Industries Qatar (IQ), which is buying the remaining 25% stake in Qatar Fertiliser Company (Qafco) from Qatar Petroleum (QP), has “substantial cash and minimal debt”, giving it “significant” financial flexibility to consolidate ownership in joint ventures, Moody’s, a global rating agency, has said.
In its latest issuer comment, the rating agency said the market heavyweight IQ has potential to buy the remaining 20% stake in Qatar Petrochemical Company (Qapco) and 50% in Qatar Fuel Additives (Qafac), when shareholder agreements expire in the coming years.
IQ reported a cash balance of $3.1bn as on June 30, 2020. This amount consolidates cash held at Qafco and Qatar Steel level, and on average, 65%-70% of the cash has historically been held at the IQ holding company level.
Highlighting that IQ’s proposed plan to buy the remaining 25% stake in Qafco from QP for $1bn is credit “positive”; Moody’s said it will give IQ full strategic, operational and financial control over Qafco and 100% of its dividends, which in turn would increase the parent’s attributable net profit.
“We estimate that IQ’s attributable net profit would have been 11% higher for 2019 pro forma, if Qafco was fully owned by IQ instead of 75%,” Moody’s said, adding IQ’s fertiliser business segment, effectively the Qafco operation, is an important earnings contributor to the IQ group, despite its volatility.
As part of the transaction, Qafco will acquire QP’s 40% stake in Qatar Melamine Company (QMC), a key subsidiary of Qafco. Both Qafco and QMC have also entered into a new gas sale and purchase agreement (GSPA) with QP.
The GSPA is effective until 2035 and covers the natural gas needs of both companies. The new GSPA provides feedstock to Qafco and QMC under a more simplified, competitive and favourable arrangement compared to the prior agreements.
“The new GSPA will slightly improve Qafco’s cost position because it will buy natural gas feedstock from QP at a cheaper rate on average than previously. Under the announced transaction, the 25% stake that IQ is buying will revert back to QP in December 2035, once the GSPA expires,” Moody’s said.
The company will have an extraordinary general assembly meeting in the coming weeks to seek shareholder approval for the acquisitions of the Qafco and QMC stakes and to authorise IQ’s board to negotiate and take appropriate action in the future regarding IQ’s rights in its other joint ventures.
Regarding the potential stake purchase in Qapco and Qafac; Moody’s said should this occur, the acquisitions would give IQ “significant” flexibility to make strategic and investment decisions across its portfolio of companies, and give it full control of financing and dividend distribution decisions.
In addition, the acquisitions would improve analytical transparency because the current joint venture operations are equity-accounted in IQ’s financial statements.