Saudi Arabia’s rosy vision of the future is colliding with its current troubled reality. Oil giant Saudi Aramco is trying to cut the cost of last year’s $69 billion deal to acquire a 70% stake in domestic chemicals group Saudi Basic Industries Corporation, Reuters reported on Sunday. Given that the seller is Saudi’s own $300 billion Public Investment Fund – guardian of the kingdom’s intended pivot away from oil – something has to give.
Aramco’s gambit is eye-catching. Chairman Yasir al-Rumayyan is also governor of the PIF, so he is effectively negotiating with himself. And the oil company has already rejigged the terms of the SABIC purchase once. Its November IPO prospectus outlined how it would pay only a third of the purchase price upfront, instead of a half, with the rest in equal 16% chunks between 2021 and 2024.
As the world’s biggest oil producer with the lowest production costs, Aramco stands to gain market share as U.S. shale producers go bust. But its prospectus also divulged that it made less than $2 billion of free cash flow in 2016 – when oil prices were last this low – and that the SABIC deal would temporarily raise net debt above 15% of total capital. That’s lower than Western oil majors, but Aramco has also committed to pay a $75 billion annual dividend over the next five years.
As the government owns 98.5% of the company, Aramco could just pay out dividends to non-state investors. But the state could also use the cash. Official figures on Monday showed Saudi’s oil revenue fell 24% year-on-year in the first quarter. It is also tripling value-added tax to 15% – a panicky move which will hit short-term consumption. The government may therefore not worry too much about renegotiating the SABIC deal. The chemical company’s share price has fallen 40% since the deal with Aramco was struck in March 2019.
A discounted sale would be a blow for the PIF. But its mandate to diversify Saudi finances already seemed to be going awry. Having pumped $45 billion into SoftBank Group’s misfiring Vision Fund, it has of late been buying shares in major oil companies as well as Newcastle United soccer club. Removing some of its firepower may prove to be a blessing in disguise.
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