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Commodities

Saudi Aramco: History’s Biggest IPO?

 4 min read / 

Saudi Aramco, usually known just as Aramco, is a Saudi Arabian national petroleum and natural gas company based in Dhahran. Being fully state-owned, Aramco is most certainly the world’s most valuable company with an estimated market value of between US$1.5tn to US$10tn. Even though the company is the most secretive in the world and does not report its revenues or reserves, people familiar with the matter report that Aramco has hydrocarbon reserves of 261 billion barrels, which is more than ten times that of ExxonMobil. It pumps more oil than the entirety of the US – an estimated 10.2m billion barrels per day. Not surprisingly, news about the intention of Saudi Arabia to list shares of oil giant have quickly become the most hotly discussed topic amongst investors and the largest investment banks have started a fight to win a part in listing of Saudi Aramco.

The reasons behind the potential of listing Aramco seem to be simple: Prince Muhammad, the kingdom’s deputy crown prince, believes that the offering of Aramco would greatly benefit the Saudi economy and the company itself. Indeed, the sale of Aramco will bring substantial revenues to the kingdom’s coffers, which would definitely improve the state of the Saudi Arabia budget deficit, which reached a record high of $98bn last year. Moreover, even a small IPO will make “Aramco more efficient and more cost effective through higher transparency” as reported by Mohammad-al-Sabban, a former senior adviser to the Saudi oil ministry.

Analysts suggest that the size of the IPO will never reach the $10tn level as suggested by some. During recent meetings, officials have suggested that options of listing range from offering shares of petrochemical or refining arms of the business to selling shares in the parent company. However, investment bankers are sure that it is practically impossible for the Saudi government to list the parent company due to several reasons. One of them being a question of how new listed entity would split revenue with the Saudi government. Aramco’s original concession agreement dates back to its foundation in 1933 and the exact terms are unknown. Therefore, excluding the main business unit of Aramco from listing reduces the valuation to somewhat between $100bn to $500bn which is a far cry from $10tn. Worth mentioning that whatever the deal size, banks should expect their fees to be low on the percentage basis due to the prestige of the deal and the state-nature of the transaction.

Investors are excited about the possible offering of Aramco, even at today’s low oil prices, however there are also some risks to watch out for. Riyadh, the capital and main financial hub of Saudi Arabia, is dependent on the oil and gas sector for 85 percent of its export earnings. Logically, Riyadh would not be willing to allow Aramco to keep more income from crude for the benefit of shareholders. However, in order for the IPO to be successful, investors have to see a clear picture of potential dividends. Additionally, in order to be listed on the largest stock exchanges and have access to the international investors, Aramco has to report a detailed balance sheet and report of its operations – something that the oil giant has never done before. Some argue that its reserves, which have barely budged since the late 1980s, are overstated. Internal documents about them are “phenomenally closely guarded secrets”.

Even though from the first sight it might seem that the decision to IPO Aramco is not logical considering the current fragile commodity markets, there is a definite logic in the Saudi Arabia’s strategy. Listing of Aramco will add substantial value to the Arabian stock exchange and will force the company to operate more efficiently. It would also fit with a trend that has started to transform the oil industry for the first time in half a century—denationalisation. The big question remains as to the percentage of the company that the Saudis are willing to offer and that would also determine the degree of revealing about the inner operations of Saudi Aramco. Nevertheless, giving investors a stake in the world’s largest oil company can definitely serve as a way to deepen a coalition of stakeholders in the kingdom’s stability. Bringing foreign investors back into the Saudi oil business could be a way to strengthen the economy, reduce budget deficit and would be a first step to throw open the country’s closed economy.

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Commodities

UK Gas Prices Surge Following Deadly Austrian Explosion

 2 min read / 

Austria Gas Explosion

Gas prices have soared to their highest level since 2013, following an explosion at a natural gas hub in Austria, which threatened supplies already affected by a closed North Sea pipeline.

UK natural gas prices jumped 23% – to 73.7p a therm – on ICE Futures Europe ($9.86 a million British thermal units).

Gas Prices

The blast, at Austria’s Baumgarten import hub, happened at around 9 a.m. and left at least 18 people dead. This interrupted flows at one of the main points where Russian natural gas enters Europe. This follows two days of snow in London and cold temperatures elsewhere in Europe.

Arne Bergvik, chief analyst at Swedish utility Jamtkraft, has said that it is the “worst possible time” for a big gas hub to burn, as capacity is needed ahead of the winter and it changes the expectations of how much gas there will be available. He said:

“If weather turns colder and capacity is unavailable, it will absolutely drive up power prices.”

Both gas and oil prices were already affected this week, due to the shutdown of the Forties Pipeline System, which delivers around 40% of the commodities from the UK North Sea.

Rising energy costs are contributing to the UK’s high inflation rate, which increased at 3.1% In November, its fastest pace in five years.

Keep reading |  2 min read

Commodities

Why Bitcoin Is Not Chipping Away at Demand for Gold

 2 min read / 

Bitcoin and Gold

The Story

The simultaneous rise of bitcoin and relatively poor performance of gold has provoked many to ask whether the two assets are in competition. The short answer is no, they are not.

“Bitcoin has real potential, if it were to become digital gold it might have tremendous space to grow,” said Gabor Gurbacs, Vaneck Securities Director of Digital Asset Strategy. It is this sentiment which has put the two in contest. However, the investor pool for each is “vastly different”, according to Jeffrey Currie, head of commodities research at Goldman Sachs.

Gold based exchange-traded funds are currently at close to their highest since May 2013, suggesting the metal remains part of investor’s portfolios, and not that investors have not cashed out and moved over to bitcoin. The reason this is not the case lies in comparing the function each asset serves and the investors it attracts.

Comparing Bitcoin and Gold


source: tradingeconomics.com

Bitcoin attracts more speculative investors looking for quick returns, while gold is often held as a portion of investment portfolios to spread risk. In times of economic downturn gold tends to go up in price, balancing any losses from stocks and bonds. The two assets currently serve distinct purposes. Consequently, bitcoin’s price rise is unlikely to have turned investors away from gold.

Keep reading |  2 min read

Commodities

Oil Prices Rise as UK Major Pipeline Closes for Repairs

 2 min read / 

Forties Pipeline

Oil prices have reached a two-and-a-half-year high after a hairline crack was found in one of the world’s most important oil conduits. The Forties Pipeline System, which carries 40% of North Sea oil and gas, is closing for repairs after the fault was found near Aberdeen, Scotland.

This pushed Brent crude to over $65 a barrel, which it hasn’t reached since June 2015.

Major Pipeline

Tom Crotty, Director of Ineos Group, which operates the Forties network, said that the pipeline’s closure is a “force majeure situation” that will prevent the operator from moving oil through the system for the next two weeks. He said that they will know in the “next few days” how long the system will be closed for. Although routine maintenance work on pipelines is common, closures related to cracks of this nature are not.

Oliver Jakob, an analyst at Petromatrix, a Swiss-based consultancy, said:

“It’s more than just a supply disruption because it’s more significant as a price maker. There’s one thing which is the volume of oil which is lost, but it’s also that it’s a key price benchmark.”

Also, according to McKinsey Energy Insights, the closure may benefit sellers the Middle East and Asia-Pacific region as buyers look at alternatives to the North Sea supply.

Keep reading |  2 min read

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