SICO sees oil price below US$45 this year

Manama: Bahrain-based Securities & Investment Company (SICO) Research, in its equities strategy report, expects crude oil prices to remain soft in 2016.

Crude prices declined by 48 per cent in 2014, 35pc in 2015 and 14pc year to date (February 21st), due to a supply glut and lack of consensus among OPEC members to cut production.

The company is assuming quarterly prices this year of US$35, 40, 40 and 45 per barrel respectively, led by demand growth (1.2 million barrels per day in 2016 versus 1.6m bpd in 2015) which should decrease the current supply glut and bring markets to balance by 2017.

The report adopts Micro approach instead of Macro focus in analysing GCC equities. GCC nations are in challenging times due to lower oil price and governments are taking appropriate measures through fiscal reforms. The report analyses the impact of these measures on different industries and focus on companies which are overly punished, post broader market correction and are trading attractive at current valuations through bottom up approach.

GCC equities started 2016 on a shaky footing, and at the time of publishing the report on February 21st, S&P GCC Index was lower by 10.8pc to date. This was led by Saudi Arabia at minus 14.9pc, Kuwait at minus 8.4pc and Qatar at minus 4.4pc. Key factors behind this sell-off included uncertainty about crude oil prices; the lifting of feedstock subsidies in Saudi Arabia, resulting in higher production costs for petrochemical companies; stretched valuations; and heightened geo-political tensions in parts of the MENA region. However, according to the report, the broader market correction has pushed yields higher, and created deeper value in selective names owing to attractive and sustainable yields. SICO has identified 14 stocks that have a clear earnings growth despite the changing macros, with a demonstrable ability to generate and distribute cash. These companies, which are analysed in detail in the report, are active in the transportation, banking, real estate, healthcare, petrochemicals, telecommunications and consumer goods sectors.

IPO activity also slowed down considerably in 2015, with only five listings compared with 14 in the previous year; and the average over-subscription decreasing to 10.6 times from 18.5 times a year earlier. Saudi Arabia’s Tadawul was the most active market with four IPOs (versus six in 2014); while there were no listings in UAE compared with four the previous year.