News that Saudi Aramco is preparing for its first sale of riyal-denominated Islamic bonds followed by sales of dollar-denominated bonds raised questions about why the Saudi state oil conglomerate wants to raise a reported $10 billion in 2017.
At closer examination, however, the bond sales seem as much intended to satisfy transparency concerns prior to Saudi Aramco’s international public offering (IPO) scheduled for next year as they are to raise cash.
Comments by Saudi Minister of Energy, Industry and Mineral Resources Khalid al-Falih in early February about the state of Aramco’s crude reserves and news that the company had selected key banks to serve in advisory roles for the upcoming IPO demonstrate that the government is preparing to ensure a successful limited sale of Saudi Aramco in 2018.
Saudi Aramco has reportedly hired Riyad Capital and the local subsidiary of HSBC Holdings to aid the state oil company in the sale of Islamic bonds, or sukuk, by the end of June. Two other banks — NCB Capital and Alinma Investment — are also advising on the bond sale.
Though the bond sales would be the first for Saudi Aramco, two of its joint venture companies — SATORP, the Jubail refinery operation between Saudi Aramco and French oil firm Total; and Sadara Chemical Company, the petrochemicals deal between Saudi Aramco and Dow Chemical, conducted sukuk sales in 2011 and 2013, respectively.
Saudi Aramco’s bond sales follow the government’s international debt issuance in October that garnered Riyadh $17.5 billion, the largest bond sale from an emerging market country. The success of that international bond sale prompted the Saudi government to curtail regular monthly sales of local currency bonds that Riyadh had begun offering to local banks in 2015 to raise cash to plug its budget deficits.
However, Saudi Finance Minister Mohammed al-Jadaan said at the end of 2016 that the government would resume the monthly domestic bond sales in the first quarter of 2017 but would ensure that in doing so the private sector would not be crowded out or the Saudi banking system become too strained. The monthly domestic debt issuances had absorbed so much money that money market rates in the kingdom rose sharply, putting pressure on the Saudi economy.
As for the much-anticipated IPO, which aims to sell up to 5% of Saudi Aramco, Falih appeared to be stoking investor interest when he said in early February that an independent audit of Saudi Aramco’s crude oil reserves indicates higher levels than the state oil firm’s reservesestimates. “So far, the correlation between what [the independent auditor has] determined and what Aramco has on its own books and announced in the past is very reassuring,” said Falih.
In its Facts and Figures for 2015, the most recent published, Saudi Aramco estimated that the kingdom holds 261.1 billion barrels in crude and condensate reserves. Falih insisted that results of the independent audit would be included in the prospectus for the IPO. The Saudi government has put the firm’s valuation at as high as $2 trillion and there are predictions that the limited sale could garner Riyadh as much as $100 billion.
In preparing for the IPO, the Saudi government will have to be transparent about Saudi Aramco’s assets, acquisitions and contracts. Listing on the New York Stock Exchange, for example, would require the state oil firm to comply with a spectrum of US securities laws applicable to foreign companies, which would require Saudi Aramco to make extensive disclosures.
Falih was perhaps alluding to the necessity for Saudi Aramco to open its books to external scrutiny when he said: “The foreign investor is in need of more information and we are working over the coming period to get assistance from specialised financial institutions to prepare for the IPO.”
Saudi Aramco chose New York-based boutique bank Moelis & Company to serve as its internal independent adviser for the IPO. The state oil firm is also close to making decisions about picking local and international banks that would be involved in preparatory work for the sale.
Falih stressed the magnitude of the impending international offering, saying: “Even if we sold 5% as we intend, no market in the world can absorb an IPO of this size.” For that reason, he suggested that there would be “two, likely three” markets in which the shares will be listed, with the base listing being in Riyadh.
That is consistent with statements previously made by Saudi Aramco officials who indicated shares would be listed on bourses in London, Hong Kong, Tokyo, New York and Canada. The determination for the Saudi government in narrowing the listings to perhaps just three markets, including its own domestic bourse, will be where Riyadh believes it can get the most bang for its buck.
- Jareer Elass is a Washington-based energy analyst, with 25 years of industry experience and a particular focus on the Arabian Gulf producers and OPEC.
- Copyright ©2017 The Arab Weekly.