaries including styrene, phenol, acetone, cyclohexane and nitrobenzene. Demand for benzene as a raw material for the production of styrene constitutes 52%, while cumene used in the manufacturing of phenol and cyclohexane accounts for 19% and 13%, respectively. Nitrobenzene and other chemical intermediaries account for the rest of the demand for benzene. Off late, the demand for benzene has been increasing buoyed by higher gasoline consumption in Asia. According to the CMAI, the demand for benzene is expected to witness an absolute growth of 1.3 million tonnes per year through 2011. On the other hand, the supply side dynamics remain tight mainly due to a shortage of investments in the sector. However, rising demand has necessitated additional capacities to be installed. According to the CMAI, approximately 9 million tonnes per year of benzene capacity is likely to be added over 2007-10. Further, according to the CMAI, around 3.1 million tonnes per year of new benzene capacity is likely to be added across Northeast and Southeast Asia during the next five years. In the Middle East, 1.5 million tonnes of new annual benzene capacity will be added over 2007-11. However, on the flip side, increased capacity is likely to strain utilisation rates, which are expected to fall to 80%. Benzene prices, which follow crude oil and natural gas prices, have increased significantly since the start of 2Q09 mainly due to higher demand for styrene from Asia. The price of benzene shot up sequentially 66.9% during the first two months of the second quarter. Moreover, the Asian demand for benzene is increasing fast and the trend may necessitate exports from the US and the Europe. However, in the long run, with an increase in capacity, the price for benzene is expected to exhibit a better correlation to the cost of production. Polypropylene (PP) is the basic raw material for the production of a variety of products including fibers, yarns, and textiles. It is also used in food packaging, electronic films, photo and graphic arts applications and automobiles, where its low weight serves as an inherent advantage. Historically, the demand for PP has grown at around 7-8% mainly due to its versatility and relatively low cost compared to other polymers. According to the CMAI, the demand for PP is expected to increase at approximately 6% per annum over the 2007-12 period buoyed by rising demand from India and China. However, the overcapacity build-up in Middle East and Asia is expected to become a key challenge for the industry as 9 million tonnes of annual capacity gets added over 2008-10. The scenario is also expected to intensify the competition for the export markets with North America likely to lose its leadership position and Europe turning into a net importer. Meanwhile, China continues to remain the largest consumer of PP. According to the China Petroleum & Chemical Industry Association (CPCIA), the PP production is likely to increase to 12 million tonnes by 2010 from an estimated 7.13 million tonnes in 2007. Further, according to International Construction Information Society (ICIS), a cost and specification information provider for the construction industry expects at least 11 new PP plants with total capacity of 3.9 million tonnes per year under construction to come on-stream between 2008 and 2011.
Asian economies, mainly China, remain the biggest export market for the Middle East Economic downturn leads to negative demand for petrochemicals in China
The ongoing global economic recession and credit crunch has dampened demand leading to price correction across basic petrochemical products. The prices of ethylene, butadiene, polypropylene and benzene have declined to at least three-year lows. However, on a positive note, the improving demand scenario has led to an improved trend in 2Q09. The prices for polypropylene, polyethylene and benzene witnessed a sequential improvement during 2Q09. While polypropylene prices reported a 24.4% sequential gain, polyethylene price improved 17.4% in 2Q09 compared to the previous quarter. The price of benzene however, gained the maximum rising 80.6% in 2Q09 on a sequential basis.
Price Change in Crude Oil and Natural Gas
-36%
-18%
0%
18%
36%
54%
72%
2004 2005 2006 2007 2008
Crude OPEC basket Natural Gas
Price Change of Key Petrochemicals
-56%
-28%
0%
28%
56%
2006 2007 2008 2009
Polyethylene Ethylene Benzene Polypropylene
Source: Bloomberg *2009 includes prices till August Source: Bloomberg On the demand side, Asian economies have emerged as the key markets for petrochemical products because of their favourable demand growth. China remains the biggest export market with petrochemical demand expected to rise around 9% each year till 2012 compared to a mere 1.8% projected for the US and Europe. At the same time, as a result of the feedstock cost advantage, the Middle East region has emerged as a significant petrochemical producer, targeting its low cost products towards the Asian markets. However, given the economic slump, the demand for petrochemical products is likely to remain low with over-capacity further deteriorating the situation. Ethylene derivatives exports from North America are expected to decline as a result of weakening global demand, appreciating dollar and overcapacity building up in the Middle East. The reduction in operating rates in Asia particularly the Middle East is expected to exert pressure on US exports and cash margins. According to ICIS, exports from the Middle East are expected to increase from 4.3 million tonnes in 2008 to 11.7 million tonnes in 2013 benefiting from capacity expansions. Consequently, net trade balance for US polyethylene is expected to fall from 3.4 million tonnes in 2008 to 0.80 million tonnes by 2013. With access to low cost feedstock (coal), China has been developing the local industry to fulfil the soaring domestic demand. However, the scenario is changing fast as a result of the sluggish demand for petrochemicals. According to CPCIA, Chinese petrochemical industry is moving downwards for the first time after ten years of high growth. Further, according to the Centre for Business Intelligence, an independent commodities information provider in China, demand for key petrochemical products including ethylene, polyethylene, benzene and purified terephthalic acid (PTA) witnessed negative growth in demand for the first time in 2008. Amongst this, PTA’s demand was the most affected declining 8% in 2008 compared to a rise of 26% in 2007. The slowdown in global demand for Chinese textiles, toys, electronics, home appliances, machinery and other finished manufactured goods has caused the dip in demand for petrochemical products. Further, industry experts believe that the sector would be challenged by overproduction, lack of innovation and competitiveness and price undercutting from other parts of the world.
