Aramco’s downstream diversion solves few problems

Saudi Aramco has a new way to keep corporate financiers busy. The state-owned oil giant has spent more than two years weighing up what would be the world’s largest ever initial public offering. 

Now it might buy a stake in petrochemical maker Saudi Basic Industries Corporation. Though it’s not unusual for oil producers to diversify into making oil-based products, the deal would do little to help Saudi Arabia achieve a couple of key objectives.


There are scant details about the possible investment, which Aramco confirmed on Thursday following a Reuters report. The oil group says it has been looking at possible acquisitions at home and abroad, and that it is in talks with Saudi’s Public Investment Fund (PIF), which owns 70 percent of SABIC. Yet it’s unclear whether Aramco would buy all the shares or just take a minority stake in the $104 billion company.


There’s some logic to either option. As one of the world’s lowest-cost producers, there’s little point in Aramco buying other oil fields. Moving into refining and selling petroleum-based products makes more sense. Aramco has invested heavily in Texas-based Motiva Enterprises, which operates North America’s largest refinery, and Aramco and SABIC already operate several joint ventures.


Less clear is how a deal might help Saudi Arabia open the desert kingdom up to private capital – a key part of Crown Prince Mohammed bin Salman’s vision. Shifting equity holdings from one state entity to another does not obviously create value, and makes the resulting creation even larger and less transparent.

Buying assets might be one way for Aramco to get closer to the $2 trillion valuation that the royal known as MbS has put on the business. But that number still looks a stretch. Even if oil prices remain at current elevated levels for the next decade, Aramco is worth no more than about $1.7 trillion, according to a Breakingviews calculator. A holding in SABIC would not make a big difference.


Even if Aramco took over the PIF’s entire stake – and public investors gave the buyer full credit for the shareholding – it would boost the oil giant’s value by $70 billion, or 4 percent. As corporate finance ideas go, this one doesn’t solve many problems.