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MENA energy | COVID-19 outbreak to weigh on Saudi energy stocks in the short-term; Qatari stocks stable

2019 COVID-19 epidemic strains trade with China, puts industrial demand at risk; Oil, petchem prices down 16.4%, on average, since outbreak. The outbreak of the COVID-19 took a heavy toll on the global energy market. A mix of rising travel and trade restrictions with China, as well as waning economic activity and industrial demand in the country, led energy prices to tumble. On 6 February, Saudi Arabia banned travel to China and blocked expats who travelled to the country from returning to the Kingdom, prompting exporters to reroute their volumes. Oil and natural gas prices fell 12% and 13.4%, respectively, since the outbreak¸ while global methanol, ethylene, and polymers prices dropped 5.5%, 22.5%, and 2.7%, respectively, as of the time of writing.

Run a scenario analysis of the impact of COVID-19 on listed Saudi energy companies; Expect highly negative 1Q20 performance. Our analysis is based on spot global petchem prices as of 9 February, under different volume assumptions and periods until the outbreak is contained, while keeping all else constant. It is based on actual production capacities and figures from the latest reported financial statements. Based on our analysis, we expect Saudi oil and petchem players’ profitability to tumble in the short run. Aramco exports c20% of its crude to China, while listed Saudi petchem companies (Aramco, Advanced, Chemanol, SIIG, Yansab, and Sipchem [Neutral | TP SAR18.0]) export up to 70% of their output to Asia. Moreover, we expect listed Saudi energy producers’ margins to be squeezed by falling prices and high operating leverage, leading to a 1Q20 bottom line drop of at least 50% y-o-y, on our estimates.

Sipchem likely to miss our full year 2020 net income estimate by 36%. At spot commodity prices, we expect Sipchem’s 1Q20 net income to drop by 54% y-o-y on margin compression alone. Volume loss could further weigh on profitability. This is assuming the company is able to reroute Chinese volumes elsewhere, as per management guidance. However, net income could drop a further c14-28%, should the company fail to reallocate 10-20% of volume, meaning Sipchem could miss our 2020e SAR843mn net income estimate by at least 36.7%.

Nakilat [Overweight | TP QAR2.4] and QEWC [Overweight | TP QAR22.1] offer safety, upside. Nakilat’s share price fell c13% (our TP implies 10% upside) since the outbreak, on concerns of a global energy slump. This is unwarranted, in our view, given the company’s operations are secured by long-term offtake agreements, with only 2.5% of income being unhedged. QEWC’s operations are also stable (91% of income comes from operations in Qatar), with the stock offering c40% upside at the current share price. QEWC’s gradual deleveraging and rising JV income should result in a 2020-24e EPS CAGR of 5.6%, which should reflect on dividends. Nakilat and QEWC yield 5.8% and 5% in 2020, respectively.