Why Saudi Aramco’s acquisition of a stake in SABIC is an excellent move
In the latest criticism of the Kingdom’s economic growth, articles have been written claiming that the main driver of Saudi Aramco’s plans to buy a controlling stake in Saudi Basic Industries Corp. (SABIC) from the Saudi Public Investment Fund (PIF), is PIF’s requirement for immediate liquidity.
In truth, Saudi Aramco is already working with SABIC on the fully integrated crude oil-to-chemicals (COTC) complex. Saudi Aramco wants to move away from being just an exporter of crude and to use its oil to create petrochemicals and fuel for export — to become an integrated energy company. Owning a major stake in SABIC would give Saudi Aramco a quick boost toward that goal.
There is a fatal flaw in the explanations given for the primary purpose of Saudi Aramco’s acquisition of a strategic stake in SABIC. The fundamental fact absent from many economic analyses is that Saudi Vision 2030 is designed to be implemented in a low-oil-price environment. The goal of this national strategy is to wean the Kingdom’s economy from oil dependency with its associated price fluctuations. This strategy was confirmed personally by the crown prince during television interviews.
At this time, whatever impact the sale of the SABIC assets will have on the Saudi PIF, there is no necessity in the transaction. Current oil prices are above $70 per barrel, which is helping to reduce the budget deficit, and the Kingdom is surging ahead with all planned upstream and downstream projects. In May, Moody’s reaffirmed the Kingdom’s A1 credit rating. The Saudi economy is stable and economic reforms are moving apace.
The PIF and Saudi Aramco are all wholly owned by the Kingdom. It is not logical that shifting liquidity between entities both belonging to the same owner should be interpreted as some sort of lifeline for the PIF.
It is interesting to note that SABIC has reported an 81 percent year-on-year leap in the second-quarter net profit to SR6.70 billion ($1.79 billion) — showing the strength of this diversified manufacturing company.
By purchasing a strategic stake in SABIC from PIF, Saudi Aramco avails itself of stability in the acquisition. This acquisition is an excellent tactical, developmental approach for the following reasons:
1) Saudi Aramco has a plan for continued growth in refining and petrochemicals capacities, which represents a pivotal role for non-oil revenues, essential for a diversified and sustainable economic future.
2) Integrated refining and petrochemical projects provide greater opportunities for enhancement of hydrocarbon streams and improved profitability.
3) Saudi Aramco’s acquisition of stakes in petrochemical plants is part of its ambitious strategic plan to become a leading global integrated energy and chemical company, which will boost non-oil revenues, the hub of the Kingdom’s Vision 2030.
4) The growing petrochemical sector in the Kingdom provides many direct and indirect jobs. The refining and petrochemical sector is one of the largest non-governmental sectors that have the highest percentage of Saudi employees.
To move forward with the transaction, which is not yet certain, Saudi Aramco is considering a global bond sale to fund part of its purchase of the stake in SABIC. Advised by JP Morgan and Morgan Stanley, the bond sale will most likely be combined with bank loans. While Saudi Aramco will reveal some of its financials as part of the funding process, it will not have to contend with naysayers attempting to diminish its corporate valuation.
Dr. Faisal Mrza is an energy and oil marketing adviser. He was formerly with the OPEC and Saudi Aramco. Twitter:@faisalmrza