Complex Made Simple

Saudi Aramco has a major ‘Ace in the hole’ to maximize value of its IPO

Estimating Saudi Aramco’s 5% share sale through a local and international IPO could bring in anywhere from $50bn to $100bn, depending on the oil company’s valuation at the time of the listing.

Aramco has been a joint stock company since January 2018, a key step allowing it to have more shareholders than its existing one in the kingdom.The government values Aramco at $2trn, 5% of which would be $100bn.

Others are looking at$1bn, especially when oil was struggling in the $50 levels during most of 2017, i.e a sale returning $50bn.

There are several factors helping Saudi bring that Aramco valuation up, one of which is an ace in the hole that it will reveal when the time is just right.

First, let’s look at a recent deal Aramco did.

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Halliburton and Saudi Aramco reach shale deal

The New York Times (NYT) reported that Halliburton, a central player in US shale drilling, and in a sign that the American shale gas revolution is spreading to the Middle East, has reached a deal with Aramco last weekend to lift its production program in three Saudi Arabian shale fields.

On the surface, Aramco aims to produce more natural gas to support its growing chemical industry, and reduce the practice of burning oil for domestic power to increase its crude exports.

Over the last year, Saudi Aramco has awarded $4.5 billion in contracts to international oil service companies to increase its gas production, according to NYT.

“This is a great opportunity to maximize Saudi Arabia’s asset value,” Jeff Miller, Halliburton’s chief executive, said in a statement at Sunday’s signing ceremony in Saudi.

NYT said the asset value in reference points to the Aramco IPO, where the company aims to raise its value by investing heavily in refineries and chemical plants in Saudi Arabia and around the world.

According to NYT, interest in shale exploration and production is growing in the Middle East and North Africa.

“Last month, Bahrain announced that it had found a major shale oil and gas field in waters off its coast and a senior executive at Algeria’s state oil company Sonatrach said last week that the company was seeking cooperation with Exxon Mobil to develop the country’s shale gas,” said NYT.

And here’s anotherneat trick.

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Delay tactics

The flotation of Saudi oil giant likely to be delayed until 2019, the Saudi energy minister hinted recently.

Last Friday, Khalid al-Falih said: “Most likely it will be in 2019 but we will not know until the announcement has been made,” he told a conference in St Petersburg.

“The timing I think will depend on the readiness of the market, rather than the readiness of the company or the readiness of Saudi Arabia,” he added.

The market is ready, so why delay?

Stock exchanges in London, New York and Hong Kong have been lobbying for the right to float the company, with Saudi officials also indicating that it will partially be listed on Saudi Tadawul as a start.

“British officials recently said the 2018 target would be missed. Doubts have also been fuelled by the lack so far of any prospectus for investors,” reported UK’s daily The Guardian.

London feels is a frontrunner to host the flotation after Aramco engaged a reputation firm to see what “key stakeholders” think of the firm, reported the daily.

Is the oil price right?

Read: OPEC oil production cuts are history! Prices crash on Friday  

Price manoeuvring

On Friday, OPEC and Russia signalled the beginning of the end for their production cuts.

For the past 18 months, OPEC and non-OPEC crude producers, which account for more than 40% of global supplies, have reduced output by 1.2 million bpd to bring supply and demand back into balance, and recentluy the 5-year average oil storage target was reached.

“Oil prices recently hit $80 a barrel, in part because of the OpEC curbs but also because of the US reimposing sanctions on Iran and production falling in crisis-stricken Venezuela,” said the Guardian.

Sources told Reuters that Opec (Saudi) and Russia are likely to increase production by about 1 million barrels a day. The news resulted in oil prices falling back to $77.

Saudi, which applauded US moves to apply a new round of sanctions on Iran, is looking to fill that void, while tension in the Middle East plays its role to keep risks and oil prices up.

A meeting of OPEC and Russia next month would likely result in them agreeing to increase production, said the daily.

The surprise announcement forthcoming when Saudi is ready to IPO.

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Ace in the hole

Aramco’s current estimate of oil in place is quite specific: 807 billion barrels.

This is comprised of about 145 billion that have already been produced in the 80 years since crude was first discovered, and around 260 billion that is frequently quoted as Aramco’s “proven” reserves; and a balance of about 400 billion listed by the company as “probable, possible and contingent” reserves, reported Arab News.

“You do not have to be an energy expert to see that if some of that 400 billion “probable” is transferred to the “proven” column then the company should be worth more,” added Arab News.

Will Aramco make that announcement?

“Aramco has hired two of the best independent valuers in the world, Dallas-based DeGolyer and MacNaughton, and Gaffney, Cline and Associates (part of oil services giant Baker Hughes) to review reserves as part of the IPO preparation,” said Arab News.

“Although the actual figure is a closely guarded secret, Aramco sources say that the initial results from these valuations show a number for “proven” reserves significantly higher than the 260 billion figure,” added Arab News.