Putting Together a Shopping List for Saudi Aramco

 | Dec 22, 2017 | 9:00 AM EST
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Just over a week ago, an interview by the CEO of Saudi Aramco, Amin Nasser, with Reuters prompted me to write a story saying Aramco may be on the prowl for acquisitions in the fuel refining and retailing space.

Ahead of its planned IPO for next year, Aramco -- which has been valued at $2.0 trillion by Saudi Arabia's Crown Prince Mohammed bin Salman -- is wise in seeking to bulk up its refining and retailing operations in order to match its exploration and production ones.

Nasser said the company plans to almost double its refining capacity. He did not say specifically that the Saudi state oil company is looking to buy other firms, but there is no other way it could achieve that level of growth.

On Wednesday, The Wall Street Journal reported that Aramco was looking at Houston-based Tellurian (TELL) , a liquefied natural gas producer, with the intention of buying a stake. The article said the talks were very preliminary and that the Saudi company was looking at other companies as well.

With that in mind, it might be a useful exercise to screen for possible acquisition targets in the refining space, not just in the U.S. but in other regions of the world, to see what companies would best fit Aramco's strategy. Of course, this is highly speculative, as there is much about the company's strategy that remains shrouded in mystery.

Let's take the U.S. first. Valero Energy (VLO) looks like a good one for Aramco. It has two main segments, refining and ethanol, including associated marketing activities and logistics operations.

This San Antonio-headquartered refiner looks a bit pricey right now, however, as it is trading at a price to book value of 2.0, the highest for its own range, and a forward price-to-earnings (P/E) ratio of 14 versus a five-year average of 9.8, according to FactSet data.

Also in Texas, but headquartered in Houston, is Phillips 66 (PSX)  It seems to be more interesting as a candidate because it has diversified operations besides oil refining, which could seem very attractive to Aramco.

PSX's midstream segment transports, stores, fractionates and markets natural gas liquids in the U.S. and exports liquefied petroleum gas (LPG) to Asia and Europe. Its chemicals segment manufactures and markets ethylene and other oil derivative products.

This company is not cheap either. It trades on a forward P/E of 15.5 compared with its five-year average of 12.3 and is at a price-to-book ratio of 2.3, the high end of its range.

But perhaps these two U.S. companies are too big for Aramco to bite just yet. The Saudi company seems to prefer smaller firms and likes the emerging markets.

In that space, Taiwanese company Formosa Petrochemical Corp. (FPCC) looks like a good opportunity in Asia. FPCC is the first privately owned refinery in Taiwan and the country's leading ethylene producer. The stock is listed on the Taiwan stock exchange.

Another Asian opportunity could be Pakistan State Oil Co., the country's largest energy company. It is headquartered in Karachi and listed on the Pakistan Stock Exchange, trading on a forward P/E of just 5.6, which is below its five-year average of 5.9, and is at a price to book value of just 0.8, well below its five-year average of 1.2.

In Europe, the Saudi oil giant could start by looking at smaller refiners in emerging Europe. Three companies stand out in the region.

The first is Poland's PKN ORLEN, a refiner and retailer with operations not just in Poland but also in the Czech Republic, Germany and the Baltic states. The second is Turkey's only refiner Tupras. The third is Romania's second-largest refiner, Rompetrol, which owns the country's largest refinery, strategically located near the Black Sea.

These are just a few examples of companies that Aramco might consider if it wants to make itself bigger and better before what is set to be the world's largest initial public offering next year.

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