Spain made its fortune plundering South America. And Rome was built on the spoils of conquest. But the Gulf States are managing to accumulate the world’s wealth without even crossing their own borders. According to a recent report entitled The Monumental Petro-Wealth Transfer, by Morgan Stanley currency analyst Stephen Jen, at $130 a barrel about $1bn a day is being added to the region’s trade surplus. At these prices, the Gulf States are sitting on reserves worth almost $65trn – about three times the entire value of the world’s equity markets. That translates to some $4m per citizen of the Gulf Cooperation Council, which includes Saudi Arabia, the United Arab Emirates and Qatar.
But unlike the 1970s oil spike – when most of the petrodollar spoils were poured into New York, London and Zurich to be invested in Treasury bills, or spent on consumer goods – the Gulf States are now investing the money at home. From 1978-1981, 75% of the increase in oil cartel Opec’s export revenues was spent on imports of goods and services, notes The Economist. Today, the International Monetary Fund (IMF) estimates that only 40% of the windfall is being spent. And this time it’s not just being spent on empty consumption. Just as the Romans built reservoirs and aqueducts, the city states of the United Arab Emirates have been building desalination plants. Skyscrapers, power plants and airports have sprung out of the desert. They are building a future for themselves beyond oil – an empire built on financial services, luxury tourism and technology.
There’s one problem. With pipelines rusting and oil-refining equipment falling into disrepair, there is a danger that the Gulf States have neglected the very thing that their success is built upon. In the 15 years from 1989 to 2004, no new major refineries were built in Saudi Arabia, for example. That’s why they are now investing in a radical overhaul of their energy infrastructure. The Saudis are preparing to invest $80bn on increasing oil output to 12.5 million barrels per day (bpd), and growing the country’s refining capacity by 43% to six million bpd over the next few years, according to ArabianBusiness.com. Other countries in the Persian Gulf are planning to invest $170bn in energy infrastructure.
There’s plenty of oil money to finance these projects – it’s people, equipment and energy that the Gulf really needs. And that’s why the best way to play the region’s development just now is to invest in the companies that are being brought in to deliver these projects. Abu Dhabi may be swarming with migrant workers from India and Pakistan, but engineers and specialist equipment makers are in short supply. Despite the dominant role governments play in the region, it’s private firms that are being brought in to do the job. Saudi Aramco, the state-owned oil giant, is in a hurry to find outside help to build heavy conversion refineries to turn the heavy and sour crudes found locally into the light crude the market demands, lifting refining capacity in the Gulf as a whole by about three million bpd to ten million bpd by 2015.
The most obvious threat to these projects is a collapse in the price of oil. But having built up nearly $1trn in financial reserves over the last six years, there is plenty in the bank even if revenues drop off, notes Assif Shameen in Barron’s. We look at one company set to benefit below.
The best bet in the sector
For Kentz Corporation (LSE:KENZ), the Middle-East-focused engineering contractor, demand for its services is “nothing short of sky-high”, according to Oliver Haill in Growth Company Investor. In the last six months alone, Kentz has seen its backlog of projects swell from $594m to $827m as it benefits from the overhaul of energy infrastructure in the Gulf. More than two-thirds of its sales come from the region.
The company provides mechanical, electrical, engineering and construction services for industrial and infrastructure projects. It also recently secured a $208m contract in Qatar to supply the electrical systems for a new medical research centre, due for completion in 2011. But its speciality is in providing the manpower for oil and gas projects, with energy giants such as Shell, ExxonMobil and Anglo Coal among its biggest clients.
Sales rose by 47% to $544m in 2007, with pre-tax profits rising 37% to $34m. With plenty of cash on its books, Kentz is looking to expand by picking up an oil exploration and production company, so that it can complete the entire engineering, procurement and construction process of both onshore and offshore oil and gas plants itself. The company is valued on a forward p/e of 13.7, a significant discount to the sector average of 18.1, notes Haill.