Congratulations to both Petronas and Aramco for having struck a good deal at a fast pace. It has to be because both are Fortune 500 companies. Even news reports said it is positive for Petronas and the project itself.
I consider it very fast because in late January, the mainstream media reported Aramco ditching plans for a joint venture from the Rapid project. Within a month, Aramco left, came back and everything is sorted out and a Sale and Purchase Agreement (SPA) is signed for such a huge deal.
News reports said the US$7 billion (RM31.1 billion) investment by Aramco for a 50 percent stake in the refinery and cracker assets will significantly reduce the financial burden placed on Petronas. This however is different from what the finance minister II said earlier when Aramco decided to pull out in January.
It is good that Malaysia will get a good deal from this huge investment.
What then are the benefits to the new partner. Surely, it will add value to Aramco’s proposed listing and strengthen its equity story. With fierce competition from shale oil, it will ensure lock-in for future demand for Saudi crudes and improve their market share in the Asian crude market.
What will happen with the US7 billion to be received by Petronas? A brokerage house reported that the cash surplus to be mainly directed to dividend payments to the government. It was also reported that as at end September 2016, Petronas’ operating cash flow of RM36.1 billion was only sufficient to cover for RM35.9 billion in capex spending. The dividend of RM12 billion in the period had to be financed by its cash reserves.
A relieve from capex commitment to be directed to dividend payment to the government?
Now let us focus on the processes that culminates to the signing of the SPA.
Petronas started enticing Aramco from 2014. Obviously there would have been numerous discussions and negotiations. A shocker came when Aramco decided to shelve plans for a partnership in January.
Sources said it is due to an effort to save cash ahead of its planned initial public offering (IPO), and to avoid undermining profit margins of other refinery assets in owns in Asia. The other concern was over the likely returns.
On Monday, Feb 27, 2017, the prime minister announced the decision was made before noon after discussions between top executives from Aramco and Petronas to seal the deal and will be signed the next day. It was a dramatic reversal in the project’s fortunes after the pull out in January.
For the proposed partnership, subject to regulatory approvals and completion of other associated agreements, Aramco will provide as much as 70 percent of the refinery’s feedstock requirements.
While the local media valued the deal at US$7 billion, neither Aramco nor Petronas disclosed official financial details. Overall construction is nearly 60 percent completed as of Feb 28.
While everything is well and good, we need to clarify a few points.
1. It was not very clear whether the deal is a reduced scale from the earlier negotiations when Aramco decided to pull out. I would like to guess that it is because returns from refining are definitely better compared to the overall project. Remember the concern by Aramco over likely returns.
2. The speed with which an agreement is reached and signed for such a huge deal. It is hoped that details are well-covered and discussed and we arrive at a win-win situation and on equally beneficial terms.
3. It was the top executives that completed the discussions and the SPA signed the next day. Is there a process where an investment committee has to vet the terms and conditions of the agreement and a board to approve the huge deal? Not too long ago, we experienced some very big deals where the management did not get the board’s approval!
It is hoped the valuation has taken into consideration some goodwill elements. Further, the development risks have been eliminated and the construction risks are much reduced.
Since there were no price indications in both the Petronas and Aramco website on the deal, are the arrangements made for it to be on a hybrid barter deal?
With their excellent track record I do hope Petronas would have ‘ticked’ all of the above. I am sure Malaysians do not want to believe that political considerations overrides commercial decisions.
We have had a few frustrations with Middle Eastern proposed investments such as in the Iskandar region, particularly in Medini, an oil storage facility in Johor, aluminium smelter project in Sarawak and 1MDB's multibillion-dollar Tun Razak Exchange real estate development.
Let us pray that this will be a very successful project.
Tell the truth and shame the devil. We do not want our only Fortune 500 company to be taken for a ride.
What say you...