Saudi Basic Industries Corp.

Transcription

1 Primary Credit Analyst: Tommy J Trask, Dubai (971) ; tommy.trask@spglobal.com Table Of Contents Rationale Outlook Our Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Government Influence Ratings Score Snapshot Reconciliation Related Criteria DECEMBER 19,

2 Business Risk: STRONG Vulnerable Excellent a+ a- a- CORPORATE CREDIT RATING Financial Risk: MODEST A-/Stable/A-2 Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Strong Access to competitively priced feedstock from Saudi Aramco. Large-scale plants following completion of a major investment phase. Very high and resilient profitability. Sovereign ownership, which helps with, for example, funding and infrastructure. Limited geographic diversity with most of profits stemming from Saudi Arabian production. Cyclicality related to the petrochemicals industry. Financial Risk: Modest Strong credit metrics and free operating cash flow, with moderate debt. High dividends and accelerating capex. DECEMBER 19,

3 Outlook: Stable The stable outlook reflects S&P Global Ratings' view on the sovereign as well as our expectations that Saudi Basic Industries Corp. (SABIC) will maintain high profitability under current benign industry conditions. We expect EBITDA margins of above 30% in 2017 and 2018, and continued substantial headroom in SABIC's credit metrics, including funds from operations (FFO) to debt of more than 60% (97% in 2016) and debt to EBITDA of less than 1.5x (0.9x in 2016). Although we see a risk of further increases in ethane and methane prices in Saudi Arabia, SABIC should be able to maintain strong profitability, even with much higher feedstock costs. Downside scenario We would downgrade SABIC if we downgraded Saudi Arabia. We could also consider a negative rating action, or a lowering of the stand-alone credit profile (SACP), in case of a large increase in feedstock prices, together with weakening market conditions, leading to leverage that was higher than the above-stated targets. Adoption of an aggressive financial policy (not currently envisaged) could also negatively impact ratings. Upside scenario We do not foresee rating upside at this stage, as the ratings on SABIC are capped by our rating on Saudi Arabia (A-/Stable/A-2). Our Base-Case Scenario Assumptions An oil price of $50/barrel in 2017 and $55/barrel thereafter. Revenues to improve significantly in 2017 on the back of rising output prices and in 2018 in line with global GDP growth. Margins expected to remain stable at 32%-33% in 2017 and Capital expenditure (capex) of Saudi Arabian riyal (SAR) 13 billion in 2017 and SAR22 billion in Stable dividend payout. No share buybacks. No major debt financed acquisitions. Key Metrics 2016A 2017F 2018F EBITDA margin (%) Adj. debt/ebitda 0.9 <1.0 <1.0 FFO/adj. debt (%) >100 >100 A--Actual; F--S&P Global Ratings' forecast. Company Description SABIC is the fourth-largest diversified global chemical company. It was founded in 1976 to use the natural gas created as a by-product of Saudi Arabia's crude oil production. The company is listed on Saudi Arabia's stock exchange, but DECEMBER 19,

4 remains majority-owned by the Kingdom of Saudi Arabia, which holds a 70% stake. We estimate SABIC's total production to be about 72 million metric tons (mmt) in 2017, which ranks it among the top five global producers of ethylene, polyethylene (PE),polypropylene (PP), ethylene glycol, methanol, and methyl tertiary butyl ether (MTBE). Following a major investment program over recent years, SABIC now operates 14 crackers, of which 11 are located in Saudi Arabia and three in Europe. SABIC also makes use of its access to low-priced domestic gas by diversifying into nitrogen-based fertilizer production--such as ammonia and urea--as well as steel operations. Most activities involve joint ventures. However, SABIC exercises control and consequently fully consolidates these entities, including the minorities. Despite SABIC's large-scale international diversification in recent years, the lion's share of the company's EBITDA--but not of sales--stems from its Saudi activities, which are distinctly more profitable. Bearing in mind that the majority of its Saudi production is also exported, SABIC's sales profile is geographically well balanced, with the Middle East and North Africa representing 24%, Europe 26%, China, India, and Far East 29%, America 9%, and the remaining 12%. Business Risk: Strong Our view of SABIC's strong business risk profile is supported primarily by the excellent competitive position and strong profitability of the company's Saudi activities, which enjoy access to competitively priced gas-based feedstock, positioning the company favorably on the worldwide cost curve. This access is made possible through the company's long-term gas supply contracts with national oil company Saudi Aramco. However, SABIC's limited geographic diversity is a key rating constraint. Its Saudi Arabian production assets continue to account for the lion's share of profits, even if it exports the majority of domestic production. Other relative weaknesses are the cyclicality of SABIC's petrochemicals and steel-production business units. Also, due to the improved competitiveness of the U.S. petrochemical industry, in which the development of shale gas has cut natural gas prices, European petrochemicals producers are under severe competitive pressure. In this context, SABIC is restructuring its Europe-based activities. SABIC is the world's No. 2 producer of ethylene and the No. 3 producer of polyethylene. Its all-in production--which comprises mainly petrochemicals, intermediates, and polymers, and secondarily, fertilizers and steel--reached 72.7 mmt in 2016, up from 58.5 mmt in SABIC's 12 domestic gas crackers and chemical complexes are located at the Jubail and Yanbu industrial sites. SABIC's sizable international activities, SABIC Europe, and SABIC IP (both not rated), are important revenue contributors, but represent only a fraction of the group's profits. Peer comparison Table 1 Saudi Basic Industries Corp. -- Peer Comparison Industry Sector: Chemical Cos Saudi Basic Industries Corp. BASF SE Industries Qatar QSC Saudi Telecom Co. EQUATE Petrochemical Co K.S.C.C. Rating as of Nov. 7, 2017 A-/Stable/A-2 A/Stable/A-1 A+/Negative/-- A-/Stable/A-2 BBB+/Stable/A-2 --Fiscal year ended Dec. 31, Currency SAR QAR SAR $ Revenues 132, , , , , DECEMBER 19,

