Page 8 - MEOG Week 42

MEOG FinanCe & inVestment MEOG
Aramco IPO delayed again
saUdi arabia
SAuDI Aramco’s long-awaited initial pub- lic offering (IPO) was delayed again last week with investors reported to still be wary of the $2 trillion price tag demanded by Crown Prince Mohammed bin Salman (MbS).
As reported previously by Middle East Oil &a Gas (MEOG), a total valuation of $1.5 trillion is more palatable, though bloomberg cited its own calculation of $1 trillion as being “more realistic”.
A week earlier, the Financial Times reported that the Saudi government had been poised to move ahead with the listing early this week.
The uK-based economic daily quoted sources close to the deal saying that following the government’s approval, the Aramco board of directors was expected to give its nod paving the way for Aramco to announce plans for a floata- tion of up to 3% of equity shares on the domestic Tadawul stock exchange.
The state has prioritised listing in the king- dom ahead of an international lisitng in an attempt to bank on the availability of large pools of domestic capital and financing as well as strong interest from local retail investors.
Aramco, the crown jewel of the Saudi econ- omy, is very much a sought after asset class among private Saudi investors who have been locked-out for decades by the ruling class from directly participating in the company’s fortunes.
Russian investors eager to put a foot in the door of one of their largest competitors in the global crude oil market have also expressed strong interest in taking a stake in Aramco, said Kirill Dmitriev, CEO of the Russian Direct Investment Fund.
Meanwhile, western investors seem to be staying on the sidelines.
Listing 3% on Tadawul would mark a signifi- cant departure from the original plans of listing 5% in London or New York. However, despite a competent person’s report (CPR) by DeGolyer & MacNaughton last year broadly affirming reserve levels, questions persist about the value of investing in Aramco, particularly given the volatility of the oil market and the fact that the 5% to be sold will not include any right to the kingdom’s oil concession.
ratings downgrade
Ratings agency Fitch last week downgraded Ara- mco’s long-term issuer default rating to A from A+ with a stable outlook
The move is in line with Saudi Arabia’s sov- ereign downgrade following drone and missile attacks on the company’s domestic infrastruc- ture in September, which resulted in a tem- porary suspension of more than half of its oil production.
Moody’s estimates the attack will have a very limited impact on Aramco’s operational and financial performance in 2019. However, a ratings downgrade was necessary given the
interdependency between the sovereign and Aramco and the influence the state exerts on the company through strategic direction, dividends and taxation, Moody’s said.
The firm’s rating is supported by the strength of the balance sheet of the world’s largest oil producer by volume and earnings with cash bal- ances exceeding debt. Fitch projects that Aram- co’s leverage will remain low, even assuming its ambitious dividend target and after the acqui- sition of Saudi basic Industries Corp. (SAbIC), which will be paid for in installments.
In addition, the company is one of the most profitable companies in the world and has one of the lowest per barrel extraction fees globally. The company’s profitability significantly improved in 2017 as the state reduced the company’s tax rate to 50% from 85%, and started to compensate the company for income forgone as a result of Ara- mco’s selling some of its products to domestic customers at regulated prices.
The company’s profile is strengthened by its move away from upstream production through the acquisition of the government’s 70% stake in SAbIC, one of the world’s largest petrochemical producers. This fits into the company’s vertical integration strategy and should help diversify its earnings.
In 2018, the company boasted liquids pro- duction and total hydrocarbon production averaging 11.6mn and 13.6mn barrels of oil equivalent per day, respectively.
Aramco estimates its proved liquids reserves at 227bn barrels and its total hydrocarbon reserves at 257bn barrels of oil equivalent, which implies a reserve life of 52 years, though green- field exploration efforts have been limited in recent years, with focus instead being directed towards maintaining and adding to production capacity.™
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Week 42 22•October•2019