Saudi Aramco oil reserve upgrade seen boosting bonds, IPO

Thu, 2019-01-10 20:53

DUBAI: A flurry of announcements from Saudi Arabia’s energy
authorities was seen by experts as a triple boost for the Kingdom
at a crucial time for the global oil industry.

Khalid Al-Falih, the energy minister and chairman of Saudi
Aramco, the world’s biggest oil company, on Wednesday revealed
that the Kingdom’s oil and gas reserves had been valued by
independent experts as significantly higher than previous official
estimates.

Al-Falih also updated global markets on plans for an initial
public offering (IPO) of Aramco shares, scheduled for 2021,
assuming markets conditions allow, and nailed down the schedule for
what could be a record-breaking issuance of bonds. The
international debt offering, set to be Aramco’s first, will now
take place in the second quarter of this year, he said.

The upward estimate of reserves was the most eye-catching of the
announcements. Saudi Arabia is officially ranked second in the
world for reserves, after troubled Venezuela, but the Kingdom’s
own estimate has stayed constant for some years.

The latest assessment comes from DeGolyer & MacNaughton, a
respected firm of oil analysts based in Dallas, Texas. The firm
concluded that, including reserves in the “partitioned zone”
between Saudi Arabia and Kuwait, the Kingdom’s total oil reserves
would have amounted to 268.5 billion barrels at the end of 2017,
after which the DeGolyer study was made.

Natural gas reserves were also upgraded in the DeGolyer survey,
showing 325.1 trillion standard cubic feet (scf) of gas compared to
a previous estimate of 307.91 trillion scf.

Jean-Francois Seznec, the US-based academic and specialist in
Middle East business and finance, said: “The audit by a reputed
independent firm certainly adds to the credibility of the IPO, even
though it may not happen in the next few months.

“I was especially intrigued by the increase in natural gas
reserves … I always assumed that the Kingdom was short of gas; I
guess I will have to change my tune,” he added.

Other analysts linked the announcement on reserves to
longer-term financial planning by Aramco. Ellen Wald, president of
Transversal Consulting and author of “Saudi Inc,” a business
history of the

Kingdom, said the announcements show that “both Aramco and
Saudi Arabia are not hesitant to open up their books if there is a
good reason. The upward revision is not large enough to be
particularly

significant, but the openness is, especially in the context of
issuing bonds or a future IPO.”

Jim Krane, fellow in energy studies at Rice University’s Baker
Institute in Houston, Texas, said: “There’s been a cottage
industry in speculation about the ‘true’ size of Saudi oil
reserves. These figures ought to put to rest speculation about the
true size of Saudi reserves being anything other than what Aramco
says they are.”

The bond issue is an important step for Aramco. Although it has
issued bonds in Saudi riyals before, this will be the first time it
has tapped the international markets for debt. Al-Falih said the
issue was “probably” going to be in US dollars.

International bond issues oblige the issuer to reveal detailed
financial information about the company, in what could become a
trial run for the higher levels of financial disclosure required
for an IPO by Aramco.

Al-Falih told Bloomberg that the funding program “will be
sustained over time as Saudi Aramco grows and undertakes its
capital program … We believe that having bonds and commercial
paper as one of its sources of capital is prudent and
necessary.”

The funds to be raised this year are likely to be earmarked for
the acquisition of Sabic, the industrial conglomerate listed on the
Saudi stock exchange, in which Aramco has said it is considering
purchasing a stake.

That acquisition could cost as much as $70 billion. Aramco has
not decided on how to fund that outlay but a big bond issue could
be a key part of the process. Al-Falih did not specify the exact
size of the planned Aramco issue but said: “It is not gong to be
anywhere near the number that has been rumored.”

Further out, the reserves upgrade could also affect the
valuation of Aramco in any IPO. Al-Falih restated the official
intention to proceed with an international offering of shares by
2021. The flotation was originally slated for 2018.

Krane said: “I’m not sure that certifying Aramco’s
reserves is enough to resurrect the IPO any time soon. There are
good reasons why Saudi policymakers called off the IPO, and worries
over the size of Saudi reserves were not high on the list.

“But providing this transparent audit gives us an important
piece of the puzzle. Investors now have more certainty that Saudi
reserves are real. Even if the IPO winds up selling off part of
Aramco’s downstream business — something not directly related
to producing crude oil — confidence over reserves will build
confidence.”

Meanwhile, a Reuters report published Thursday suggested strong
global appetite for Saudi bonds more generally.

The Kingdom, seeking to raise $7.5 billion in bonds, attracted
demand that topped $27 billion for the dual-tranche paper maturing
in 2029 and 2050, according to a document seen by the news
agency.

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Source: FS – All-News-Economy
Saudi Aramco oil reserve upgrade seen boosting bonds, IPO