Aramco’s Giant Chemicals Deal Starts to Show Signs of Paying Off
Saudi Aramco’s decision to buy chemicals maker Sabic, which led its debt levels to burst through a self-imposed borrowing target, is now showing signs of paying off as prices for plastics, paint and packaging soar.
Last year’s $69 billion acquisition of a stake in Saudi Basic Industries Corp., as the chemicals maker is formally known, has helped drive a turnaround in Aramco’s business of converting oil into plastics and other products. The downstream unit reported earnings before interest and taxes of $4.6 billion in the second quarter, up from a $344 million loss in the same period of 2020. Aramco also benefited from having Sabic fully incorporated into its own results, whereas a year earlier it only included 15 days of Sabic’s performance.
Sabic, the world’s biggest chemicals maker by market value, last week reported its highest quarterly net income in almost a decade as the economic recovery from the coronavirus pandemic boosted demand for its products. Aramco is currently ahead of schedule in its plans to get $3 billion to $4 billion in cost synergies from integrating Sabic by 2025, Chief Executive Officer Amin Nasser said Sunday in a call with reporters.
In the biggest cash-only deal in the last two years, Aramco bought 70% of Sabic from Saudi Arabia’s sovereign wealth fund. The takeover was widely seen as moving government money from one pocket to another, rather than representing a great bargain for Aramco.
Sabic’s share price roughly halved in the 12 months after Aramco announced the deal in March 2019. It now trades at 122.40 riyals, almost what the oil producer agreed to pay.
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The debt taken on by Aramco to fund the purchase, along with a pledge to pay $75 billion in annual dividends, created a huge call on its cash. As oil prices slumped last year, it didn’t generate enough cash to cover the dividend. This year, the market’s turned around.
Aramco’s free cash flow rose to $22.6 billion between April and June, above its quarterly dividend of $18.8 billion for the first time since the start of the pandemic. Gearing, a measure of net debt to equity, fell to 19.4% from 23% at the end of 2020, though it remains above management’s preferred cap of 15%.
Still, Aramco has several more years before it has paid off its Sabic debts. In response to last year’s oil slump, Aramco renegotiated the payment terms it had agreed with the Public Investment Fund, giving itself an extra three years.
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