A new way of thinking: Aramco moves from equity to debt
Next year was supposed to be an interesting year for the equity market in Saudi Arabia and abroad because of the plans to sell a stake of Saudi Aramco to the public in what was expected to be the biggest initial public offering ever.
Instead, next year will certainly be interesting for the debt market as Saudi Aramco is moving now to buy a stake in the petrochemical giant Saudi Basic Industries Corp. (SABIC) from the Saudi wealth fund, the Public Investment Fund (PIF), which owns 70 percent of SABIC.
Aramco is planning to buy between 50 and 70 percent of SABIC, as reported by media outlets. To finance such an acquisition, Saudi Aramco is thinking about tapping the debt market through the issuance of international bonds, according to a report by Bloomberg. That might not be enough; the company might also take loans, and use some of its cash too.
Arranging such financing is not easy but Saudi Aramco has appointed just the right man for the task, Motassim Al-Ma’ashouq. He was appointed as a treasurer on Aug. 7 by the Aramco board and will resume his new duties from Sept. 1. Al Ma’ashouq was the vice president at Aramco for IPO preparations and is one of the most capable people in the company when it comes to raising funds and dealing with banks.
Strategically, the move by the PIF to sell a stake in SABIC to Aramco is a good plan for three reasons. First, it will bring a huge amount of cash to the PIF at around $50 to $70 billion. That cash can be used to finance PIF ventures and allow the fund to pursue its strategy to hold 50 percent of its assets in international investments.
Second, it will make Aramco’s chemical business one of the biggest in the world now that the company owns SABIC along with its flagship chemical project Sadara.
Third, with a lot of cash coming to the PIF, the government can postpone the IPO of Aramco to a later date when oil prices increase, not on geopolitical concerns such as what’s happening this year and involuntary supply shortages, but on fundamental factors. Surely oil prices will increase in the future as the current low levels of investment in the oil industry will lead to structural shortages in the near future as demand outpaces supply.
It’s already evident that oil prices will increase next year with no huge boosts in supply expected from North America because of the bottleneck in pipeline infrastructure.
Moreover, the US will impose more sanctions on oil producers such as Venezuela and Iran, which will result in a shortage of oil supply in the market.
There are clear strategic benefits for the SABIC-Aramco deal but there are still more issues to consider that can be derived from the deal or are related to it.
First of all, the move shows that the PIF and the government are open to new thinking and ways of doing business. So why not sell more of the PIF’s local assets or state-owned assets to Aramco? The PIF on July 4 acquired an additional stake of 15.2 percent in the private and independent power producer ACWA Power. Therefore, the PIF’s total equity stake in ACWA (directly and indirectly through its subsidiary Sanabil) rose to 24.98 percent.
It’s time for more consolidations in the Saudi oil and gas industry
Wael Mahdi
Aramco is already active in power generation. Aramco Systems is one of the largest power producers in Saudi Arabia. It also ventured into a solar and wind energy project and the company had future plans to bid for the forthcoming solar power bids, according to a previous comment to the media by its chief executive. Adding the ACWA Power stake to its investment portfolio gives Aramco competitive advantage for potential investors in its IPO who prefer to invest in green energy. At the same time it will provide more cash for the PIF.
Second, it’s time for more consolidations in the Saudi oil and gas industry. After SABIC, the government should consider selling other companies to Aramco just like Taqa. Taqa is one of the biggest owners of drilling rigs in Saudi Arabia, which is Arabian Drilling Co. Taqa’s business is well integrated into Aramco’s, and the company is managed by a former Aramco executive, Azzam Shalabi. The board of Taqa has leading Aramco figures such as Ziyad Al-Murshed and the PIF’s Hisham Attar.
Selling Taqa to Aramco will give Aramco greater advantage in increasing its local content and meeting its target for IKTIVA (the In-Kingdom Total Value Add program) faster. Also selling Taqa will provide more cash to the PIF.
Third, the SABIC-Aramco deal will limit the overlapping businesses between companies such as the Crude-To-Chemical project in Yanbu and the Saudi Arabian Industrial Investments Co., which was known formerly as SAIIC but now is rebranded to Dussur. This company is owned by the PIF, SABIC, and Aramco. It’s chaired by Mohammad Abunayyan, chairman of ACWA Power, and has on its board Al-Murshid of Aramco and Attar of PIF. So the synergy is already there and incorporating this company under the new entity or spin it off to Aramco would be an advantage to the PIF as well.
The bottom line is that the PIF still has more venues to raise cash without rushing into selling Aramco shares to the public, at least until the valuation of the company can improve owing to structural factors in the market. The PIF can raise at least $70 to $90 billion from selling all these assets to Aramco, and Aramco can raise the cash from the debt market using its good track record.
In addition, global debt and bonds market will flourish and bankers still waiting for Aramco’s IPO can be satisfied with all these new deals. The result will be the creation of an energy giant in Saudi Arabia. However, that would be challenging for Aramco itself as managing a wide portfolio of companies that enjoyed operational freedom and have different corporate governance values is not going to be easy for the state-owned company.
- Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