Demand and Production in China in 2008 ('000 tonnes)
0
3,200
6,400
9,600
12,800
16,000
Ethy
lene
Prop
ylen
e
Poly
ethy
lene
(PE)
Poly
prop
ylen
e
Petro
benz
ene
Purif
ied
tere
phth
alic
acid
(PTA
)
Mon
oeth
ylen
egl
ycol
(MEG
)
Met
hano
l
Demand Production Sources: CBI Research & Consulting, China National Bureau of Statistics
Global turmoil leads to weak demand, over capacity aggravates situation
The Chinese government has undertaken certain initiatives to revive the industry. During January 2009, China’s state council approved a stimulus package of approximately RMB 500 billion (USD 73 billion) to ensure scheduled commission of planned capacity additions, in order to revive the local industry. This initiative will likely reduce chemical imports to 17 mmt in 2011 from 20 mmt in 2007.
China Cracker Expansion Plans, ’000 tonnes
Company Project location 2009 expansion
2010 expansion
2011 expansion
Start-up time
Sinopec (including joint ventures) Fujian United Petrochemical
Fujian, South China 800 - - 1H 2009
Shanghai Secco Petrochemical
Shanghai, East China 300 - - Aug-09
Tianjin Petrochemical Tianjin, North China 1,000 - - Sep-09
Zhenhai Refinery and Petrochemical
Zhejiang, East China 1,000 - - Oct-09
Guangzhou Petrochemical
Guangdong, East China - - 1,000 Planning
board Wuhan Petrochemical
Hubei, Central China - - 800 Planning
board PetroChina Dushanzi Petrochemical
Xinjiang, Northwest China 1,000 - - 1Q 2009
Panjin Petrochemical Liaoning, Northeast China 450 - - Oct-09
Fushun Petrochemical
Liaoning, Northeast China - 800 - Planning
board Sichuan Petrochemical
Sichuan, Southwest China - - 800 Planning
board Daqing Petrochemical
Heilongjiang, Northeast China - 600 - Planning
board Total New Capacity 4,550 1,400 2,600 Source: CBI Research & Consulting
The demand for petrochemicals has remained weak given the ongoing financial turmoil. This in turn has led to the closure of production facilities, delays in capacity addition plans and industry-wide merger and acquisition activity. Capacity additions have been facing delays or postponement mainly in the financing and engineering stages with tightened credit availability. The liquidity crunch has already forced Qatar Petroleum and Korea-based Honam Petrochemical to defer a joint cracker and derivatives project. Saudi Aramco and Dow Chemical-operated Ras Tanura project, estimated at USD 26 billion and touted as the biggest petrochemical project in the sector is faced with apprehensions regarding the scheduled completion in 2014. While decline in feedstock costs has improved profitability for producers, the weak demand scenario has kept a check on the volumes of business generated. However, on a positive note, the demand situation is expected to improve in the medium term. Petrochemical prices, which have already seen multi-year lows, have been slowly, but definitely, recovering. On the other hand, with a decline in construction costs, petrochemical players are renegotiating contracts with their engineering partners. Saudi Aramco decided to renegotiate contracts for its giant Manifa oilfield development project towards the end of 2008. Apart from this, the present situation is believed to be throwing up an array of consolidation and merger opportunities with the Middle East being considered a potential buyer for distressed assets across Asian and European petrochemical companies. In February 2009, Abu Dhabi’s sovereign wealth fund IPIC agreed to acquire Canada-based NOVA Chemicals for USD 2.3 billion, including the debt assumption. In another development, Sabic and Sipchem have signed an MoU to work together on new projects worth USD 4 billion using Sipchem’s government allocation of feedstock ethane. Further, the companies are also taking preparatory steps towards streamlining operational efficiencies, enhancing vertical integration, reducing capacity and realigning portfolios to focus on core businesses and see through this global turmoil.
Petro Rabigh reports SAR 6.54 billion as revenues from its refinery Higher expenses results in a net loss of SAR 1,256 million in 2008
Financial Performance - FY2008 Revenues Petro Rabigh acquired the assets and inventories of Saudi Aramco on October 01, 2008. Accordingly, the company reported revenues of SAR 6,543.34 million for the three months ending December 2008. The company’s performance in 2008 was negatively impacted by the weak demand for refined products, especially naphtha. The price of naphtha, which is a key constituent in petrochemical production, declined significantly on weak demand and an unprecedented fall in petrochemical prices due to the global crisis. Expenses The company reported SAR 6,892.33 million as CoS pertaining to its refinery operations. Depreciation charges for the year amounted to SAR 272.90 million, while general & administrative (G&A) expenses increased from SAR 422.90 million in 2007 to SAR 679.66 million in 2008. Profitability Petro Rabigh’s refining segment experienced strong downward pressure on margins, which coupled with the delay in the start of the new facilities, negatively impacted the operating margins. The company reported a gross loss of SAR 348.99 million for 2008 on account of higher expenses than revenues earned. Furthermore, increased depreciation charges and G&A expenses resulted in an operating loss of SAR 1,301.56 million for the year. However, interest income more than doubling to SAR 45.53 million and foreign exchange losses coming down to SAR 0.21 million from SAR 40.13 million in 2007, helped the company restrict net losses at SAR 1,256.24 million, however, still higher compared to SAR 442.57 million in 2007. Accordingly, Petro Rabigh’s adjusted LPS stood at SAR 1.43 in 2008, up from SAR 0.51 in 2007.
