Aramco's Sabic deal to be financed mainly from oil company's cash, says Fitch

The state producer was the world's most profitable company earning $111 billion in 2018 – beating Apple and Google

The Aramco-Sabic transaction is a "significant leap forward” for Saudi Aramco’s downstream strategy, Aramco president and chief executive, Amin Nasser said. Reuters

Saudi Aramco's $69 billion (Dh253.4bn) acquisition of Sabic will be funded largely by the state oil company's free cash flow, with the resulting transaction boosting integration significantly, said Fitch.

The acquisition will be financed through a mixture of bonds as well as the oil company's vast cash reserves. Aramco said earlier this week, it has established a Global Medium Term Note Programme and will conduct a series of fixed income investor meetings to potentially sell a bond to partly fund the Sabic acquisition.

"We assume the transaction will be funded largely from Saudi Aramco's free cash flows, and the company's leverage will remain very conservative by industry standards," the ratings agency said.

Aramco, which emerged as the most profitable company earning $111 billion in 2018 – beating the likes of Apple and Google – said it had acquired 70 per cent of Sabic's shares, the largest petrochemicals company in the region.

Fitch estimates that after the transaction, the share of downstream in Aramco's total earnings before interest, tax, depreciation and amortisation will rise to 9 per cent, compared with 3 per cent in 2018. In comparison, international oil companies such as Shell, Total and BP derive around 23 per cent of their Ebitda from downstream and chemicals business, said Fitch.

Downstream refers to the refining and petchems side of the energy value chain, in which the Gulf state oil companies are increasing investment as they look to diversify their business into more product lines. Aramco's acquisition of majority shares in Sabic was also indicative of the larger global trend towards integration in the energy industry to hedge against low oil prices, said the agency.

"Refining and petrochemical margins are counter-cyclical to oil prices and represent a hedge against low oil prices," said Fitch.

The shift came amid the industry-wide squeeze felt by oil majors focused largely on the upstream side of the business during the fall in prices between 2015 and 2016.

"Companies that have lower production costs and are more integrated into petrochemicals would be better positioned to withstand ensuing declining demand, although it is difficult to predict how the market could change if demand for oil peaks; this, however, is unlikely to happen for at least 10 years," added Fitch.