Sabic Q2 net profit falls as average sales prices drop

Saudi Basic Industries Corporation (Sabic) on Sunday posted a better-than-expected 4.5 per cent fall in second-quarter earnings as it reduced costs amid lower average sales prices.

The Arabian Gulf’s biggest petrochemicals producer said net profit dropped to 6.17 billion Saudi riyals (Dh6.04bn) from 6.46bn riyals in the year-earlier period.

The result outpaced analyst forecasts because the price of naphtha, an oil derivative used as a petrochemicals feedstock, declined, according to Iyad Ghulam, an analyst at NCB Capital.

“Sabic’s profits were excellent. The company benefited from the improvement in the price of feedstock and they capitalised on it and improved their margins,” said Mr Ghulam.

The price of the benchmark Brent crude has plummeted to about US$55 per barrel from last year’s peak of $115 per barrel because of weaker demand in Asia and Europe, a global oil supply glut and the strong US dollar.

The profit margins of petrochemical producers are narrowing because prices of petrochemicals, including olefins such as ethylene, are linked to crude prices.

Besides naptha, Sabic can also use cheap gas as a feedstock, giving it a competitive advantage against European and Asian petrochemical rivals that rely mostly on naphtha.

NCB Capital, which forecasts an average Brent crude price of $62 per barrel this year and $65 per barrel next year, expects Sabic to deliver a full-year net profit of 19.7bn riyals this year and 21.7bn riyals next year. It has a neutral rating on the company.

“We remain cautious on the [petrochemical] sector because of the volatility in the oil price and unpredictable outlook of the oil market,” said Mr Ghulam.

Saudi Kayan Petrochemical, a unit of Sabic, this month reported a second-quarter loss of 13.4 million riyals, down from a loss of 133m riyals in the same period last year, because of declining feedstock prices.

The collapse of oil prices has affected petrochemicals projects in the region.

“We expect Sabic and the petrochemicals sector in general to revisit any expansion plans due to the drop in oil prices,” said Mr Ghulam.

Last October, Royal Dutch Shell and Sabic cancelled the expansion of Saudi Arabia Petrochemical Co, their joint venture in Saudi Arabia, saying that the feasibility studies were “not encouraging”.

The oil price slump has also been felt in Qatar, where it led to the scrapping of the $6.4bn Al Karaana petrochemicals project, a joint venture between Qatar Petroleum and Shell.

Arabian Gulf countries have invested billions of dollars in petrochemical projects in an effort to create downstream industries that will diversify their energy earnings.

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