Saudi Aramco: the company to watch

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Saudi Aramco, the world's most profitable company, is on a mission to become a leading chemicals player, as well as a top energy company, with funds to back those ambitions. The Saudi government in December launched an IPO of Aramco on the Tadawul (Riyadh) stock exchange, with shares trading as of 11 December. The government raised $25.6 billion from the issue of 3 billion shares, 1.5% of Aramco's capital, making it the world's largest IPO, and valuing the entire company at $1.73 trillion. The government says it intends shortly to exercise some or all of the greenshoe option, which could increase the issue size by 15% to 3.45 billion shares, 1.725% of the company, making the IPO worth $29.4 billion. The proceeds will be used by Saudi Arabia to diversify its economy away from a near-total dependence on oil.

Apart from a few hedge funds, which saw the opportunity for a quick profit, investors outside Saudi Arabia and the Arab Gulf region largely ignored the IPO. A survey of 31 major institutions carried out by the brokerage firm, Sanford C. Bernstein, and reported in Fortune magazine, showed they valued the company at an average of only $1.26 trillion. Analysts outside the region cite reports that wealthy Saudi families and individuals were pressured into supporting the issue, and that the government itself, through institutions including the Saudi Public Pension Fund, also pumped a large amount of money into it. Nevertheless, in the week following the launch of trading, the Aramco share price rose, despite a small pullback, by almost 18% to value the entire company at $2.04 trillion, just exceeding Crown Prince Mohammed bin Salman's long-hoped-for valuation of $2 trillion.

Analysts say that if continued pressure from subdued oil prices forces Riyadh to monetize more of its Aramco holding—via, for instance, a share sale to the Chinese government or its proxies or a second issue on an international stock exchange after the contractual 12-month lock-up period—it would be in the country's interest to have the highest possible Aramco share price as a base valuation. One or more bond issues linked to Aramco are another option. The country is estimated to need a Brent crude price of $80-84/barrel (bbl), compared with the current price of $65.60/bbl, to balance its budget and halt a drain on its foreign currency reserves.

Meanwhile, Aramco is due to complete, in the first half of 2020, the acquisition of a 70% stake in Sabic for $69.1 billion, which, after adding its own chemical assets in Saudi Arabia and overseas, will make it one of the top chemical players worldwide in revenue and capacity terms. The deal to acquire control of Sabic—the remaining 30% of Sabic shares will remain listed on the Tadawul exchange—is expected to boost Aramco's downstream business and make it more attractive to investors. The two companies are already working on a joint oil-to-chemicals (OTC) project at Yanbu, Saudi Arabia, which is expected to produce 9 million metric tons/year (MMt/y) of chemicals and base oils from 400,000 b/d of crude and come onstream in 2025. It is one of several OTC projects that Aramco is progressing. OTC technology is expected to revolutionize the worldwide petrochemical industry.

Aramco's chemicals business will operate in more than 50 countries and is expected to have the largest net production capacity for ethylene and be among the top four companies by net production of polyethylene, ethylene glycol, and polypropylene, according to IHS Markit.

It is still unclear what level of integration is expected between Aramco and Sabic, and how the new grouping will be managed. Yousef al-Benyan, CEO of Sabic, does not expect any change to Sabic's strategy or growth. "Sabic will remain a listed firm and will have its own governance," Benyan said recently. Abdulrahman al-Fageeh, Sabic's executive vice president/petrochemicals, told CW recently that there is a team in place looking at possible synergies. The Saudi government recently reduced the tax rate on Aramco's downstream business from a 50-85% tiered range to the general Saudi corporate tax rate of 20%, on condition that Aramco consolidates its downstream business under a separate, wholly-owned subsidiary by the end of 2024.

When it unveiled plans to buy a majority stake in Sabic, Aramco said that it had another $100 billion to spend on downstream acquisitions, mainly outside Saudi Arabia. The company signed a letter of intent in August to acquire a 20% stake in Reliance Industries' refining, petrochemicals, and fuel-marketing operations in India for $15 billion. It is reportedly eyeing other major acquisitions in India, notably of the Indian government's majority stake in Bharat Petroleum.

Aramco is a partner in another major integrated refinery and downstream project in India that was first announced in 2017. Aramco and Abu Dhabi National Oil Co. (Adnoc) are expected to hold a combined 50% stake, with the rest divided among Indian Oil, Bharat Petroleum, and Hindustan Petroleum. Aramco and Adnoc will supply crude oil to the proposed 1.2-million b/d refinery.

This project was moved from its original site of Ratnagiri to Roha, Raigad District, in Maharashtra State, India. Indian oil minister Dharmendra Pradhan said in September that the project would cost more than the originally envisioned $45 billion, and in November the cost was officially estimated at a staggering $70 billion. The new estimates followed a review by a joint economic group of UAE and Saudi officials.

In recent years, Aramco has also agreed on refining and petchem deals in the US, China, Malaysia, and South Korea to secure downstream outlets for its crude oil production.

In the US, it bought Shell out of the Motiva Enterprises refining joint venture in 2017 and plans to build a cracker and downstream plants at the Motiva Port Arthur, Texas, site. Meanwhile, Motiva agreed this year to acquire Flint Hills Resources' nearby cracker and related chemical assets.

In Malaysia, Aramco is an equal partner with Petronas in the Rapid petrochemical complex in Johor State, which is now being commissioned. It is also planning to build a petrochemical complex in South Korea, where it is a majority shareholder in S-Oil, a leading oil refiner. Aramco completed last September the purchase of Shell's 50% stake in the Saudi Sasref refinery and plans to expand the facility downstream into chemicals.