Prince Salman's Sovereign Wealth Fund Looks Sick, But I Wouldn't Call It Dead Nor Suggest Coffins Need Filling -- July 24, 2018

Updates

July 28, 2018: it's official -- the Saudi Aramco IPO is dead. At least according to oilprice.com.

Two things here:

• First, nobody besides MbS wants the deal. Aramco Chairman Khalid al-Falih "has long been opposed to a deal for Sabic" the WSJ sources said. Meanwhile, Sabic executives worry that the company "would lose its identity in any deal."
• Second, in the absence of an Aramco IPO, Saudi Arabia really has no option; Prince Mohammed’s advisers see a deal between the kingdom’s two largest companies as central to remaking the economy.

And the Saudi economy desperately needs remaking: even though oil prices recently have risen, following the 2014/2015 oil price crash which forced the government to inject billions into the economy (and liquidate more billions in reserves) to keep the populace content and the economy operating, the government is running a massive budget deficit this year after announcing the biggest fiscal stimulus package in the country’s history.

July 27, 2018: Aramco considers bond sale to buy SABIC stake. And it's a 70% stake. Also here.

Original Post 

I don't know how widely accepted the views are in this op-ed over at oilprice.com, but gleaning what seem to be the facts from the article suggests this is as good a place to start as anywhere to understand the huge news reported overnight.

Six data points, first.

First, Prince Salman's Vision 2030: take a very small part of Saudi Aramco public; the process has been delayed by one to two years, maybe more, depending to whom one listens.

Second: in the oil sector, there are three "streams": the upstream (E&P); midstream (pipelines); and, downstream (end users -- refineries and retail outlets). In a country like Saudi Arabia, there probably is not much call for "midstream." And that appears to be true. According to the op-ed, the two big oil/gas entities in Saudi Arabia are a) upstream, or Aramco; and, b) downstream, or  SABIC, a petrochemical company.

Third: Saudi Aramco and SABIC are (currently) two completely separate entities.

Fourth: SABIC is huge. The continuous international growth in Saudi Arabia's downstream sector (i.e., SABIC) and the successful acquisition of entities in Europe (including DSM Petrochemicals) and elsewhere, saw SABIC growing increasingly powerful [internationally].

Fifth: Saudi Aramco, as part of Prince Salman's Vision 2030, had pretty much decided to take a minority stake in SABIC, but now, out of nowhere, there is talk that Prince Salman may have much larger plans. Saudi sources are suggesting that Aramco is targeting the entirety of the 70 percent stake in SABIC that is currently held by the Prince (i.e., the Saudi sovereign wealth fund PIF).

Sixth: there was always competition between Saudi Aramco and SABIC but now that Prince Salman owns the kingdom, he can set his eyes on some bigger fish, including SABIC.

Now there are two stories going forward. The first story is what this means to Prince Salman, Saudi Arabia, and the global markets if Saudi Aramco and SABIC combine to become one huge behemoth. My hunch: petrochemical companies in the EU are going to be scrambling.

The second story is what this means for the Saudi Aramco IPO. Some suggest this is more evidence that the IPO will never see the light of day. That fits my world view.

So, now we wait and see.

How does the analyst over at oilprice.com see it playing out? Apparently he sees it as one huge slush fund for Prince Salman to fund his Vision 2030 projects:

... possibly a more important factor for crown prince Salman, the sale of PIF’s 70 percent stake in SABIC to Aramco would inject tens of billions into the coffins (sic) 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 $70-80 billion 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. 

Freudian? I got a chuckle out of the statement the analyst made: "...the sale of SBIC to Aramco would inject tens of billions into the coffins of the sovereign wealth fund."

Yes, the sovereign wealth fund took a "trillion-dollar hit" with the ill-advised oil production surge in 2014 - 2017, but by no stretch of the imagination did anyone say that the fund was dead, or now made up of coffins.

My hunch is that the good doctor meant to say "coffers."

"... the SABIC equity sale to Aramco would give the PIF and Prince Salman enough breathing space to get going." 

Maybe he did mean "coffins."