Saudi Aramco oil reserve upgrade seen boosting bonds, IPO

Saudi Aramco's oil and gas reserves had been valued by independent experts as significantly higher than previous official estimates. (Saudi Aramco)
Updated 10 January 2019

Saudi Aramco oil reserve upgrade seen boosting bonds, IPO

  • International investors seen valuing ‘openness’ as Saudi Arabia discloses oil estimates
  • Upward estimate ‘adds to the credibility’ of Aramco IPO, says expert

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.

US in criminal probe of China's Huawei

Updated 17 January 2019

US in criminal probe of China's Huawei

  • The Wall Street Journal said the US justice department is looking into allegations of theft of trade secrets from Huawei's US business partners
  • Huawei forcefully denied accusations that his firm engaged in espionage on behalf of the Chinese government

WASHINGTON: US authorities are in the "advanced" stages of a criminal probe that could result in an indictment of Chinese technology giant Huawei, a report said Wednesday.
The Wall Street Journal, citing anonymous sources, said the Department of Justice is looking into allegations of theft of trade secrets from Huawei's US business partners, including a T-Mobile robotic device used to test smartphones.
Huawei and the Department of Justice declined to comment on the media report.
However, Huawei noted that "Huawei and T-Mobile settled their disputes in 2017 following a US jury verdict finding neither damage, unjust enrichment nor willful and malicious conduct by Huawei in T-Mobile's trade secret claim."
The move would further escalate tensions between the US and China after the arrest last year in Canada of Huawei's chief financial officer Meng Wanzhou, who is the daughter of the company founder.
The case of Meng, under house arrest awaiting proceedings, has inflamed US-China and Canada-China relations.
Two Canadians have been detained in China since Meng's arrest and a third has been sentenced to death on drug trafficking charges -- moves observers see as attempts by Beijing to pressure Ottawa over her case.
Huawei, the second-largest global smartphone maker and biggest producer of telecommunications equipment, has for years been under scrutiny in the US over purported links to the Chinese government.
Huawei's reclusive founder Ren Zhengfei, in a rare media interview Tuesday, forcefully denied accusations that his firm engaged in espionage on behalf of the Chinese government.
The tensions come amid a backdrop of President Donald Trump's efforts to get more manufacturing on US soil and slap hefty tariffs on Chinese goods for what he claims are unfair trade practices by Beijing.
In a related move, lawmakers introduced a bill to ban the export of American parts and components to Chinese telecom companies that are in violation of US export control or sanctions laws -- with Huawei and fellow Chinese firm ZTE the likely targets.
"Huawei is effectively an intelligence-gathering arm of the Chinese Communist Party whose founder and CEO was an engineer for the People's Liberation Army," said Republican Senator Tom Cotton, one of the bill's sponsors.
Democratic Senator Chris Van Hollen said in the same statement: "Huawei and ZTE are two sides of the same coin. Both companies have repeatedly violated US laws, represent a significant risk to American national security interests and need to be held accountable."
Last year, Trump reached a deal with ZTE that eases tough financial penalties on the firm for helping Iran and North Korea evade American sanctions.
Trump said his decision in May to spare ZTE came following an appeal by Chinese President Xi Jinping to help save Chinese jobs.