Saudi Aramco extends payment plan as it closes $69bn Sabic deal

Saudi Aramco will pay for its 70 per cent stake in petrochemicals company Sabic over the next eight years after extending its payment schedule for the $69.1bn deal to provide a buffer against weaker oil prices. 

The state energy giant will pay Saudi Arabia’s sovereign wealth fund a near 30 per cent premium to Sabic’s current share price as the chemicals group suffers from a weaker global economy and curtailed demand for its products because of the coronavirus pandemic. 

The deal’s completion comes despite Saudi Aramco reporting a 25 per cent drop in first-quarter net income as global oil demand collapsed by as much as a third, and company executives warning that the pandemic would continue to weigh on earnings.

While Saudi Aramco is affected by market swings like other listed energy majors, its executives must also manage decisions taken by the kingdom’s highest authorities, who dictate oil policy and increasingly how the company spends its cash. 

The transaction, announced in March 2019, was intended to provide a financial boost to Saudi Arabia’s Public Investment Fund — Crown Prince Mohammed bin Salman’s chosen vehicle to diversify Saudi Arabia’s oil-dependent economy.

The deal between the state entities will provide funds for the PIF at a time when it is looking to snap up assets at knockdown prices and develop huge projects in the kingdom.

The PIF had large financial commitments ahead of the pandemic, which has triggered Saudi Arabia’s biggest economic crisis in years and prompted the kingdom to enact austerity measures. In recent months, Riyadh has transferred $40bn in foreign reserves to the PIF.

Following a seller loan provided by the PIF, Saudi Aramco will pay instalments and loan charges over a staggered period until 2028, the energy company told the kingdom’s Tadawul stock exchange on Wednesday. The first payment, of $7bn, is due this August.

In Saudi Aramco’s initial public offering prospectus ahead of its December 2019 flotation, it said the company would pay 36 per cent of the purchase price on closing in cash and 64 per cent in the form of a seller loan. Payments and loan charges secured by promissory notes were set to be paid between 2020 and 2025.

Saudi Aramco is on the hook for billions of dollars in payments this year, including a targeted $75bn in dividends. Yet the kingdom said ahead of the IPO that the state would give priority to outside shareholders and forgo its right to receive their full allocation in the event of a cash crunch.

In a sign of how the company is trying to conserve cash, it said it would reduce capital spending to as low as $25bn this year, from $33bn in 2019.