5 Table 1 Saudi Basic Industries Corp. -- Peer Comparison (cont.) EBITDA 44, , , , ,239.0 Funds from operations (FFO) Net income from cont. oper. 40, , , , , , , , , Cash flow from operations 30, , , , ,126.7 Capital expenditures 13, , , Free operating cash flow 17, , , , Discretionary cash flow 2, , , Cash and short-term investments 60, , , , ,808.0 Debt 38, , ,071.5 Equity 210, , , , ,790.0 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash int. cov. (X) Debt/EBITDA (x) FFO/debt (%) N.M. N.M Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) N.M. - Not Meaningful N.M. N.M N.M. N.M N.M. N.M. 7.3 Financial Risk: Modest We assess SABIC's financial risk profile as modest because of its low debt in relation to impressive free operating cash flow (FOCF) before dividends. It has sizable cash balances, which will help fund the company's increasing capital expenditure (capex) program. Nevertheless, relative weaknesses include cash flow volatility due to oil and chemical prices, and our expectation of volatility in credit metrics from peak to trough of the economic/industry cycle, as well as a high dividend payout. SABIC's adjusted FFO-to-debt ratio remains comfortably within our leverage targets for the rating in our base-case scenario for 2017 and 2018, despite our expectation of increasing capex. As of the end of December 2016, adjusted FFO to debt was 104.8%. We expect capital spending to increase in future years, in line with SABIC's growth strategies, which include a 400,000 barrels per day crude oil to chemicals complex with Saudi Aramco, a coal-to-chemicals project in China, and a petrochemicals complex on the U.S. Gulf Coast in a joint-venture with Exxon Mobile. DECEMBER 19,

6 SABIC's gross financial debt declined to SAR58.9 billion ($15.7 billion) as of Sept. 30, 2017, with reported cash and short-term deposits at a high SAR57.2 billion. Of this, we view SAR15.0 billion as unavailable for immediate debt repayment at the parent company level. Our adjusted net debt figure was SAR38.4 billion at the end of September Apart from the abovementioned cash adjustment, we add pensions (SAR12.6 billion) and operating leases (SAR5.4 billion) to debt. Financial summary Table 2 SABIC Financial Summary (Mil. SAR) Average of past three fiscal years Revenues 156, , , , , ,026.0 EBITDA 48, , , , , ,655.0 Funds from operations (FFO) 44, , , , , ,013.0 Operating Income 31, , , , , ,271.0 EBIT 33, , , , , ,100.0 Interest Expense 2, , , , , ,439.0 Net income from cont. oper. 19, , , , , ,780.0 Working capital changes (10,716.0) 2, , ,125.0 (538.0) Cash flow from operations 46, , , , , ,267.0 Capital Expenditure 15, , , , , ,932.0 Free operating cash flow 30, , , , , ,335.0 Dividends Paid (594.0) 14, ,504.0 (33,200.0) (27,673.0) (29,225.0) Discretionary cash flow 9, , , , , ,110.0 Cash and Short-term investments 67, , , , , ,822.0 Debt 44, , , , , ,922.0 Equity 210, , , , , ,238.0 Adjusted ratios Annual revenue growth(%) (10.7) (10.3) (21.3) (0.5) 0.0 (0.5) EBITDA margin (%) EBIT interest coverage (x) EBIT margin (%) Return on capital (%) EBITDA interest coverage (x) EBITDA cash int.cov.(x) FFO cash int. cov. (X) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) Discretionary cash flow/ebitda (%) Total Debt/debt plus equity(%) N.M. - Not Meaningful. DECEMBER 19,

