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25-Sep-2018

Trading Call - Play higher oil prices through SIPCHEM, SABIC, and YANSAB as well as long MSCI Saudi Arabia

Our Trading Call report highlights trading ideas that might not always reconcile with our analysts’ fundamental view, given the different time horizons/rationale behind the calls. Our trading calls are driven by index events, special situations, and/or fundamentals. So far our 2018 trading calls have generated an avg. total return of 22% YTD (23% on median basis) vs. 13% for MENA & -7% for EM.
 
Buy equal-weighted basket of SIPCHEM, YANSAB, and SABIC to play higher oil prices 

Oil prices are trading higher on supply concerns, and while we think demand-side estimates may need downward revision if oil prices hit USD90-100/bbl levels, we believe that in the short run the oil price rally will continue following the recent OPEC meeting. How to play this? We suggest an equal-weighted basket of SIPCHEM, SABIC, and YANSAB. Within our petchem coverage, SIPCHEM, YANSAB and SABIC should be the largest beneficiaries of higher oil prices, in our view. SIPCHEM due to a largely fixed feedstock base (over 90% by volume) and a strong relationship between methanol and oil (correlation to oil of 0.86 over the past five years), should hypothetically mean that any oil price gains should go straight to its margins. YANSAB has the largest fixed feedstock base among ethylene crackers (c60% by volume) and all of its products are strongly correlated to oil. Finally, SABIC would benefit as the bulk of its Saudi operations have a large fixed feedstock base that should allow its margins to expand, though on the downside, the European and Asian operations are likely to be hindered as rising oil prices tend to put pressure on spreads. Other petchem producers could also see some benefit, but not to the same extent as the aforementioned stocks, given more exposure to variable feedstocks like propane and naphtha, which would also rise in a higher oil price environment thus reducing the positive impact of higher product prices. We note YANSAB, SABIC, and SIPCHEM are down 9%, 7% and 19% from their 52-week highs.

Higher oil prices could provide a boost to MSCI’s Saudi Arabia index, we remain long (+12% since inception vs -10% for EM) 

In addition to the direct benefit for petchems, higher oil prices are supportive to our Long Saudi Arabia call (since 19 Feb 2018) as the market prepares to join MSCI and FTSE EM indices taking in USD16bn worth of passive inflows over March-December 2019. The petchem names above are part of FTSE and MSCI indices (although SIPCHEM is part of the small caps within MSCI indices) and should benefit from combined inflows of USD3.4bn next year (mainly into SABIC USD2.9bn and YANSAB USD0.5bn) as Saudi Arabia joins the EM benchmarks. MSCI Saudi Arabia is down 3% since 20 June 2018 (when MSCI upgraded the market to EM) with 12-month forward P/E (x) multiple contracting from 14.6x to 13.3x. This is in contrast to the trend we saw in a few EM and FM markets, where multiples expanded significantly from the MSCI announcement to implementation with large returns overall. We expect Saudi Arabia to start trading higher as we get closer to the index events, and higher oil prices should provide a tailwind to the trade.

Mohamad Al Hajj

Yousef Husseini