0
2,400
4,800
7,200
9,600
12,000
2008 1H09
Total Revenues (SAR Millions)
-2,000
-1,600
-1,200
-800
-400
0
2007 2008 1H08 1H09
Net Profit (SAR Millions)
EBIT and EBITDA Margin
-30%
-24%
-18%
-12%
-6%
0%
6%
2008 1H09
EBIT Margin EBITDA Margin
Net Profit Margin
-30%
-24%
-18%
-12%
-6%
0%
2008 1H09
-
10,400
20,800
31,200
41,600
52,000
2007 2008 1H08 1H09
Total Assets (SAR Millions)
-6.0%
-4.8%
-3.6%
-2.4%
-1.2%
0.0%
2008 1H08 1H09
Return on Average Assets (RoAA)
-
2,400
4,800
7,200
9,600
12,000
2007 2008 1H08 1H09
Shareholders' Equity (SAR Millions)
-30%
-24%
-18%
-12%
-6%
0%
2008 1H08 1H09
Return on Average Equity (RoAE)
Chart Gallery
Size of the Company The salient features of the balance sheet are:
Petro Rabigh witnessed a 54.6% increase in assets to SAR 50.80 billion compared to SAR 32.86 billion in 1H08 following the completion of the asset transfer from Saudi Aramco’s Rabigh refinery in October 2008. As a result, both current and non-current assets witnessed healthy YoY growth during the first half of 2009.
Non-current assets base increased 35.8% to SAR 43.69 billion compared to SAR 32.16 billion in
1H08 mainly on account of additions to property, plant and equipment (PPE). Additions on account of the Rabigh refinery and petrochemicals complex led to PPE expanding to SAR 15.75 billion compared to SAR 0.58 billion in 1H08. Leased assets, which include desalination & power plants and marine terminal facilities were reported at SAR 6.38 billion compared to none in 1H08, leading to an increase in non-current assets. Despite this, the share of non-current assets in the total assets base declined from 97.9% in 1H08 to 86.0% in 1H09.
Current assets also increased from SAR 0.69 billion in 1H08 to SAR 7.12 billion in 1H09 mainly
on account of transfers pertaining to the Rabigh refinery. While trade receivables were carried at SAR 3.18 billion, inventories were valued at SAR 2.84 billion for the first half of 2009. Accordingly, the share of current assets in the total assets base increased from 2.1% in 1H08 to 14.0%.
Total liabilities increased 85.5% to SAR 41.81 billion from SAR 22.53 billion in 1H08 with the
share in the balance sheet going up from 68.6% to 82.3%. Non-current liabilities, accounting for 64.9% of the total balance sheet increased 54.4% to SAR 32.96 billion led by a rise in long-term loans that increased 2.6% to SAR 21.90 billion. In addition to this, loan from founding shareholders that stood at SAR 4.58 billion compared to none in 1H08 also contributed to the increase.
Current liabilities also rose from SAR 1.19 billion in 1H08 to SAR 8.84 billion in 1H09, mainly on
account of the transfer in accounts payable pertaining to the Rabigh refinery, which stood at SAR 7.42 billion during 1H09. Furthermore, the company also raised a short-term loan of SAR 0.63 billion adding to the current liabilities.
Shareholders’ equity reduced 12.8% to SAR 9 billion in 1H09 led by rise in accumulated losses for
the period. The company’s accumulated losses increased from SAR 0.81 billion in 1H08 to SAR 2.14 billion in 1H09 as a result of rise in net losses for the period. Accordingly, the contribution of shareholders’ equity to the total balance sheet decreased from 31.4% to 17.7%.
Financial Performance Analysis – 1H09 Petro Rabigh generated SAR 11,776.77 million in revenues from refining activities. However, higher CoS of SAR 11,408.85 million (96.9% of total revenues) impacted the company’s financial performance. The company reported a gross profit of SAR 367.93 million for 1H09, up from the loss reported in 2008. However, depreciation charges of SAR 328.26 million and 35.1% higher G&A expenses of SAR 318.63 million led to an operating loss of SAR 278.96 million for 1H09 compared to SAR 236.31 million in 1H08. The company also reported a 54.3% decline in interest & other income to SAR 15.36 million, while foreign exchange losses stood at SAR 1.04 million as against a gain of SAR 5.16 million in 1H08. Accordingly, net loss for the first half of 2009 increased to SAR 264.65 million compared to a net loss of SAR 197.56 million in 1H08. Adjusted annualised LPS stood at SAR 0.60 compared to SAR 0.45 in 1H08. The annualised negative return on average equity stood at 5.8% in 1H09 as against 4.9% in 1H08. Similarly, annualised negative return on average assets was reported at 1.1% for 1H09 compared to 1.3% in 1H08.
