Tom Kirkman

Saudi Aramco IPO Will Not Save Kingdom

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Yep.  This Saudi Aramco IPO should be a spectacular crash and burn failure.

Saudi Aramco IPO Will Not Save Kingdom

Saudi Crown Prince Mohammed bin Salman (MbS) has staked his country’s future on selling a 5% stake in Saudi Aramco, the most valuable asset it has.

And it is his hope that this IPO will help finance the country’s turnaround making it less dependent on oil revenue.

It’s been trying to do this for three years and was ready to pull the trigger when the Houthi rebels in North Yemen pulled theirs and damaged major Aramco facilities at Ab Qaiq in August.

The IPO itself is off the table until next year but the Saudis have officially put it back on the table, submitting the necessary paperwork to make the sale.

What’s held up this IPO has been MbS’s insistence on a $2 trillion valuation while playing very coy about the company’s actual assets and reserves. It took a couple of rounds of failed book-runner commitments to finally get the Saudis to offer some glimpse at Aramco’s finances.

From Irina Slav at Oilprice.com in March 2019:

Aramco has never published financial reports. Although there were assurances that it will start doing so ahead of the IPO, to date the latest entry on Aramco’s Corporate Reports page is from July 20 last year, and includes production figures for 2016. Last year, sources had told Reuters the company was planning to start publishing financial reports early this year, but this has not happened yet.

By April, Aramco finally produced financial numbers that were reasonably current and even Bloomberg was skeptical of this $2 trillion valuation. It certainly wasn’t true when oil prices were in the gutter below $40 a barrel in 2016.  ...

 

... Debt to GDP, which was just 1.4% in 2014 will rise to 28% in 2020.

Aramco needs to either raise production or get higher prices to stem this bleeding. Neither of these things are on the table in the near future.

The reality is that for the past few months the Saudis have bailed themselves out with a war premium on the price of oil through their own machinations, getting the U.S. to apply embargoes and sanctions on all of their competitor and picking fights with Iran and inviting attacks on their tankers and infrastructure to keep prices from collapsing amidst a global economic slowdown and oil glut.   ...

 

... In the end whatever money Aramco raises from investors will be used to fund the Saudi government’s operational deficit over the next eighteen months to two years, maximum.

That’s not enough to save the country and remake the economy through reinvestment in its people. It doesn’t matter if, officially, the budget deficit is financed through debt and drawing down reserves while Aramco uses the money to invest globally in diversifying its portfolio.  ...

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The fundamental question was how MBS could save face because the IPO had to happen? Even he can't lose this amount of face. So the IPO had to happen, even if a relatively meaningless one.

So a 2% float on the local market, strong arm locals into purchasing, a bit of overseas, probably Chinese investment, and I wonder in what currency. And a firm promise not to sell shares on an international market for at least a year. In other words, if you try and just short it, it will take a while because the value will appear to hold as long as no one can sell the shares. So much for my dream of easy money with a big short.

So a success for MBS, an IPO. Probably spent far more money making it happen than it gathers. Since this started Aramco has flexed its muscles taking on debt and investing in low margin mega-projects. And foreign adventurism and wars draining the treasury since they basically fight their battles by throwing money at it.

We don't talk about the rate of drilling in the KSA. A lot more of that going on than they used to do, and that is to just essentially stay flat and well productivity continues to decline. Their attempts at unconventional, primarily for gas extraction, is an expensive fiasco. Their reputation is still a global image that the company knows how to drill well. They don't, at least for what they need going forward, especially from a cost per well, and time to completion, perspective. 

A reminder of the old cliche'. What's the easiest way to make a trillion dollars? Start out with two trillion (and lose a trillion to be done to one).

It will take more time, but in the end it will probably be very ugly. This isn't a country that can feed itself. 

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55 minutes ago, John Foote said:

Their reputation is still a global image that the company knows how to drill well. They don't, at least for what they need going forward, especially from a cost per well, and time to completion, perspective. 

It's sour oil, so just to move most of it they have to stabilize it, separate out the H2S. That was an inexpensive process when oil was $100 and their oil was flowing mostly without a significant stimulus. They stupidly shattered the world market a number of years back, by pumping and dumping onto an already saturated global market, all in one poorly-advised effort to swamp the LTO drillers in America. By estimates, that lost them about $250B that they will never get back . . . at least from oil. And now, just as you say, those old free-flowing wells are in decline, requiring massive water-flooding, and even that's not enough: they're having to step up their drilling program in a big way. Without an awful lot of help from Schlumberger and or Halliburton, they can't do that very well at all--and these are not like the old wells. At $55 oil, water-flooding, drilling at great expense, separating out H2S and paying for new separators, keeping a burgeoning welfare population content and generating a large cash flow has become a losing proposition for them. Sure, Aramco makes vast money, but after it gets shuffled around, well . . . who knows. IMO, buying a piece of that IPO is like placing a bid on a piece of art without authentication it's a Rembrandt: there's no telling what their reserves are, how easy they currently are to get at, and whether or not their facilities will be utterly destroyed--especially after that hit at Abqaiq ostensibly using a bunch of cheap drone missiles.

