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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Has Saudi Arabia Fooled Oil Analysts?

There is never a dull moment in the Desert Kingdom when looking at the ongoing economic changes taking place inside Saudi Arabia. The world’s largest oil company Saudi Aramco, the main revenue source for the Kingdom, is the latest source of intrigue for observers, with rumors that it is targeting a majority stake in one of the world’s largest petrochemical giants - SABIC. This move has been misunderstood by many analysts, and may actually be an ambitious attempt to counter the continuous delays that the planned Aramco IPO has faced. MBS’s advisors have come up with this strategy in order to restructure the Saudi economic base, provide the Kingdom with renewed power in the downstream sector, and address the much-needed additional funding for Saudi Arabia’s Vision 2030.

Rumors that Saudi Aramco was looking to acquire SABIC began with suggestions that the oil giant would acquire a minority stake in the petrochemical company, but now it appears that Aramco is making a much larger move.

Today, Saudi sources have stated that Aramco is targeting the entirety of the 70 percent stake in SABIC that is currently held by the Saudi sovereign wealth fund PIF. This move would create an oil company the likes of which has never been seen before. Whether these latest reports are reliable is yet to be seen, but the impact on the shape of global oil markets would be significant. Sources have reported that JPMorgan and Morgan Stanley have been appointed as advisors to Aramco’s move to buy a controlling stake in SABIC.

SABIC has long been ruling the downstream sector in the Kingdom, while Aramco was focused on its upstream endeavors. The continuous international growth in Saudi Arabia’s downstream sector and the successful acquisition of entities in Europe (including DSM Petrochemicals) and elsewhere, saw SABIC growing increasingly powerful.

As always, success created not only competition but also a kind of envy. Aramco’s dream of ruling the world’s up and downstream sector was always partly constrained by SABIC’s ongoing success. But now that Crown Prince Mohammed bin Salman has taken control in the Kingdom, it appears that Aramco will regain full power in downstream and lock in its own future demand in targeted markets. By acquiring a controlling stake in Saudi Arabia’s second most influential oil company, Aramco would gain near-complete control. Related: Rosneft Sees Oil At $80 By Christmas

At the same time, the Aramco move is regarded to be a sign that its IPO adventures are unlikely to end in success. Aramco CEO Nasser indicated that the possible acquisition of a majority stake in SABIC would delay the IPO again. Analysts see it as yet another sign that this ambitious plan is unlikely to become a reality.

There is still a chance however that the IPO could be saved, with Aramco gaining the option of putting only its downstream group up for an IPO in the coming months. A possible acquisition and merger of the two downstream groups could lead to a more interesting option for Aramco than attempting to IPO the entire company. With a complete focus on downstream, some major legal and financial risks could be mitigated. A downstream IPO is nothing new to the market, and does not involve the Kingdom’s main asset, the 276-billion-barrel oil reserve.

No major discussion will be needed to assess the existing valuation of reserves, or the overall status of the fields. A focus on downstream would also not put the crown jewels of the Kingdom within reach of a potential legal action from other nations.

At the same time, and possibly a more important factor for crown prince MBS, the sale of PIF’s 70 percent stake in SABIC to Aramco would inject tens of billions into the coffins of the sovereign wealth fund, which is currently desperately seeking additional funding to support its vast list of projects (Red Sea, NEOM and Qiddiya) and investments.

Additional investments would help to stimulate Saudi Arabia’s struggling job market and the development of SMEs. A sale of SABIC, leading to a downstream IPO by Aramco, could give a significant boost to MBS’s main target at present of developing the city of the future, called NEOM, a $500 billion investment project in the northwest of the Kingdom, including a free zone in the Sinai (Egypt). The leverage of the expected $70-80billion of the SABIC equity sale to Aramco would give the PIF and MBS enough breathing space to get going.

The SABIC acquisition will for sure put some pressure on Aramco’s financial position, but with higher oil revenues and still very low interest rates globally, the pain will be minimal. At the same time, Aramco’s valuation will go up based on SABIC assets and the global market position. Related: Anti-OPEC Bill Could Be A Game-Changer For Oil Markets

All in all, this move may act as a much-needed pressure valve for Riyadh and Dhahran. The pressure on the Saudi government and Aramco to perform above market standards in order to hit the targets required for a successful IPO will be slightly reduced. SABIC will likely be strengthened by the move, gaining access to Aramco’s oil production and technical assistance.

In contrast to Aramco, SABIC is struggling to keep up with market changes of late. An Aramco influx of management and technical skills could however be just what the downstream giant needs.

Analysts have been left dazed and confused by the stream of news and apparent struggles in Saudi Arabia of late, but the Crown Prince could well be smiling behind the closed doors in his Riyadh palace. Without loosing face or support, MBS could now be able to push forward his grand strategy.

The risks of an IPO are now being mitigated, while financial resources are available to push forward on other fronts. The Kingdom will first get the rewards of the inclusion into the FTSE and MSCI Emerging Markets Index in the next 12-18 months, resulting a multibillion dollar influx of FDI and other investments. With the Tadawul (Riyadh Stock Exchange) growing, possibilities of having a larger share of the Aramco IPO in Riyadh also becomes an option. Perhaps the market confusion is coming from a misunderstanding of the strategy of MBS.

By Cyril Widdershoven for Oilprice.com

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  • Amvet on July 29 2018 said:
    My guess is that Saudi oil reserves have decreased to the point where an Aramco IPO must be done before the bad news leaks.

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