Higher expenses negatively impacts bottom-line in 1H09
Working Capital Snapshot (in SAR Million) 2007A 2008A 1H08A 1H09A Current assets Cash and cash equivalents 185.95 1,534.09 377.37 878.04 Trade receivables 0 2,348.49 0 3,175.76 Average collection period (Days) NA NA NA 42.80 Inventories 0 974.11 0 2,840.71 Inventory conversion period (Days) NA NA NA 29.56 Advances to suppliers 420.88 90.25 212.94 53.28 Average advances to suppliers period (Days) NA 14.26 NA 1.11 Prepayments and other current assets 90.26 109.00 100.82 168.11 Average prepayment period (Days) NA 5.56 NA 2.15 Total current assets 697.09 5,055.94 691.13 7,115.88 Current liabilities Accounts payable 1,118.83 6,647.42 779.62 7,418.74
Average payment period (Days) NA 205.64 NA 112.50 Short term loans 0 0 0 633.72 Accrued expenses and other current liabilities 445.45 421.13 410.42 658.17 Current portion of finance lease obligation 0 130.53 0.00 134.25 Total current liabilities 1,564.27 7,199.07 1,190.03 8,844.88 Net Core Working Capital -607.69 -3,125.57 -465.86 -1,180.90 Average Core Working Capital Cycle (Days) NA -186 NA -37 Net Current Assets -867.18 -2,143.14 -498.91 -1,729.00 Average Working Capital Cycle (Days) -434 -1,505 -683 -1,936
Source: Petro Rabigh
Peer Comparison In order to do a peer comparison, we have taken comparable companies involved in oil & gas business across GCC that includes Saudi Industrial Investment Group (SIIG), Saudi Basic Industries Corporation (SABIC), National Industrialization Company (NIC) and Petro Rabigh.
Financial Performance of Comparable Companies SIIG SABIC NIC Petro Rabigh 2008 1H09 2008 1H09 2008 1H09 2008 1H09 Ratios: Total Assets Turnover Ratio (x)
Rabigh II expansion to scale up company’s operations
New Projects and Strategies Petro Rabigh holds the advantage of having Saudi Aramco and Sumitomo Chemical as its founding shareholders. As a result, the company is not only guaranteed access to inexpensive and uninterrupted feedstock, but also the established marketing channels and the technical knowhow of running the business. This virtually eliminates the initial hiccups typically faced by capital intensive petroleum and petrochemical units. The company has been progressing well with its expansion plans, evident from the transfer of Rabigh refinery completed in October 2008. In addition, the petrochemical complex has been commissioned as well. The company’s petrochemical plant, which is well integrated with its refinery, is likely to benefit from economies of scale. The company had supplied 340,000 bbls of diesel and 320,000 bbls of gasoline as of August 2009. The company also commenced exports to international markets with the first shipment of 19,200 metric tonnes of pure mono-ethylene glycol to China in May 2009. Going forward, the company’s plans to expand the Rabigh complex by adding more specialised chemical units such as paraxylene and vinyl acetate monomer, along with the increase of gasoline production bodes well for long-term growth sustainability. The feasibility study for the Rabigh II expansion is being undertaken by JGC Corporation. The second phase of expansion will include scaling up of ethane cracker capacity by 30 million scf/d along with the construction of a new aromatics complex using 3 million tonnes of naphtha. In addition, the complex will also include petrochemical units for production of higher value and speciality products like EPR, TPO, MMA, PMMA, LDPE/EVA, caprolactam, polyols, cumene, phenol/acetone, acrylic acid, SAP and Nylon-6. The feasibility study is expected to be complete by 3Q10 following which, based on the outcome, Petro Rabigh will decide on the implementation plan. SWOT Analysis
THREATS
Increasing competition owing to region-wide capacity expansions Delays in start of production facilities could lead to higher associated costs Overcapacity in the industry could erode margins of petrochemical companies
OPPORTUNITIES
Rising demand for refined petroleum and petrochemical products from expanding economies to support future growth Petrochemicals sector to benefit from the impressive domestic investment program of governments across GCC to diversify from oil
WEAKNESS
Huge debt on its balance sheet with debt-equity ratio of 3.75 as of 1H09
STRENGTHS
Strong back-up from founding shareholders - Saudi Aramco and Sumitomo Chemical Secure access to feedstock at a highly discounted rate from Aramco Access to well-established marketing channels of its founding shareholders
Cost of Equity: 11.61% WACC: 7.21%
Risks and Concerns:
The current economic downturn has squeezed liquidity across most economies in the GCC. Consequently, mobilisation of funds towards infrastructure projects has been adversely impacted, leading to further slowdown in overall economic activity. In addition, the weak growth has negatively impacted demand across sectors, thereby restricting consumer spending. Going forward, the region’s economies are likely to witness slower/negative growth in 2009 despite some improvement during the second half of the year. Furthermore, as demand for refined products and petrochemicals remains heavily dependent on economic fundamentals, companies may witness restrained revenue growth.
The price realisations for refined petroleum products are directly correlated to movement in
oil and gas prices. As oil and gas prices have remained volatile in the recent past, any significant dip in prices can negatively impact revenues for the company.
The prices of petrochemical products are mainly determined by the demand/supply scenario
and movement in crude oil and natural gas prices, which form the basic raw materials. Therefore, any significant dip in crude oil and natural gas prices may lead to lower price realisations for petrochemical products, whereas at the same time, lower input costs may help improve operating margins and vice versa.
