Qatar Petroleum and QAPCO’s Plan to Build Petrochemical Complex Is Credit Positive for Industries Qatar

Qatar Petroleum and QAPCO’s Plan to Build Petrochemical Complex Is Credit Positive for Industries Qatar

On 13 February, state-owned Qatar Petroleum (QP, Aa2 stable) and Qatar Petrochemical Company (QAPCO, unrated) signed an agreement to develop a $5.5 billion petrochemical complex in Qatar’s Ras Laffan industrial city. QP will have an 80% equity interest in the project, while QAPCO, which is 80%-owned by Industries Qatar (IQ, Aa3 stable) and 20%-owned by Total SA (Aa1 stable), will hold the remaining 20% stake. The companies expect the plant to be operational in 2018.

The planned project is credit positive for IQ because we expect it to be highly cash generative and an important contributor of dividends and cash flow. IQ is likely to benefit from QP and Qatar’s practice of providing competitively priced natural gas supplies under long-term contracts, enabling the project to remain commercially viable, even if petrochemical demand weakens. The deal is credit neutral for Total and Qatar Petroleum owing to its comparatively small scale relative to their substantial annual revenues, cash flows and investment programmes.
Upon its commercial launch, the plant will increase QAPCO’s existing ethylene production capacity by more than 50%, thereby expanding IQ’s presence in the high-margin petrochemicals sector. Petrochemicals contributed close to 40% of IQ’s 2011 consolidated revenues of QAR16.5 billion ($4.5 billion), and had an EBITDA margin of close to 60%.

The project’s prospects for commercial success are very high given its strategic importance to the State of Qatar, which is seeking to diversify its domestic economy beyond liquefied natural gas exports. In January, the government said it plans to spend $25 billion to expand its domestic petrochemical industry, and based on Qatar’s history, we expect the government’s involvement to extend beyond simply ensuring a successful completion and launch of the project to assisting with its commercial promotion.

Although IQ’s consolidated leverage would rise if it used debt financing to fund its share of the project costs, we expect that QP will bear the brunt of the costs owing to its large equity participation. If QAPCO was called upon to immediately fund its share costs, a scenario we see as highly unlikely, IQ’s pro forma debt-to-EBITDA ratio, based on December 2011 results, would be 1.2x, while its retained cash flow to debt would be 47%. Those figures are well within the credit metrics for its Aa3 rating, where we expect debt to EBITDA will be below 1.5x and retained cash flow to debt to be above 35%.