Middle East Energy & Power
Total Page：16
File Type：pdf, Size：1020Kb
Global Equity Research Middle East OIL & GAS EM Oil & Gas Middle East Energy & Power Value in power, chemicals recovery may take time Initiation of Coverage While the supply/demand fundamentals for many commodities are deteriorating globally, the near-term outlook for Middle East power remains conspicuously tight. Power generation is struggling to meet demand growth, especially over the peak summer months, prompting some governments to continue spending and make regulatory changes in the sector. In contrast, although the collapse in global chemical prices and a weakening demand outlook has highlighted the region’s low-cost producer advantage, the increase in petrochemicals capacity as part of the region’s diversification plans may have helped promote a severe downturn in the chemicals cycle, in our view. As such, we prefer companies with domestic exposure to infrastructure and power, a derivative of industrialisation, rather than chemicals names that are more reliant on global export markets. Our key conviction Buy recommendations within the sector are Qatar Electricity & Water Co. (QEWC), TAQA, Dana Gas, Saudi Electric Co. (SEC) and Tabreed. We take Scott Darling a more cautious view on chemicals and refining with Neutral recommendations for +971 (0)4 428 4601 Industries Qatar (IQ), SABIC, Petro Rabigh and Ma’aden. [email protected] NI plc, London ! Tight power markets: We believe fundamentals for the Middle East power sector remain strong. We expect supply to struggle to meet peak summer demand up to 2010 before new capacity provides a more balanced market early next decade. We forecast ~$11bn pa in new power projects required to 2020. ! QEWC (PT QR 125), TAQA (PT AED 2.0) and Dana Gas (PT AED 0.8) are our core Buy recommendations: These companies have direct or indirect exposure to local power and industrial sectors, high earnings growth from capacity expansions and are partly defensive in a low oil price environment. We Analyst Certification also have Buy ratings on Tabreed and SEC. I, Scott Darling, hereby certify (1) ! Chemicals outlook likely to worsen near term…: With weakening global that the views expressed in this Industry Report accurately reflect my demand and increased capacity, we do not expect the chemicals cycle to recover personal views about any or all of until early next decade. We see downside risk to earnings estimates in the near the subject securities or issuers term as consensus expectations are, on average, ca. 40% too high, in our view. referred to in this Industry Report and (2) no part of my compensation ! …but stocks offer long-term value: Despite the near-term uncertainty, Middle East was, is or will be directly or indirectly related to the specific chemicals producers are better positioned globally owing to their low-cost recommendations or views advantage. We see long-term value in IQ (PT QR 95) and SABIC (PT SAR 60), expressed in this Industry Report. our preferred chemical names. ANY AUTHORS NAMED ON THIS REPORT ARE RESEARCH ANALYSTS UNLESS OTHERWISE INDICATED. February 24, 2009 PLEASE SEE IMPORTANT DISCLOSURES BEGINNING ON PAGE 162 gl Nomura International plc http://www.nomura.com February 24,2009 2 Middle East energy & power coverage summary Company Country Price* Rating Price Target Up/downside, % Key positives Key negatives Oil & gas Dana Gas UAE AED 0.59 Buy AED 0.8 36 1. High production growth and upside to exploration 1. Geopolitical risks in Kurdistan 2. Indirect exposure to Middle East power 2. Low-margin barrels 3. Limited sensitivity to oil prices 3. UAE gas project delays TAQA UAE AED 1.12 Buy AED 2.0 65 1. Leverage to tight Abu Dhabi power market 1. Higher oil price gearing versus Dana Gas 2. Acquisition strategy 2. Stock liquidity and market risks 3. Attractive valuation and dividend yield 3. Asset integration Petrochemicals SABIC KSA SAR 45.9 Neutral SAR 60 31 1. Low-cost producer supported by cheap gas 1. Downgrade risk to earnings 2. Strategic location and track record of project delivery 2. Lower chemicals demand and exposure to Europe 3. Acquisition strategy to diversify into high-margin products 3. Possible write-downs from acquisitions Industries Qatar Qatar QR 69.5 Neutral QR 95 37 1. High capacity growth, expansions in fertiliser 1. Cost disadvantage relative to Saudi (IQ) 2. Organic growth versus acquisition strategy 2. Lower chemicals demand and execution risks 3. Attractive valuation 3. Downgrade risk to earnings Refiners Petro Rabigh KSA SAR 21.0 Neutral SAR 27 29 1. Low-cost producer 1. Weak oil and chemicals demand 2. Integrated plant with improved yields 2. Expansion risks and disclosure 3. Strategic shareholder support 3. Limited diesel yield and low product specifications Utilities Qatar Electricity & Qatar QR 