Disappointing quarterly earnings at the Saudi International Petrochemical Company (Sipchem), which processes cheap natural gas into chemicals, showed this week that organisational challenges can dent even the most profitable of industries. Delays in completing three new plants led Sipchem to a second-quarter net profit of 87.7 million riyals. That compares with a profit forecast of 217m riyals for the quarter from NCB Capital, a Saudi investment bank, and an estimate of 117.3m riyals offered by Global Investment House in Kuwait.
Two of the delayed plants started up last month, while the third will be online next month, Sipchem announced last week. All three plants were scheduled to be commissioned by April. The delay was expected to continue hitting the company's earnings throughout the year, NCB said in a note yesterday. The latest result was still a hefty increase from the same period last year, when Sipchem recorded profits of just 510,600 riyals as a result of the global economic downturn.
"The delay in all three plants coming online versus our assumption will negatively impact our 2010 earnings forecasts," NCB said. "However, our estimates for 2011 earnings and beyond will likely remain intact as the plants are coming on stream imminently and will contribute for the full year 2011." The medium to long-term outlook for Sipchem is considerably better as it has access to very low-cost natural gas feedstock from the Saudi government. The company in 2007 was the last to receive a guaranteed allocation from the government, and it maintains an advantage of 70 per cent to the highest-cost producers in the global industry, according to estimates by Credit Suisse.
Newer Saudi petrochemical players have been forced to use feedstocks based on crude oil, supplied to them at prices that are much closer to international market rates. NCB has a target price for Sipchem shares of 29.40 riyals, well above yesterday's closing price of 22.65 riyals. It last traded at the target price in September 2008. The stock has fallen by 3.95 riyals, or 14 per cent, in the past two months.
Global Investment House predicted yesterday the company would "run on better profitability margins" after the start-up of the third plant next month. firstname.lastname@example.org