Story has it that FDR was carried up the Suez Canal near the end of the war. He had been told repeatedly by Eisenhower and Harry Hopkins and Patten that oil had allowed the US and her allies to win the war . . . he still had the bomb in his repertoire but hadn't even told Vice President Harry Truman about it. On that destroyer in the canal was helped Kind Saud, crippled from his war-lording days. FDR offers the king a DC3, which didn't do much for him--he had no pilot. Then FDR had someone get one of his spare wheelchairs. FDR and the king sat in their wheelchairs on the foredeck. FDR asked a place in the Holy Land for the diaspora. The king declined. Then FDR assured the gnarled old king that the mighty US would protect the House of Saud in return for first dibs on the oil. I don't know the authenticity but it's quite a story and I have heard it often. Well, we're in a very different time. There is now sour oil coming out the spigots everywhere you look: Venezuela especially (which has quite a bit more oil in reserve than KSA), Canada, even some spots in the continental US. The new refineries in ND and Texas don't even need sour oil to mix with sweet light feedstock. With the IMO-2020, oil left 3.5% sulfur content sour will no longer be used as bunker fuel.

Here's the conundrum for the global community: Russia and China own a great amount of Venezuelan debt. Again, at $100 oil, it wasn't a big deal, but now at $55 every drop of that oil goes to paying interest. Rosneft will very likely wind up running the entire Venezuelan oil industry, swinging a side deal with China. In almost every scenario one can come up with, the Saudi Aramco deal has the rotten egg smell of sour oil with its many sulfide congeners being stripped away.  

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Saudi Prince gave valuation of $2 Trillion for Aramco in 2016 so that Aramco does not go in the hands of any outsiders. Who will invest $1Trillion to takeover Aramco ??

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5 hours ago, Mehme said:

Saudi Prince gave valuation of $2 Trillion for Aramco in 2016 so that Aramco does not go in the hands of any outsiders. Who will invest $1Trillion to takeover Aramco ??

A dog turd rolled in glitter

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10 hours ago, Gerry Maddoux said:

Without an awful lot of help from Schlumberger and or Halliburton, they can't do that very well at all

There is no shortage of Schlumberger help. Look at an annual report. We are talking in excess of a billion a month club. Most drilling is actually done by contractors now. You could trim the Aramco workforce by 75% and get the job done with so much outsourced.

The fundamental drilling fiasco is fracking for natural gas. OMG what a shi* show flushing money down the crapper it is. The amount of money that goes missing is mind boggling. Unless they are willing to turnkey the operation, and have accountability, it will continue to hemorrhage cash. Between a lack of expertise, and decision processes that don't work in the environment, fracking will struggle for quite a while. I think it was Chevron they did a deal with for gas exploration who backed out once the lunacy of it came to pass. The sensible gas solution was good relations with Qatar, but they certainly couldn't manage that. A friend of mind probably ensured he'd never be a star with a White Paper suggesting Qatar was the best solution. Another one, a geologist, got fired for telling him there is not gas where they declared there was. So instead in the summer millions of barrels of crude a day for desalination and electricity. At least the turbines they bought will handle sour oil. 

And don't paint all Saudi crude as sour. The Sheyba field is sweet, Safina (shallow water), quite sour.  Every field is a bit different. And sour or not, who wouldn't want Ghawar in their country? 

I love some of the FDR stories. FDR gave King Abdullaziz a heads up about the Holocaust and said a country was being created for the Jews. The king acknowledge that was the right thing to do. Then FDR said the land was Palestine. The King said that's not right, give them a piece of Germany, this was the German's doing. FDR apparently managed to get away with the King happy. When FDR died, the King accepted his deal protecting Palestine died with it. The King did have a point. 

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There was info they will sell 0.5% in November so i understand it was already allocated. Only 10 billion USD just to confirm 2 trn valuation. My bet is Saudi Princes and China will be major buyers. Saudi Royals do not want repeat od MbS Ritz hospitality.

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On 11/6/2019 at 3:34 AM, John Foote said:

There is no shortage of Schlumberger help. Look at an annual report. We are talking in excess of a billion a month club. Most drilling is actually done by contractors now. You could trim the Aramco workforce by 75% and get the job done with so much outsourced.

The fundamental drilling fiasco is fracking for natural gas. OMG what a shi* show flushing money down the crapper it is. The amount of money that goes missing is mind boggling. Unless they are willing to turnkey the operation, and have accountability, it will continue to hemorrhage cash. Between a lack of expertise, and decision processes that don't work in the environment, fracking will struggle for quite a while. I think it was Chevron they did a deal with for gas exploration who backed out once the lunacy of it came to pass. The sensible gas solution was good relations with Qatar, but they certainly couldn't manage that. A friend of mind probably ensured he'd never be a star with a White Paper suggesting Qatar was the best solution. Another one, a geologist, got fired for telling him there is not gas where they declared there was. So instead in the summer millions of barrels of crude a day for desalination and electricity. At least the turbines they bought will handle sour oil. 

When I was there in 2010 - 2012 there was a quiet panic going on as they simply weren't finding much oil and only moderate quantities of gas. 

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4 hours ago, Marcin said:

Saudi Royals do not want repeat od MbS Ritz hospitality.

A lot of other tribes, and families, not just Sauds. A few significant families actively tried to minimize business with Royals.

As one family head told once, three things you cannot trust. First, avoid Lebanese, Second, government ministers. And third, above all avoid royals. They are there to fleece you. For years the governor of the Eastern Province was know as Mr. 50/50. 
 

There are no doubt Rashids, Otaibis, Ghamdi, AlDossaries, and such being leaned on hard. 

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18 hours ago, John Foote said:

A lot of other tribes, and families, not just Sauds. A few significant families actively tried to minimize business with Royals.

As one family head told once, three things you cannot trust. First, avoid Lebanese, Second, government ministers. And third, above all avoid royals. They are there to fleece you. For years the governor of the Eastern Province was know as Mr. 50/50. 
 

There are no doubt Rashids, Otaibis, Ghamdi, AlDossaries, and such being leaned on hard. 

I was told avoid Harbi's - they are all thieves. 

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