78.8 Buy QR 125 59 1. High capacity growth from Qatar’s industrialisation 1. Operational risks Water (QEWC) 2. Attractive and secure tariff structure 2. Contractor risks 3. Government support from gas feedstock and customer 3. Government ownership Saudi Electric KSA SAR 9.5 Buy SAR 14 48 1. Benefits to unbundling company/break-up value upside 1. Slow restructuring – social versus economic issues (SEC) 2. Tight power market with increase in power tariffs 2. Low free float and disclosure 3. Attractive dividend yield 3. High earnings multiples Tabreed UAE AED 0.54 Buy AED 0.8 48 1. Integrated business model and benefits to contract structure 1. Restructuring may take time 2. Capacity growth partly linked to government entities 2. Distressed seller of operational and non-core assets 3. Low valuation 3. High gearing Mining Nomura Equity Research Ma'aden KSA SAR 12.3 Neutral SAR 16 30 1. Upside to phosphate project & partnership with SABIC 1. Project visibility and execution 2. Sufficient funding 2. Decline in gold production 3. Low-cost producer 3. Disclosure Note: KSA = Kingdom of Saudi Arabia, UAE = United Arab Emirates. *All share price information in this report is priced at closing 18 and 19 February 2009. Source: Nomura estimates February 24, 2009 Table of contents Middle East energy & power themes ..................................................................... 4 Company recommendations ................................................................................ 6 Saudi Arabia – Not just an oil price call .............................................................. 11 Qatar – Robust growth and less risk..................................................................... 13 Upstream & downstream ................................................................................... 15 Dana Gas – The Middle East’s independent gas producer ...................................... 16 TAQA – Leverage to Abu Dhabi power................................................................ 30 Petro Rabigh – Awaiting project delivery .............................................................. 44 Selected relative valuation analysis – Upstream...................................................... 56 Selected relative valuation analysis – Downstream.................................................. 57 Petrochemicals ................................................................................................ 58 SABIC – Low-cost producer despite slowdown ...................................................... 59 Industries Qatar – Organic growth rather than acquisition........................................ 76 Ma’aden – Diversifying away from gold .............................................................. 91 Selected relative valuation analysis – Petrochemicals ............................................ 105 Power & utilities ............................................................................................. 106 Tabreed – Good value despite restructuring risks.................................................. 107 Qatar Electricity & Water – Value in Qatar’s industrialisation.................................. 120 Saudi Electric – Benefits to unbundling ............................................................... 131 Selected relative valuation analysis – Power & utilities ........................................... 144 Appendix 1 – Key country characteristics ........................................................... 145 Appendix 2 -– Valuation methodology ............................................................... 146 Appendix 3 – Middle East power market to tighten gradually................................. 148 Appendix 4 – Brief background to the Middle East power market ........................... 151 Appendix 5 – Hydrocarbon pricing in Saudi Arabia ............................................ 159 Nomura Equity Research 3 February 24, 2009 Middle East energy & power themes In this report, we highlight some of the key themes for the Middle East energy market that relate to our stock coverage. Our stock preference is for companies geared to domestic infrastructure and power spending where governments have underwritten the financial risk. While the global economy is slowing and therefore demand for Middle East exported products is decreasing, we believe the region is unlikely to cancel existing and important new projects, such as refineries or petrochemicals plants, which assist in its industrialisation and diversification. Saudi Arabia is most at risk of power The Middle East power sector remains tight: We believe fundamentals for the Middle shortages in the summer months, East power sector remain strong. We expect overall demand growth to average 6% pa, hence… in the 2009-20E period, with supply struggling to meet demand