Even before the latest slew of announcements regarding the agreement by Saudi Arabia’s flagship oil and gas company, Aramco, to acquire a 70 percent stake in the Kingdom’s key petrochemicals company, Saudi Basic Industries Corporation (SABIC), for US$69.1 billion, from the country’s sovereign wealth fund, the Public Investment Fund (PIF), the ‘deal’ looked like a meaningless accounting trick that transfers money from one side of the Saudi balance sheet to another. It looked like that because that is what it is but it is much worse than that as well.
Over and above the rhetorical nonsense spouted by the various involved participants about value-enhancing ‘synergies’ between the two entities floats the stark fact that there are none at all. Aramco chief executive officer, Amin Nasser, has often stressed that he wants to position the company less as a straightforward crude oil extraction unit and more as a high-value-added developer of advanced petrochemical products.
However, Aramco buying a majority stake in SABIC, given Aramco’s existing downstream infrastructure, will lead to enormous duplication of resources – people, offices, equipment, research and development, marketing, and capital employed, amongst others. In addition, overlaying SABIC’s existing senior and middle management with those of Aramco, an antiquated state-owned bureaucracy, will significantly adversely affect SABIC’s operating efficiency and margins.
For those who think otherwise, Aramco has history in this regard that makes grim reading. Its own former petchems and refining arm, the Rabigh Refining and Petrochemical Company (PetroRabigh), was floated via an initial public offering (IPO) in 2008. Although much of its very long prospectus was pitched with the singular intention of showing PetroRabigh as a top-notch operation manned by the best and the brightest, a very different – that is to say, true – picture emerged from the even longer appendices that were legally obliged to be present in the IPO document.
There were warnings to would-be investors that PetroRabigh had ‘significant long-term borrowings’, with much more to come to finance future expansion plans. Subsequent to its IPO listing, there were fires and power failures at its principal plant and the debt continued to soar. The share price – for those unfortunate enough to have believed what the Saudis told them – dropped like a stone, losing around 80 per cent of the funds invested in the stock in the first year or so and it remained a losing trade for the next 10 years.
Given that Aramco’s senior management can clearly not be trusted to run a hot bath, let alone a petchems giant of SABIC’s size and complexity, the question is begged as to what the point of the ‘deal’ might be. It is certainly not to accrue much-needed funds to bolster Saudi’s troubled budget. “What you see here is state-owned Aramco buying a stake in the effectively state-owned SABIC from the state-owned sovereign wealth fund, the PIF,” a senior New York hedge fund manager, told OilPrice.com.
“Rather than new foreign money flowing into Saudi as payment for the full five percent share of Aramco that was meant to go public but which they couldn’t get away because the whole IPO looked so poisonous – which was to have been used to fund MbS’s [Crown Prince Mohammed bin Salman] grandiose ‘Vision 2030’ plan [designed to diversify the Kingdom away from its dependence on oil] – it’s actually Saudi money already in its sovereign balance sheet that’s being used,” he added.
Even if Aramco had offered to buy the 30 percent plus non-PIF portion of SABIC that is listed on Saudi’s Tadawul All Share Index, it could be argued that at least Saudi Arabia was gaining some new money into its sovereign coffers but this is not the case. Moreover, the deal is set to be value-destructive for SABIC’s own balance sheets, as Aramco’s earlier-stated intention was to issue bonds backed by SABIC’s balance sheet and attached to the SABIC name that, in effect, would make SABIC pay for Aramco’s purchase of it, in a leveraged buyout-style deal.
The actual point of the deal, therefore, a number of bankers with knowledge of proceedings told OilPrice.com, is to allow MbS to save some face. Before MbS embarked on the Saudis’ second disastrous oil price war against the U.S. shale sector in less than a decade, the Aramco-SABIC ‘deal’ was to have provided money for the PIF to embark on various hare-brained projects connected to his ‘Vision 2030’, including building a futuristic city in a remote corner of the Saudi desert. It was also to have been used to add ‘extra value’ to the increasingly shunned Aramco IPO flotation until someone senior in the U.S. investment banking side of the IPO advisory team realized that the deal would make the already toxic-looking Aramco look even worse.
Now, though, MbS is caught between a rock and a hard place with this deal. On the one hand, the deal was formally announced with the great fanfare so popular amongst tin-pot tyrants, so it needs to go ahead, otherwise MbS will lose face. As it stands, in March Saudi Arabia’s central bank depleted its net foreign assets at the fastest rate since at least 2000, bringing the sustainability of the crucial SAR-US$ economic peg into question. At the same time, the Kingdom slipped into a US$9 billion+ budget deficit in the first quarter and a number of independent analysts are predicting that its overall gross domestic product could shrink by more than 3 percent this year (the first outright contraction since 2017 and the biggest since 1999), whilst the budget deficit could widen to 15 percent of economic output.
On the other hand, though, it makes even less sense now than it did before, which was none at all, as no new non-state funding that is not already on Saudi’s balance sheet is going to result from the deal. Consequently, MbS is now operating in an ‘Alice in Wonderland’ world of unreality, which can be perfectly characterised by Alice herself: “If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?” Given that everyone connected to the ‘deal’ is now operating on a level of pure fantasy, the focus of a deal that was never really a deal is on the pricing of the deal (for which there is no real price, as the deal is not real).
The details are that Aramco supposedly wants to pay less for SABIC than had been agreed. The stated reason is that SABIC’s value has fallen more than 40 percent, and the reason cited for the fall is the effect of the coronavirus pandemic. Saudi officials peddling this nonsense do not state that this is only half true and that the full reason why the value of SABIC has plummeted is because MbS decided to launch an oil price war designed to crash oil prices at a time when the coronavirus would in itself be sufficient to destroy demand and cause oil prices to crash.
In any event, SABIC’s shares have traded at around SAR70, compared to the SAR123.39 priced by the original agreement, and the company made a second straight quarterly loss in the first quarter. This has all brought SABIC’s total market value now to around US$56.5 billion, putting the value of Aramco’s planned stake at around US$40 billion, not the US$69.1 billion originally agreed. In sum, Aramco wants to pay less for it but as it is only paying for the stake owned by one arm of the Saudi government to another, the deal might as well be priced in sparrows, clouds, or angels on the head of a pin.
The real message that emerges from this is that MbS needs to continue to pretend to his people – but, more importantly, to the senior Saudis who could remove him at a time when the issue of succession to the ailing King Salman is front and center – that money is coming into Saudi from somewhere. The fact that it is an accounting trick only will be lost on most of the Saudi people and MbS may be able to convince some of the senior Saudis who are closest to him that in some way the money flowing into the PIF can be represented to the more hostile senior Saudis as ‘external funding’ that can be repurposed for use within the ‘Vision 2030’ framework.
“It is crucial that MbS buys himself some time, as many senior Saudis resent his quick rise to power and this worsened with the supposed anti-corruption clampdown in late 2017 and then the same thing happening with senior Saudis in March, when he targeted two of the royal family’s most influential members, Prince Ahmed bin Abdul Aziz [the youngest brother of King Salman], and Mohammed bin Nayef [the former Crown Prince and interior minister],” a senior source close to the Saudi government told OilPrice.com last week. “To many of these highly-placed disaffected Saudis he [MbS] is on borrowed time, and they are waiting to see how far the Americans will go in withdrawing their support for him, personally, after the phone-call and the withdrawal of the Patriot missile batteries,” he concluded.