Aramco floats downstream in deals flurry
Suddenly, Saudi Aramco is a blurred frenzy of corporate activity. In a little under a month, the KSA oil giant has pulled off some of the biggest deals in the business world this year, and enhanced its reputation beyond crude oil into the fields of finance, petrochemicals and refining. Whatever next?
Since late last month, when Aramco announced it had agreed terms to clinch the purchase of a majority stake in SABIC — the biggest corporate transaction in the Kingdom’s history — it has gone on to break all records for emerging market debt issuance with the $12 billion bond that attracted eight times that amount in interest from global investors.
Then came the $1.25 billion deal to acquire a 17 percent stake in South Korea’s Hyundai Oilbank, followed a couple of days later with news of a possible $15 billion deal to take a stake of up to 25 percent in the refining and petrochemicals business of Reliance Industries of India. Finally — though the deals are coming so fast there is no guarantee of any finality — it was announced that Aramco has signed up to buy from Royal Dutch Shell the 50 percent it does not already own of the SASREF refining joint venture in the Kingdom.
Why this sudden burst of activity? Some observers speculate that Aramco is splurging the funds it raised in the record-breaking bond issue. This is highly unlikely for several reasons. First, Aramco was already the most profitable company in the world, with annual profits of $111 billion, according to the bond prospectus, so it did not need the infusion of bond funds to enable its corporate acquisition program.
Second, the bond proceeds are in theory earmarked, at least in part, for the SABIC deal, due to complete later this year. But the same general principle applies here too — Aramco really did not need to go the the markets specifically for cash for the SABIC acquisition.
Some mischievous skeptics have argued that Aramco had to find some transactions to justify all the very expensive investment bankers, lawyers and consultants it got on board for the history-making initial public offering (IPO), which has now been postponed until 2021. But that seems unfair.
Rather, the outburst of activity is actually in support of two main planks of the strategic direction Aramco has, for the past couple of years, clearly signaled will be the direction for the future: Securing markets — especially in the East — for its crude; and further developing its expertise and capability in refining and petrochemicals, in a rapidly changing global market for the downstream business.
A clear pattern has emerged from the recent flurry of corporate activity: Aramco is looking downstream, and is increasingly looking east.
The latter is the overriding aim of the SABIC deal, which aims to create a global petrochemical giant through the synergies of Aramco’s feeder products with SABIC’s production capacity and knowhow.
In the Korea deal, the rationale was to enhance Aramco’s investment in what it called the “complex” refining sector in Asia, where there is a clear demand for Arabian-type crude and the petrochemical products they produce. “Providing long-term crude oil placement supply options,” was how Aramco phrased it.
The India deal is perhaps the most intriguing. Just under a year ago, Aramco partnered with ADNOC of the UAE, along with Indian oil companies, in a $44 billion project to build a huge refining complex at Ratnagiri, but that scheme has run into planning and environmental delays. Although Aramco remains committed to Ratnagiri, it is surely leaving all options open, and showing its belief in the long-term Indian market, with the Reliance deal.
The deal with Shell should be seen as part of the same focus on downstream, but this time at home, where there will be a growing demand for refined products to fuel the Kingdom’s industrial plans. Shell, and several other Western oil majors, have for some time been looking to slim down their traditional oil refining portfolios in favor of natural gas and petrochemicals.
So a clear pattern emerges from the recent flurry of corporate activity: Aramco is looking downstream, and is increasingly looking east.
But, given its global outlook and its new financial firepower, that would not necessarily preclude a big deal in the booming energy markets of the western hemisphere, should the right one come along. Aramco’s corporate advisory army is probably cooking something up right now.
•Frank Kane is an award-winning business journalist based in Dubai.
Twitter: @ frankkanedubai