Saudi investment in U.S. shale continues in the down market, not interested in acquiring U.S. companies at this point
Saudi Basic Industries Corp. (ticker: TADAWUL:2010), or Sabic, plans to expand investment in U.S. shale gas projects through joint ventures, according to acting CEO Yousef al Benyan. Sabic has signed an agreement with Houston-based Enterprise Products Partners (ticker: EPD) to obtain U.S. shale gas, reports Bloomberg.
The company may use the feedstock in the U.S. or export it to other countries such as the U.K., where the company has converted crackers to use shale gas as feedstock to produce olefins and their derivatives more competitively, al Benyan said in an interview in Riyadh.
“The main areas in the U.S. we are looking to invest in are the northeast and the south as they fit our overall expectations including government support, labor laws and unions,” said al Benyan. “At this point we are not looking to acquire any U.S. companies.”
Sabic said in April that it plans to expand in China and the U.S. because it’s difficult for the company to grow in Saudi Arabia due to a shortage of available gas. Al Benyan went on to say that Sabic will not be directly involved in Saudi Arabia’s shale production, but the discovery of shale gas in the country will “open up some opportunities for indirect investments for Sabic.”
$112 billion in foreign investment in U.S. oil and gas from 2008 to 2013
Many foreign companies have looked to participate in joint venture projects with U.S. companies to help gain deeper insights into extracting shale gas and tight oil from their own shale plays. From 2008 to 2013, Ernst & Young believes that foreign investment in the U.S. oil and gas industry totaled $112 billion, with the majority of the deals involving shale gas.
According to the Energy Information Administration (EIA), most of the foreign investment in these joint ventures involved buying a percentage of the host company’s shale play acreages through an upfront cash payment with a commitment to cover a portion of the drilling cost. Foreign investors in joint ventures pay upfront cash and commit to cover the cost of drilling extra wells within an agreed-upon time frame, usually between 2 to 10 years, according to the EIA.
These deals represent a win-win for both sides, with the U.S. producer receiving financial stability from the foreign investment in future projects, and the investors getting an opportunity to see shale-gas extraction operations. While different geographies represent different challenges, working in the U.S. gives foreign companies a chance to work in a stable market with well-established legal guidelines and low political risk.
Sabic beats expectations in Q2’15
Sabic has been insulated from the fall in oil prices by the size of its portfolio and global presence, but low oil prices still put a dent in Sabic’s second quarter earnings, reports The Wall Street Journal. Released on Sunday, the company’s Q2 results showed a 4.5% drop in quarterly profits due to lower sales prices.
The company reported a net profit of $1.64 billion, down from about $1.72 billion a year earlier. Despite the decline in the company’s net profit, Sabic still beat most analysts’ estimates for the second quarter. Aljazira Capital expected Sabic to post a net profit of $1.31 billion, while Albilad Capital expected the company to report $1.19 billion in net profits for the quarter.
Sabic is the biggest listed entity in the Middle East, and is 70% owned by the Saudi government. Last month, Saudi Arabia began allowing foreign investors to purchase stocks directly in its market, making Sabic one of the most closely watched companies in the kingdom.