Saudi Aramco Seems to Be Looking to Buy Refineries Before IPO

 | Dec 14, 2017 | 9:00 AM EST
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Saudi Aramco is attempting to bulk up its operations across the globe before its eagerly anticipated initial public offering (IPO), which is set to be the world's largest. CEO Amin Nasser said in an interview with Reuters published on Wednesday that the company is moving ahead with its expansion strategy in the refining and retailing area.

Aramco ultimately plans to almost double its total refining capacity, domestically and abroad, to up to 10 million barrels per day from around 5.4 million currently.

"If you look at our peers, their refining capacity is either equal or much higher than their production capacities. So, we are looking at our refining capacity to be in that range," Nasser said in the interview.

The Aramco CEO did not explicitly say the company was looking for acquisitions, but it is hard to see how it can hike refining capacity that much without buying some refineries here and there.

His remarks tie in with other efforts by Saudi Arabia to drum up demand for its crude and derivative products, just as OPEC's biggest member is bearing the brunt of the production cuts it agreed with both members and non-members last month.

In September, King Salman signed a royal decree lifting restrictions that meant that Saudi women could be issued with a driving license only if a legal guardian signed for it and only could drive with a guardian in the car.

This action in effect will lift a driving ban for Saudi women starting next year. Expect surging demand for fuel in Saudi Arabia as women take to the roads in droves. But filling up the tank could be costly: starting next year, the Saudi government plans to raise prices at the pump by around 80%, according to a report by Bloomberg.

Gasoline costs around $0.24 a liter in Saudi Arabia, and prices will not reach international levels until 2023 at the earliest, or even 2025, a source in the government told Bloomberg on Dec. 11.

Aramco's efforts to increase its retail presence make sense. With things such as electric vehicles and car-sharing gaining ground and cutting demand for gasoline, owning solid refining and selling operations could make the difference between selling product at a reasonable price and scrambling for retailing outlets in a fiercely competitive environment.

Nasser said in the Reuters interview that his company has held talks with Russian firms, including Kremlin-controlled Rosneft, on possible joint investments to increase refining capacity. He did not give any hint about possible acquisition targets, but it is reasonable to believe that any midsize refiner in Europe, Asia or the U.S. potentially could be of interest.

Investors seeking to get exposure to refiners in general should take a look at the VanEck Vectors Oil Refiners ETF (CRAK) . This ETFs's price has had an amazing year-to-date run, increasing by almost 43%. Total return has been lower, but still a healthy 35%. Developed markets make up almost 80% of its composition and emerging markets 20%; its top five holdings are India's Reliance Industries, Texas-headquartered Phillips 66 (PSX) and Valero (VLO) , Ohio-based Marathon Petroleum Corp.  (MPC) and Japan's JXTG Holdings (JXHLY) .

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