Oil price slump slashes Sabic Q4 profit by 29 per cent

Sabic, which is 70 per cent state-owned, attributed the fall in profits to lower average prices for the products which it sold.

Saudi Basic Industries Corp (Sabic), one of the world’s biggest petrochemical companies, posted a 29 per cent drop in fourth quarter net profit owing to the oil price rout.

Net profit in the fourth quarter dropped to 4.36 billion Saudi riyals (Dh4.26bn) from 6.16bn riyals in the year-earlier period, the firm said in a statement to the Saudi stock exchange.

“The decrease in net income is mainly attributable to lower average sales prices partially offset by lower costs of certain feedstocks,” the firm said in the statement.

Brent oil prices fell 48 per cent last year from a peak of around US$115 a barrel reached in June because of an oil glut sparked by the US shale boom, weaker demand in Europe and Asia and a strong dollar. The price of Brent dropped around 40 per cent in the fourth quarter last year, pulling down petrochemical prices.

As a result Sabic’s profit margins on products made with natural gas which it buys at a fixed price are squeezed. However, costs for chemicals made from petroleum products decline along with oil, which helps the company.

Full-year net profit fell 7.3 per cent to 23.43bn riyals.

Sabic expects this year to remain unpredictable, with its profit outlook hinged on the oil price, the chief executive Mohamed Al Mady said in a press conference, Reuters reported.

Sabic will probably outperform other Saudi chemical companies this year, Iyad Ghulam, an analyst at NCB Capital in Riyadh, told Bloomberg News.

“The advantage of Sabic is the diversity of its product portfolio,” he said.

The firm will continue to focus on investments in China, North America and Saudi Arabia and is eyeing acquisition opportunities in the United States, including investments in the US shale gas industry, the chief executive said, according to Reuters. Falling steel prices may push Sabic to shelve plans for two new steel plants that are being studied at a projected cost of US$4.26bn, the chief executive, said according to Reuters.

Sabic and Royal Dutch Shell cancelled in October the expansion of Saudi Arabia Petrochemical Co (Sadaf), a 50-50 joint venture in Saudi Arabia, saying the result of studies was “not encouraging”.

The oil price slump has also led to the scrapping in Qatar of the $6.4bn Al Karaana petrochemicals project, a joint venture between state-run energy firm Qatar Petroleum (QP) and Shell.

Gulf countries have invested billions of dollars in petrochemical projects and related sectors in a bid to create downstream industries that will lead to job creation and diversify oil income away from pure energy products.

“The petchem sector in the Gulf has been under pressure from North American shale and now lower oil prices, and the outlook remains difficult,” said Farouk Soussa, chief economist for the Middle East at Citigroup.

“The expansion of the petrochemicals sectors helps governments capture more of the value added in the energy sector, but does little to diversify the economy away from oil. Gulf efforts to diversify going forward have to focus on non-energy sectors, but more importantly on empowering the private sector to lead economic growth and employment.”

Sabic, the biggest listed Arabian Gulf firm, is ploughing ahead with several projects, Mr Al Mady said this month.

The firm plans to launch this year the $3.4bn Al Jubail Petrochemical Company (Kemya), a joint venture between Sabic and the US energy company ExxonMobil. Also in the works is Saudi Arabian Fertilizer Company's (Safco) $533 million expansion, known as Safco V.

Kemya will produce 400,000 tonnes of synthetic rubber products a year, which are mainly used for automotive products, and Safco V will produce 1.1 million tonnes a year of urea.

It is also in the final stages of preliminary studies for the development of the world’s first oil-to-chemicals complex in Saudi Arabia, which is envisaged to be operational by the end of the decade. Sabic expects to use about 10 million tonnes of crude at the complex per year.

Sabic shares were up 1.45 per cent at 79.5 riyals at the close in Riyadh.

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