Dow Chemical JV with Saudi Aramco: Could It Be?

So the latest Dow Chemical (DOW) rumor has yet another JV with Saudi Aramco. Could it be true? You betcha...

Let's go back to last year's announcement of the JV to build factories at Ras Tanura on Saudi Arabia's Persian Gulf coast. The plants are going to have the capacity to produce as much as 8 million tons of chemicals and plastics a year, using raw materials from nearby oil and natural gas plants at a cost of 1/10th the current market rate for oil gas.

Now it is being reported that Saudi Aramco and Dow plan to build a $26 billion petrochemicals complex in Saudi Arabia to take advantage of the world's biggest oil reserves and meet rising demand for plastics. Aramco and Dow aim to raise about $18 billion from loans and bonds starting next year to finance the project, said a banker, who declined to be identified because the plan is private. Royal Bank of Scotland (RBS) and Riyad Bank will help raise 70 percent of the project's cost, said Abdulaziz al-Judaimi, Aramco's vice president for new business, declining to provide an amount.

So, should we believe it?

If you remember my recent interview with CEO Andrew Liveris, I asked if the most prudent use of the upcoming proceeds from the Kuwait sale wasn't "more petrochemical JVs, share repurchases and dividend increases". His answer? A succinct, "Yes".

The final amounts of the project may differ from $26 billion but the deal is in the works. Liveris has made no bones about his desire to expand his petrochemical business. Here is the important point. Dow is the company of choice for nations rich in raw materials to do business with. Saudi Arabia, Kuwait, Singapore, China, Brazil and Russia are all working with Dow on various projects and what is even better for Dow shareholders is that the scale of the projects is growing exponentially larger and the cash outlays on the part of Dow to finance the deals is negligible.

Once active, the JVs are self financing and Dow simply receives and equity payment for its interest. Nice...

Looks for details in the next 30 days. Whatever the final number, it will be big.

Disclosure: Long Dow

Comments

[domink]

buddy - love the fact that you're so strongly pro Dow etc etc - but you're double counting in this case - the $26bn thats being mentioned is being raised for the Ras Tanura project not for "another" joint venture.

Also while Dow will grow in the middle east - there isnt room in Saudi for another JV with Aramco - Aramco has four large refineries - Yanbu, Rabigh, Jubail and Ras Tanura and the first three already have chemical plants with partners - Exxon, Sumitomo and Shell.

So for all of liveris's far sightedness etc etc Dow is actually very late into the petchem game in Saudi Arabia.

[domink]

also to your point of the equity outlay for these large projects being negligible - thats simply not true - the Ras Tanura venture alone will require $4bn of equity from Dow between now and 2012 - that adds a good $1bn to annual capex numbers - almost doubling the run rate of capex for the period. Layer on the $4bn in equity contributions and $9bn in assumed debt for ras tanura and then despite the $6.7bn net proceeds from the Kuwaitis the balance sheet doesnt look quite as pristine as it does today

Again, while Dow is a great commodity chemical partner - look at your list again and ask yourself if Singapore, Brazil or China really have access to cheap raw materials. The local companies in those countries pay market price for their feedstock and we've been seeing how well the Russians do JV's with the whole TNK-BP thing.

While i do think Dow is cheap at $34, i believe that your article today is not at all objective and is basically propaganda masked as investment analysis

[oiler49er]

domink is correct. the $26bln cited in the reference article is for the existing JV partnership at Ras Tanura.

To add to domink's remarks about Dow's balance sheet, I think the impact of the Rohm & Hass purchase must be considered as well. Berkshire and Kuwait will be kicking in about $4bln but much of it will fall under Dow's $15bln in cash. Now Moody's has taken notice and put Dow's credit rating under review. This turn of events raises concerns that Dow's funding for equity participation in the JV may hit some road blocks.

I am a firm believer that the Dow-Aramco partnership will be a match made in heaven when it comes to producing commodity chemicals, but whether they can get there is another story.