Valuation Methodology: We have used DCF valuation method to arrive at the fair value of Petro Rabigh, as discussed below: Assumptions:
(i) Risk free Rate (Rf) of 3.21%, equivalent to one year average yield on 10 year US T-bill. (ii) Levered Beta of 1.18 (iii) A terminal growth rate of 2%
Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 11.61% and a WACC of 7.21%.
Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 3,201.87 Terminal Value: Residual Cash Flow (FCFF of 2013E) 4,427.44 WACC 7.21% Long-Term Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 0.05 Equals Nominal Terminal Value 86,738.86 Implied Multiple of 2013E EBITDA 12.79 Times PV/ Discount Factor 0.73 Present Value of Terminal/Residual Value 63,419.10 Enterprise Value 66,620.97 Implied Multiple of 2013E EBITDA 9.82 Less: Long-term Debts 33,715.50 Less: Market Value of Preferred Shares 0.00 Add: Surplus Cash and Investments 0.00 Equity Value 32,905.47 No. of Outstanding Shares (Million) 876.00 Fair Value Per Share (SAR) 37.56
* figures in SAR Million unless specified
Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes.
Sensitivity Analysis of Nominal Terminal Value (SAR Million) Discount
Investment Opinion The performance of the refining and petrochemicals segments is directly dependent on the demand for products, which is in turn strongly correlated to the overall macroeconomic health. According to BP Statistical Review of World Energy 2009, global oil production increased from 76.99 million bpd in 2003 to 81.82 million bpd in 2008. The refining segment also witnessed healthy growth over 2003-08 led by the rising demand for refined products and sound economic growth across the world. Global refining capacity expanded from 83.64 million bpd in 2003 to 88.63 million bpd in 2008. However, global crude throughput fell by approximately 252,000 bpd to 75.18 million bpd in 2008 mainly on account of a decline in consumption. Accordingly, global refinery utilisation rates fell for the third time in succession to 84.8% in 2008 - the lowest since 2003. The prices of key refined products collapsed following weak demand due to the economic crisis. Naphtha, a major feedstock for the petrochemcals sector reached levels even lower than the spot price of crude oil following weak demand for petrochemicals. However, on a positive note, the prices of refined products are beginning to move positively with consolidating demand and improving macroeconomic environment. In addition, despite the recent economic challenges, the region is on track with its investments in oil & gas, particularly in exploration and development projects to replenish declining reserves, replace and upgrade deteriorating assets and ensure long-term supply. According to Proleads, the region witnessed a 10.9% increase in upstream oil & gas investments with 265 projects as of January 2009 from just 239 in June 2008. As of 1Q09, there were 35 million bpd of refinery projects under construction at various stages. Going forward, a favourable investent scenario along with consolidating demand and prices present a healthy outlook for the sector. The petrochemicals sector witnessed healthy growth during 2008, as sound economic growth registered by economies worldwide kept the demand for petrochemical products high. At the same time, price realisations followed an upward trajectory leading to record top- and bottom-line growth for companies operating in the sector. However, towards the later part of 2008, the sector witnessed slower growth as demand for petrochemicals plunged due to the economic slump. The slowdown across the world driven by multiple factors including the subprime mortgage crisis and declining oil prices was instrumental in pulling down demand for petrochemical products. The prices of basic petrochemicals such as ethylene, butadiene, propylene, styrene and benzene slumped to at least three-year lows. Even China, which continues to be one of the largest consumers of petrochemicals, was no exception and witnessed negative demand growth for the first time in 10 years. As the impact of the economic crisis deepened, the petrochemicals sector witnessed shut-downs of production facilities and delays in capacity addition plans. In addition, the sector has been abuzz with talks of various mergers and acquisitions. However, recently there has been a revival of sorts in the prices of crude oil and natural gas. The OPEC crude increased from USD 35.58 per bbl at the start of the year to USD 66.47 per bbl as of September 14, 2009. The prices for polypropylene, polyethylene and benzene witnessed sequential improvements in 2Q09. While polypropylene prices reported a 24.4% sequential gain, polyethylene price improved 17.4% in 2Q09 compared to the previous quarter. The price of benzene gained the maximum rising 80.6% on a sequential basis. Based on these factors, we expect a gradual improvement in the earnings of companies operating in the sector. Petro Rabigh is well-placed in the downstream business given its ownership of one of the world’s largest refining & petrochemical complex with an annual production capacity of 17.2 million tonnes of refined petroleum products and 2.4 million tonnes of ethylene and propylene-based petrochemicals. Besides this, the company has strong backing from its founding shareholders - Saudi Aramco and Sumitomo Chemical. The company not only has a feedstock cost advantage with uninterrupted access to raw materials from Saudi Aramco, but also has the location advantage of being in close proximity with the end markets. Furthermore, access to established marketing channels of its founding shareholders gives it a definite edge. Going forward, with demand improving and prices consolidating for refined products and petrochemicals, the company will benefit as its projects become fully operational. Future expansion plans including the Rabigh II project will further strengthen the company’s foothold in the industry. Based on these solid fundamentals, we hold an optimistic view on this stock. Currently, Petro Rabigh’s stock is trading at a P/E multiple of 26.67x and 11.71x on 2009E and 2010E earnings, and at a P/B multiple of 2.82x and 2.30x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has outperformed the index by more than doubling (up 112.2%) since January as against a gain of 21.2% by the Tadawul All Share Index. Considering the above factors, we arrive at a price target of SAR 37.56, which exhibits a potential upside of 13.8% from its closing price of SAR 33.00 (as on Sep 14, 2009). Accordingly, we initiate our coverage on Rabigh Refining & Petrochemical Co. with an OVERWEIGHT recommendation.
