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TEXT-S&P summary: Industries Qatar QSC
In accordance with our methodology for rating GREs, the rating also factors in our opinion that there is an "extremely high" likelihood that the Qatari government would provide timely and sufficient extraordinary support to Industries Qatar in the event of financial distress. We base our rating approach on our view of Industries Qatar's:
-- "Integral" link to the government, based on the company's 51% ownership by Qatar Petroleum (QP; AA/Stable/--), which in turn is 100% owned by the State of Qatar, and its 21% ownership by the government pension fund, the General Retirement and Social Insurance Authority (GRSI). Industries Qatar and QP have a common board and directors and share key administrative functions. The chairman and managing director of both QP and Industries Qatar is currently Qatar's Minister of Energy and Industry. In our view, despite no formal guarantee being in place, a default by Industries Qatar would have a serious reputational risk for the Qatari government. We expect the government would seek to prevent such a scenario from unfolding by providing timely and sufficient extraordinary support to Industries Qatar.
-- "Very important" role, which reflects the company's public policy role in economic diversification and wealth distribution in the Qatari economy. In our view, Industries Qatar's 2003 IPO was designed to further the government's goal of distributing wealth and increasing financial sophistication among the Qatari population, rather than due to any financial need. We estimate that around 10% of Qatari citizens remain shareholders, while the transfer of 19% of Industries Qatar shares to the GRSI, effective April 2012, is also in line with this public policy mandate. At the same time, we view Industries Qatar's subsidiary and joint venture companies as providing some diversification to the Qatari economy.
Our view of Industries Qatar's "satisfactory" business risk profile is supported primarily by the company's excellent profitability, which stems from its access to competitively priced gas feedstock--$2.04 per million Btu in 2011--supplied by QP. We consider the company's diversification by product and end market, its economies of scale thanks to shared resources, and its strong joint-venture partners, as further rating strengths. The ratings are constrained, however, by the price-induced volatility of profits, as well as the cyclicality of Industries Qatar's petrochemicals and steel-production business units, and concentration of production sites in Qatar.
Industries Qatar's "modest" financial risk profile is underpinned by the company's low financial leverage and projected strong free operating cash flow generation at its petrochemical and fertilizer joint ventures. The company's significant historical capital expenditure and generous, progressive dividend policy somewhat offset the above strengths.
S&P base-case operating scenario
The group's EBITDA for the 12 months ended June 30, 2012, was in line with our base-case scenario, reaching Qatari riyal (QAR) 8.9 billion ($2.44 billion). This was mainly attributable to a supportive industry supply/demand balance and high oil prices, resulting in strong prices and margins for chemicals, polymers, and fertilizers.
We expect a significant increase in low-density polyethylene (LDPE), ammonia, and urea capacities, which despite the softer commodity prices will likely result in somewhat higher revenue in 2012. We believe the company's profitability will also likely remain very strong relative to peers outside the Middle East, thanks to access to cheap feedstock.
S&P base-case cash flow and capital-structure scenario
The reduction in prospective capital expenditure following the reassessment of the Qatar Steel (QS) phase 2 and 3 projects is likely to result in continued strong cash flow generation and metrics in 2012. Industries Qatar's credit metrics exceeded our guidelines for the rating in 2011, given the very strong pricing environment, and this is likely to be repeated in 2012. Under a mid-cycle pricing scenario, we anticipate that Industries Qatar will likely maintain ratios of funds from operations (FFO) to debt of over 45% and debt to EBITDA below 2.0x (compared with 115% and 0.8x, respectively, for the 12 months ended June 30, 2012), which are consistent with an SACP of 'a-'.
We assess Industries Qatar's liquidity to be "adequate." We estimate a sources-to-uses ratio of at least 1.2x under our mid-cycle pricing scenario. We also view positively the company's close relationship with its majority shareholder QP in our liquidity analysis.
Industries Qatar had the following main liquidity sources on June 30, 2012:
-- Consolidated cash balances of QAR5.8 billion, of which we treat QAR1 billion as tied to operations and thus not available for debt reduction; and
-- FFO for 2012 that we estimate at more than QAR7.0 billion (for the six months until June 30, 2012, FFO was QAR4.5 billion). Uses of liquidity over the coming 12 months comprise:
-- Short-term debt obligations of QAR1.9 billion on June 30, 2012;
-- Capital expenditures of around QAR2 billion by our estimates;
-- Moderate working capital outflow due to a ramp up in new fertilizer and polymer capacity; and
-- A dividend payment similar to, or higher than, the QAR4.1 billion paid in 2012, by our estimates.
The stable outlook reflects our expectations that our assessment of an "extremely high" likelihood of extraordinary government support to Industries Qatar, if needed, is unlikely to change over the next two years.
However, we could consider downgrading Industries Qatar if we see evidence of a material reduction in the government's shareholding, a weakening of the company's public policy role, or if we were to lower the ratings on the State of Qatar. As a result we could lower our assessment of the likelihood of government extraordinary support to "high" and lower the rating to 'A+'.
Given our assessment of an "extremely high" likelihood of government support, all other things being equal, we would not lower the rating on Industries Qatar unless we lowered our SACP to below 'bb+'. This is unlikely to happen in the near term given the company's current "satisfactory" business risk profile and "modest" financial risk profile. Still, we might envisage revising the SACP in the case of a prolonged and substantial drop in chemical, fertilizer, and steel prices and/or a large increase in gas feedstock prices.
We could raise the rating if we were to revise the SACP at least two notches, to 'a+' from 'a-'.
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