The days of oil at $100 a barrel ended and then the new economic realities set in
Investors in the UAE construction stocks can remember the good days -- when oil higher than $100 a barrel encouraged a seemingly endless stream of lucrative projects. Now, with crude priced at half that, companies are trying to rebuild their balance sheets.
The downturn has translated into pain for investors in two of the largest construction companies in the UAE. Arabtec Holding Co has slumped 90 percent from its May 2014 record, while Drake & Scull International PJSC is down 78 percent from its June 2014 peak. They took on too much debt as oil earnings prompted Gulf Cooperation Council countries to commission developments, said Majd Dola, a senior research analyst at Abu Dhabi-based Al Ramz Capital.
“Both companies stretched their capacities too far when GCC governments were announcing all the fancy projects,” Dola said. “It’s a combination of mismanagement and the decline in oil prices, which has forced most of the region’s governments to cut down or cancel many of these projects.”
Both stocks fell 9 percent on Sunday following approval by DSI shareholders last week of a further reduction in capital as part of a restructuring plan that is intended to introduce a strategic investor. Arabtec has a reorganisation strategy of its own in place and is also reducing capital.
“If DSI’s proposed capital restructuring doesn’t go through, it might mean that the company shuts down because it will be out of cash, and that’s what we’re seeing increased speculation on at the moment,” Dola said. “Arabtec is in a better situation because it’s backed by the Abu Dhabi government.”
Investors may look to DSI results on May 14 for signs its restructuring plan is working after Arabtec reported its first quarterly profit since 2014. Technical metrics show that both stocks are trading close to a level that indicates they may have fallen too far too fast.