Fair Value: SAR 37.56 Investment Opinion: OVERWEIGHT
Financial Statements Consolidated Balance Sheet
(in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Non-current assets Property, plant and equipment 0 1,541.27 578.76 15,750.30 18,148.97 22,879.54 26,239.74 Leased assets 0 6,547.61 0 6,379.33 6,357.93 6,168.25 5,978.57 Construction in progress 23,812.68 31,428.49 28,461.02 18,299.24 16,886.37 13,782.65 12,774.14 Long term investment 2,450.84 3,337.63 3,124.10 3,259.91 3,363.01 3,670.60 4,030.78 Total non-current assets 26,263.52 42,855.00 32,163.89 43,688.78 44,756.28 46,501.05 49,023.22 Current assets Cash and cash equivalents 185.95 1,534.09 377.37 878.04 927.10 995.43 1,543.25 Trade receivables 0 2,348.49 0 3,175.76 3,587.89 4,860.49 5,860.55 Inventories 0 974.11 0 2,840.71 2,913.54 3,725.14 4,225.61 Advances to suppliers 420.88 90.25 212.94 53.28 53.28 53.28 53.28 Prepayments and other current assets 90.26 109.00 100.82 168.11 173.42 192.01 213.76 Total current assets 697.09 5,055.94 691.13 7,115.88 7,655.22 9,826.35 11,896.44 Total Assets 26,960.61 47,910.94 32,855.01 50,804.66 52,411.50 56,327.39 60,919.66 LIABILITIES AND EQUITY Liabilities Non-current liabilities Long-term loans 19,443.75 21,900.00 21,337.50 21,900.00 21,900.00 21,900.00 21,900.00 Loan from founding shareholders 0 3,000.00 0 4,575.00 4,575.00 4,575.00 4,575.00 Finance lease obligations 0 6,538.63 0 6,472.52 6,567.17 7,012.77 7,145.89 Provision for deferred employee service awards 0 5.78 2.63 8.92 9.76 15.06 21.76 Employees’ termination benefits 0 3.62 2.33 4.12 4.25 4.57 4.94 Total non-current liabilities 19,443.75 31,448.02 21,342.45 32,960.57 33,056.18 33,507.40 33,647.59 Current liabilities Accounts payable 1,118.83 6,647.42 779.62 7,418.74 7,665.70 8,658.44 9,057.64 Short term loans 0 0 0 633.72 633.72 702.61 729.43 Accrued expenses and other current liabilities 445.45 421.13 410.42 658.17 678.98 735.34 801.39 Current portion of finance lease obligation 0 130.53 0 134.25 137.46 153.13 174.40 Total current liabilities 1,564.27 7,199.07 1,190.03 8,844.88 9,115.87 10,249.52 10,762.86 Total liabilities 21,008.02 38,647.10 22,532.49 41,805.45 42,172.05 43,756.93 44,410.45 Equity Share capital 6,570.00 8,760.00 8,760.00 8,760.00 8,760.00 8,760.00 8,760.00 Statutory reserve 0 2,409.00 2,409.00 2,409.00 2,409.00 2,517.40 2,764.36 Employee Share Ownership Plan 0 -31.50 -31.50 -31.48 -31.48 -31.48 -31.48 Accumulated losses -617.42 -1,873.66 -814.98 -2,138.31 -898.07 1,324.55 5,016.34 Equity attributable to equity holders of the Company 5,952.58 9,263.84 10,322.53 8,999.21 10,239.44 12,570.46 16,509.21 Total liabilities & equity 26,960.61 47,910.94 32,855.01 50,804.66 52,411.50 56,327.39 60,919.66
Consolidated Income Statement (in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Total Revenues 0 6,543.34 0 11,776.77 26,342.54 35,543.14 42,431.15 Cost of Sales 0 -6,892.33 0 -11,408.85 -24,153.93 -31,305.40 -36,068.00 Gross loss from sales 0 -348.99 0 367.93 2,188.60 4,237.74 6,363.15 Depreciation 0 -272.90 -0.42 -328.26 -423.29 -486.89 -533.75 General and administrative expenses -422.90 -679.66 -235.89 -318.63 -712.72 -1,317.08 -1,784.48 Operating loss -422.90 -1,301.56 -236.31 -278.96 1,052.60 2,433.77 4,044.92 EBITDA -422.90 -1,028.65 -235.89 49.30 1,475.88 2,920.66 4,578.67 Interest and other income 20.46 45.53 33.59 15.36 32.43 35.81 57.07 Foreign currency loss -40.13 -0.21 5.16 -1.04 -1.04 0 0 Net profit/ (loss) for the year -442.57 -1,256.24 -197.56 -264.65 1,083.98 2,469.58 4,101.99 Adjusted EPS -0.51 -1.43 -0.45* -0.60* 1.24 2.82 4.68
