We expand coverage on the GCC Petrochemicals Sector with two names in focus in this report – Mesaieed Petrochemical Holding Company (MPHC) and Industries Qatar (IQCD). Our valuations are based on a mix of DDM (40% weight), EV/EBITDA (10% weight), P/E (10% weight) and DCF (40% weight). Globally, petrochemicals demand recovered during 2021 as economic activity rebounded from the lows of 2020 and appears to have resumed the super-cycle seen from 2010 to2018. Petrochemical prices rose sharply in 2021 and especially during 2Q21, which we believe will correct from the multi-year highs but remain strong enough to maintain margins for petrochemical producers, in spite of feedstock price rise. We will be expanding our coverage to include more GCC Petrochemical companies with time.
• Qatar Petrochemical companies resilient amid Covid-19 pandemic and ride the global economic recovery wave in 2021. The year 2021 witnessed global economic recovery after the lows of 2020 impacted by COVID-19. Along with the rise in crude oil prices (+50% in 2021) to average over USD 70 per barrel, petrochemical prices have also risen between 25-35% over 2020. The price rise was driven by a rebound in economic demand as well as global supply chain bottlenecks. The petrochemicals industry rode this wave of rebound to post strong topline and bottom-line results in 2021 (9M) and looks set to continue the momentum into 2022.
• Demand expected to continue from both the East (India, China) and the West (US, EU). The demand for petrochemical products is coming from both developing economies like India but also those like US and China, which had seen peak growth some time back. While crude as a source of fuel may be impacted by global environmental concerns, the widespread application of petrochemicals across industries – from packaging to construction to transportation – is likely to result in continued demand for the near to medium term at least.
• Qatar Petrochemical companies demonstrate strategic advantage over other producers as they are diversified producers. Qatar-based petrochemical companies, like their Middle Eastern peers, are amongst the lowest-cost producers on the cost curve, due to the lowest cost of oil extraction further flowing along the value chain. Further, because of other products like fertilizers, output is diversified, providing resilience during periods of economic volatility.
• Major product-feedstock spreads to remain steady after suffering from downcycle until 2020. Spreads across major pairs such as Polyethylene (PE)-Naphtha, Polypropylene (PP)-Naphtha, and Polypropylene (PP)-Propane have witnessed a rebound in 2021 and are likely to remain steady for the next few years. Demand for fertilizers is also expected to remain steady. Consequently, margins and cash flows of petrochemical companies are also likely to sustain.
We prefer companies that have significant market share in major product segments like Urea, PE and PP, have feedstock allocations for inputs, and have low leverage (they stand to be insulated from expected rising interest rates). We assume demand, prices, and spreads to sustain until 2024. Risks to our valuations arise from renewed economic restrictions to halt the spread of new COVID-19 variants, which could negatively affect demand.