HSBC lifts earning forecast for GCC oil firms

HSBC global research has enhanced the earning estimates of four GCC petrochemical majors and emphasised their tumbling earnings will show resilience by the end of Q1 2009.

The bank has also downward revised the average prices of several commodities for this year. HSBC identified the return of Chinese buyers to the markets as having the potential of reviving the markets.

HSBC enhanced Industries Qatar's Earnings Per Share (EPS) estimate for first quarter of 2009 from QR11.85 to QR13.23. The bank also upgraded EPS estimate of Sabic to SAR9.15 from SAR8.10. The bank, however, brought down the EPS estimate of Saudi Arabia Fertiliser Corporation (SAFCO) from SAR17.40 to 14.37, while laving the EPS estimate of Yanbu National Petrochemical Company secured at SAR4.00.

The bank enhanced the net income estimate of Sabic and Industries Qatar to SAR 7,450 and QR7, 227 respectively from the previously announced SAR24,300 and QR6,518.

The GCC-based petrochemical majors may reach the 'trough' of their 'earnings' on the financial market soon. And "in turn may actually see a positive chemical sector stock price performance over the next few months", HSBC said.

"We contend that with the demand picture looking particularly murky in Q4 2008 and Q1 2009, we may be approaching a trough in earnings revisions and in turn may actually see positive chemical sector stock price performance over the next few months," the report said.

The prevailing "earning weakness" in Q4 2008 and Q1 2009 may lead to the entry of new petrochemical players in the financial markets, the HSBC said. "Earnings weakness in Q4 2008 and Q1 2009 may result in some further downside in valuations, which in turn may serve as a good entry point for some."

Low demand in the markets is not sustainable in the long run, HSBC said. Demand may particularly show resilience after the Chinese buyers return to the market in March next year.

"In Q4 2008, probably stemming from a panic in the market, global trade has come to a virtual standstill. We believe this state is clearly unsustainable. A combination of minimal trade and extreme destocking may result in an inventory rebuild. We believe this may happen post-February 2009 after the Chinese New Year once the Chinese buyers return to the market and are forced to rebuild inventory," HSBC report said.

Data presented by HSBC stated that the commodities such as ethylene, polyethylene, ammonia and urea will fall in the range of 30 per cent to 47 per cent.

HSBC said that in the recovery period of petrochemical companies, after they reached their trough, has been rapid in the past few years. "Once a trough was hit, the average recovery time historically was fairly rapid – 19 months on an average, and 12 months if we exclude the 2000 downturn from the analysis," the report said.

"Average recovery performance during the period was very strong – 37 per cent – suggesting exceptional returns for all those who timed their recoveries properly."

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