Consolidated Cash Flow Statement (in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Cash Flows from Operating Activities Net loss for the year -442.57 -1,256.24 -197.56 -264.65 1,083.98 2,469.58 4,101.99 Adjustments for: Depreciation 0 272.90 0.42 328.26 423.29 486.89 533.75 Property, plant & equipment 0 0 0 0.26 0.26 0 0 Provision for deferred employee service awards 0 5.78 2.63 3.16 4.03 5.34 6.74 Provision for employees’ termination benefits 0 3.66 2.33 0.55 0.64 0.32 0.37 Operating profit before changes in working capital -442.57 -973.91 -192.19 67.57 1,512.19 2,962.14 4,642.85 Changes in operating assets and liabilities (Increase) in trade receivables 0 -2,348.49 0 -827.26 -1,239.39 -1,272.61 -1,000.05 (Increase) in inventories 0 -974.11 0 -1,866.60 -1,939.43 -811.60 -500.47 Decrease in advances to suppliers 482.03 330.63 207.94 36.97 36.97 0 0 (Increase) in prepayments and other current assets -74.47 -18.75 -10.56 -59.11 -64.42 -18.59 -21.75 Increase/(decrease) in accounts payable -698.09 5,528.59 -339.21 771.33 1,018.29 992.74 399.20 (Decrease)/increase in accrued expenses and other liabilities 323.41 -24.31 -35.03 237.03 257.85 56.36 66.04 Cash generated from operations -409.68 1,519.65 -369.05 -1,640.06 -417.94 1,908.44 3,585.82 Zakat paid -13.09 0 0 0 0 0 0 Employee termination benefits – paid 0.00 -0.04 0 -0.04 -0.04 -0.04 -0.04 Net cash provided/(used in) by operating activities -422.77 1,519.61 -369.05 -1,640.10 -417.99 1,908.39 3,585.78 Cash Flows from Investing Activities Property, plant & equipment 0 0 -579.18 -14,369.59 -16,841.30 -5,027.79 -3,704.26 Additions to construction in progress -15,971.90 -8,237.80 -4,648.35 13,129.24 14,433.15 2,965.16 845.27 Other purchases of property, plant and equipment 0 -1,002.51 0 0.33 0.33 0 0 Additions to long term investment -2,119.65 -886.79 -673.26 77.72 -25.38 -307.59 -360.18 Net cash used in investing activities -18,091.55 -10,127.09 -5,900.79 -1,162.29 -2,433.20 -2,370.22 -3,219.17 Cash Flows from Financing Activities Short term loans 0 0 0 633.72 633.72 68.89 26.82 Proceeds from issue of share capital (net) 3,945.00 4,567.50 4,567.50 0 0 0 0 Net movement in long-term loans 12,675.00 2,456.25 1,893.75 0 0 0 0 Loans received from founding shareholders 0 3,000.00 0 1,575.00 1,575.00 0 0 Repayment of finance lease obligations 0 -68.14 0 -62.38 35.48 461.27 154.39 Net cash from financing activities 16,620.00 9,955.61 6,461.25 2,146.34 2,244.20 530.15 181.21 Net increase/(decrease) in cash and cash equivalents -1,894.31 1,348.14 191.42 -656.05 -606.99 68.33 547.83 Cash and cash equivalents at the beginning of the year 2,080.27 185.95 185.95 1,534.09 1,534.09 927.10 995.43 Cash and cash equivalents at the end of the year 185.95 1,534.09 377.37 878.04 927.10 995.43 1,543.25
Common – Size Statements
Common-Size Consolidated Balance Sheet 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Non-current assets Property, plant and equipment 0.0% 3.2% 1.8% 31.0% 34.6% 40.6% 43.1% Leased assets 0.0% 13.7% 0.0% 12.6% 12.1% 11.0% 9.8% Construction in progress 88.3% 65.6% 86.6% 36.0% 32.2% 24.5% 21.0% Long term investment 9.1% 7.0% 9.5% 6.4% 6.4% 6.5% 6.6% Total non-current assets 97.4% 89.4% 97.9% 86.0% 85.4% 82.6% 80.5% Current assets Cash and cash equivalents 0.7% 3.2% 1.1% 1.7% 1.8% 1.8% 2.5% Trade receivables 0.0% 4.9% 0.0% 6.3% 6.8% 8.6% 9.6% Inventories 0.0% 2.0% 0.0% 5.6% 5.6% 6.6% 6.9% Advances to suppliers 1.6% 0.2% 0.6% 0.1% 0.1% 0.1% 0.1% Prepayments and other current assets 0.3% 0.2% 0.3% 0.3% 0.3% 0.3% 0.4% Total current assets 2.6% 10.6% 2.1% 14.0% 14.6% 17.4% 19.5% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Non-current liabilities Long-term loans 72.1% 45.7% 64.9% 43.1% 41.8% 38.9% 35.9% Loan from founding shareholders 0.0% 6.3% 0.0% 9.0% 8.7% 8.1% 7.5% Finance lease obligations 0.0% 13.6% 0.0% 12.7% 12.5% 12.5% 11.7% Provision for deferred employee service awards 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Employees’ termination benefits 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total non-current liabilities 72.1% 65.6% 65.0% 64.9% 63.1% 59.5% 55.2% Current