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Highlights

Aramco to buy 70% of SABIC for $69.1 billion

Public Investment Fund can now place more aggressive bets

For Aramco, downstream expansion is key

London — Saudi Arabia's state oil giant just got a lot bigger, but in doing so, the country's hopes of weaning itself off of petroleum dependence have also received a shot in the arm.

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Saudi Aramco's announcement Wednesday that it had agreed to acquire a 70% stake in state-led petrochemical company SABIC for $69.1 billion will further its downstream ambitions, while giving Saudi Arabia's sovereign Public Investment Fund a massive cash injection in one of the most highly anticipated transactions in the energy industry.

The PIF, which had held the SABIC shares, is the vehicle through which Saudi Arabia aims to finance ambitious structural reforms aimed at diversifying its oil-dominated economy, under a plan dubbed Vision 2030 and overseen by Crown Prince Mohammed bin Salman. So far, however, progress on the Vision 2030 goals has been "slow and negligible," according to analysts with investment bank MUFG, hampered by bureaucratic foot-dragging and structural inertia.

The funds the PIF will receive from the SABIC sale could be transformative, enabling Saudi Arabia to place more aggressive bets to shake up its economy, the Middle East's largest, in a future when growth in oil demand is no sure thing and Saudi youth are clamoring for job opportunities.

Yasir Othman al-Rumayyan, the PIF's managing director, said the deal "will unlock significant capital for PIF's continued long-term investment strategy, underpinning sectoral and revenue diversification for Saudi Arabia."

The PIF was founded by royal decree in 1971 to focus on domestic investment, and its remit has been turbocharged by the Vision 2030 plan, which envisions the PIF as Saudi Arabia's central engine of growth. The fund holds investments in some 200 companies, and many of its more recent forays have been in the tech sector, such as its $3.5 billion stake in ride-hailing company Uber. It is also a strategic partner with other investment funds, such as Blackstone Group and Japan's Softbank.

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The original plan had been for the PIF to be the beneficiary of a public listing of up to 5% of Saudi Aramco, with Saudi officials pinning their hopes on the company achieving a $2 trillion valuation that many analysts poo-poohed.

But amid internal disagreements over how to proceed with the listing and a lackluster oil price environment, it was shelved last year in favor of the SABIC acquisition. Aramco officials said they would prefer to fully digest the SABIC transaction first before proceeding with the IPO, which they insist is still on, with a new target date of 2021.

By purchasing the SABIC stake from the PIF in a domestic deal, Aramco for now has escaped having to open its books to public scrutiny, as an IPO would have required. That has been reportedly one of the major sticking points of a listing.

"For the PIF, the SABIC deal is a short-term substitute for an Aramco IPO," said Ellen Wald, an energy consultant who recently authored Saudi, Inc., a book chronicling Aramco's history. "Aramco is the Saudi entity best positioned to receive favorable financing, so this deal is the most efficient way for the PIF to get that cash."

The transaction, which Aramco said is subject to regulatory approvals and other conditions, will see it pay Riyal 259.125 billion ($69.1 billion) for the 70% stake. Aramco said it had no plans to acquire the remaining 30% of publicly traded SABIC shares.

Company officials have previously said they may issue about $10 billion in bonds in the second quarter of 2019 to help fund the purchase, in what would be Aramco's first international bond sale.

THE FUTURE IS IN CHEMICALS

From an operations standpoint, Aramco, the world's largest crude producer, will see a boost to its plans to expand its downstream footprint, both inside and outside Saudi Arabia.

Aramco is planning to spend more than $100 billion on new refining and chemicals projects over the next decade, as it seeks to balance its upstream and downstream operations and secure outlets for its crude.

SABIC, one of the top five chemicals producers in the world, was formed in 1976 and has operations in more than 50 countries. It has grown rapidly, with a petrochemical production capacity of 62 million mt/year, compared to 17 million mt/year for Aramco, according to the companies.

"Aramco cannot achieve its goal to be a competitor to the big private oil companies without a global outlook in its operations," said Karen Young, a Middle East economics expert at the American Enterprise Institute in Washington.

Already, Aramco and SABIC are jointly developing a new 400,000 b/d crude-to-chemicals facility at Jubail, on the country's Gulf Coast, and Aramco provides much of the feedstock for SABIC's own petrochemical plants.

Eventually, Aramco aims to integrate its refining and petrochemicals assets to process 2 million-3 million b/d of crude into chemicals. This will help it take advantage of a chemicals demand expected to account for a third of total oil demand globally up to 2030.

Integrating its upstream and downstream operations will also help Aramco absorb any volatility in commodity markets.

"SABIC is a good strategic fit and a solid platform to support our continued investment for future growth in petrochemicals - the fastest growing sector of oil demand," Abdulaziz al-Judaimi, Aramco's senior vice president of downstream, said in a statement.

-- Herman Wang, herman.wang@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com