7 Liquidity: Strong We view SABIC's liquidity as strong and calculate that liquidity sources should exceed liquidity needs by more than 1.5x over the 12 months started Sept. 30, 2017, and by more than 1x over the next 24 months. We also take into account the company's solid bank relationships and high standing in credit markets. Principal Liquidity Sources SAR57.2 billion of cash and cash equivalents available at the end of the third quarter of Our expectation of about SAR43 billion of cash funds from operations. US$2 billion of undrawn bank lines maturing in Principal Liquidity Uses Short-term debt maturities of SAR11.9 billion. Our expectation of working capital outflow of SAR0.7 billion-sar1.2 billion. Capex of about SAR20 billion dividend payment of SAR10 billion-sar15 billion. Debt maturities As of Dec. 31, 2016: 2017: SAR13.2 billion 2018: SAR13.3 billion Thereafter: SAR49.5 billion Covenant Analysis Debt at the parent company level has no financial covenants, which we view as a supportive liquidity factor. Government Influence We view SABIC as a government-related entity (GRE) and assume a high likelihood of extraordinary support in the event of stress. We view the company's link with the government of Saudi Arabia as very strong and its national role as important. In our opinion, SABIC plays an important role in Saudi Arabia's strategy to diversify its economy toward non-oil industries. In addition, the company is a significant employer in Saudi Arabia. About 90% of its local workforce are Saudi nationals. SABIC is 70% owned by the Public Investment Fund (PIF), a Saudi government-owned public investment fund. The board of directors comprises nine members, five of whom represent the Saudi government, including the chairman and vice chairman. We understand that PIF intends to keep SABIC as one of its core holdings and as a key strategic investment. SABIC also benefits from very high ongoing support in that the government sets the price of the gases SABIC uses as feedstock in the production of petrochemicals, fertilizers, and steel in Saudi Arabia. This has a strong positive influence on SABIC's profitability, and is intended to further diversify Saudi Arabia's industrial operations and add value to its DECEMBER 19,

8 natural hydrocarbon resources. The state's current ethane price of US$1.75 and methane price of US$1.25 per million British thermal units positions SABIC favorably on the worldwide cost curve. In addition, the government supports and participates in the funding of new projects for SABIC, through government-related agencies such as PIF or the Saudi Industrial Development Fund (SIDF). Our sovereign rating on Saudi Arabia currently caps the rating on SABIC, as we do not rate companies with a very strong link to the government higher that the government itself. This is because the government controls SABIC's operating strategy and financial policy. Ratings Score Snapshot Corporate Credit Rating A-/Stable/A-2 Business risk: Strong Country risk: Moderately high Industry risk: Moderately high Competitive position: Excellent Financial risk: Modest Cash flow/leverage: Modest Anchor: a+ Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Strong (no impact) Management and governance: Strong (no impact) Comparable rating analysis: Neutral (no impact) Stand-alone credit profile : a+ Related government rating: A- Likelihood of government support: High (-2 notches from SACP) Reconciliation DECEMBER 19,

9 Table 3 Reconciliation Of Saudi Basic Industries Corp. Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. SAR) Saudi Basic Industries Corp. reported amounts Debt Shareholders' equity EBITDA --Fiscal year ended Dec. 31, Operating income Interest expense EBITDA Cash flow from operations Capital expenditures Reported 62, , , , , , , ,689.6 Standard & Poor's adjustments Interest expense (reported) Interest income (reported) Current tax expense (reported) (1,690.4) , (3,000.0) Operating leases 5, , Postretirement benefit obligations/deferred compensation 12, Surplus cash (45,653.9) Capitalized interest (300.0) (300.0) (300.0) Non-operating income (expense) Non-controlling Interest/Minority interest , , Debt - Guarantees 2, Debt - Other 1, Working capital - Other (9,805.0) -- Total adjustments (23,570.4) 47, , , (2,470.4) (9,154.0) (300.0) Standard & Poor's adjusted amounts Debt Equity EBITDA EBIT Interest expense Funds from operations Cash flow from operations Capital expenditures Adjusted 38, , , , , , , ,389.6 Related Criteria Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue Ratings, Sept. 21, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Criteria - Corporates - Industrials: Key Credit Factors For The Commodity Chemicals Industry, Dec. 31, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, DECEMBER 19,

10 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Business And Financial Risk Matrix Business Risk Profile Financial Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Ratings Detail (As Of December 19, 2017) Saudi Basic Industries Corp. Corporate Credit Rating Corporate Credit Ratings History A-/Stable/A-2 22-Feb-2016 Foreign Currency A-/Stable/A-2 11-Feb Sep-2006 A+/Negative/A-1 A+/Stable/A-1 22-Feb-2016 Local Currency A-/Stable/A-2 11-Feb Apr-2008 A+/Negative/A-1 A+/Stable/A-1 *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com DECEMBER 19,

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