liabilities Accounts payable 4.1% 13.9% 2.4% 14.6% 14.6% 15.4% 14.9% Short term loans 0.0% 0.0% 0.0% 1.2% 1.2% 1.2% 1.2% Accrued expenses and other current liabilities 1.7% 0.9% 1.2% 1.3% 1.3% 1.3% 1.3% Current portion of finance lease obligation 0.0% 0.3% 0.0% 0.3% 0.3% 0.3% 0.3% Total current liabilities 5.8% 15.0% 3.6% 17.4% 17.4% 18.2% 17.7% Total liabilities 77.9% 80.7% 68.6% 82.3% 80.5% 77.7% 72.9% Equity Share capital 24.4% 18.3% 26.7% 17.2% 16.7% 15.6% 14.4% Statutory reserve 0.0% 5.0% 7.3% 4.7% 4.6% 4.5% 4.5% Employee Share Ownership Plan 0.0% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% Accumulated losses -2.3% -3.9% -2.5% -4.2% -1.7% 2.4% 8.2% Equity attributable to equity holders of the Company 22.1% 19.3% 31.4% 17.7% 19.5% 22.3% 27.1% Total liabilities & equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Common-Size Income Statement 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Total Revenues NA 100.0% NA 100.0% 100.0% 100.0% 100.0% Cost of Sales NA -105.3% NA -96.9% -91.7% -88.1% -85.0% Gross loss from sales NA -5.3% NA 3.1% 8.3% 11.9% 15.0% Depreciation NA -4.2% NA -2.8% -1.6% -1.4% -1.3% General and administrative expenses NA -10.4% NA -2.7% -2.7% -3.7% -4.2% Operating loss NA -19.9% NA -2.4% 4.0% 6.8% 9.5% EBITDA NA -15.7% NA 0.4% 5.6% 8.2% 10.8% Interest and other income NA 0.7% NA 0.1% 0.1% 0.1% 0.1% Foreign currency loss NA 0.0% NA 0.0% 0.0% 0.0% 0.0% Net profit/ (loss) for the year NA -19.2% NA -2.2% 4.1% 6.9% 9.7%
Financial Ratios 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Liquidity Ratios: Current Ratio (x) 0.45 0.70 0.58 0.80 0.84 0.96 1.11 Quick Ratio (x) 0.45 0.57 0.58 0.48 0.52 0.60 0.71 Inventory Conversion Period (Days) NA NA NA 30 27 34 34 Average Collection Period (Days) NA NA NA 43 41 43 46 Average Advances to Suppliers Period (Days) NA 14 NA 1 1 1 0 Average Prepayment Period (Days) NA 6 NA 2 2 2 2 Length of Operating Cycle (Days) NA 20 NA 76 71 80 83 Average Payment Period (Days) NA 206 NA 113 108 95 90 Length of Cash Cycle (Days) NA -186 NA -37 -37 -15 -7 Activity Ratios: Debtors Turnover Ratio (x) NA NA NA 8.53 8.87 8.41 7.92 Creditors' Turnover Ratio (x) NA 1.77 NA 3.24 3.38 3.84 4.07 Net Fixed Assets Turnover Ratio (x) NA 0.21 NA 0.59 0.65 0.84 0.97 Total Assets Turnover Ratio (x) NA 0.17 NA 0.48 0.53 0.65 0.72 Equity Turnover Ratio (x) NA 0.86 NA 2.58 2.70 3.12 2.92 Profitability Ratios: EBITDA Margin (%) NA -15.7 NA 0.4 5.6 8.2 10.8 Operating Profit Margin (OPM) (%) NA -19.9 NA -2.4 4.0 6.8 9.5 Net Profit Margin (NPM) (%) NA -19.2 NA -2.2 4.1 6.9 9.7 Return on Average Equity (RoAE) (%) NA -16.5 -4.9* -5.8* 11.1 21.7 28.2 Return on Average Assets (RoAA) (%) NA -3.4 -1.3* -1.1* 2.2 4.5 7.0 Leverage Ratios: Debt to Equity (D/E) Ratio (x) 3.27 3.41 2.07 3.75 3.30 2.73 2.09 Shareholders' Equity to Total Assets Ratio (x) 0.22 0.19 0.31 0.18 0.20 0.22 0.27 Total Liabilities to Total Assets Ratio (x) 0.78 0.81 0.69 0.82 0.80 0.78 0.73 Current Liabilities to Equity Ratio (x) 0.26 0.78 0.12 0.98 0.89 0.82 0.65 Growth Rates: % YoY Growth in Total Revenues NA NA NA NA 302.6 34.9 19.4 % YoY Growth in Operating Profit NA 207.8 -244.6 18.0 -180.9 131.2 66.2 % YoY Growth in EBITDA NA 143.2 -244.4 -120.9 -243.5 97.9 56.8 % YoY Growth in Net Profit NA 183.9 -227.2 34.0 -186.3 127.8 66.1 % YoY Growth in Total Assets NA 77.7 68.8 54.6 9.4 7.5 8.2 % YoY Growth in Shareholders' Equity NA 55.6 65.4 -12.8 10.5 22.8 31.3 Ratios used for Valuation: Adj. EPS (SAR) -0.51 -1.43 -0.45* -0.60* 1.24 2.82 4.68 Adj. BVPS (SAR) 6.80 10.58 11.78 10.27 11.69 14.35 18.85 P/E Ratio (x) -65.32 -23.01 -73.16 -54.62 26.67 11.71 7.05 P/BV Ratio (x) 4.86 3.12 2.80 3.21 2.82 2.30 1.75 Current Market Price (SAR)** 33.00 33.00 33.00 33.00 33.00 33.00 33.00
* Annualized ** Current Market Price as on September 14, 2009
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