Saudi Aramco has changed its mind about a bond sale of about US$40 billion that would have funded the bigger part of its planned acquisition of a majority stake in local petrochemicals giant Sabic. The Wall Street Journal reports that the oil major had been concerned about requirements for disclosure as well as the volatility and uncertain outlook for oil prices, according to unnamed sources familiar with the developments.
Aramco announced plans to acquire up to 70 percent of Sabic in a deal expected to be worth about US$70 billion. The seller is the Saudi sovereign wealth find, the Private Investment Fund. The deal would have expanded Aramco’s downstream business substantially, which would have made it more attractive for potential investors if its initial public offering ever took place, which senior officials recently said it would.
Yet US$70 billion turned out to be too hefty a price even for the world’s biggest oil company in terms of resources. Talk at the time surrounded Aramco’s plan to use US$20 billion of its own cash and borrow the rest in a combination of various large long-term loans and smaller short-term bridge loans. The shorter-term loans could be replaced with bond issues after a year or a year and a half, several sources told Reuters last month.
Yet the public disclosure condition of international bond sales has made Aramco think twice. As the WSJ reports, bond issuing requires disclosure of three years of audited financial results as well as detailing any obstacles that could affect the bond sale. Aramco, however, is notoriously opaque when it comes to financial results and everything else. While its executives have repeatedly made assurances that Aramco would start reporting its financial results and disclose information about its operations ahead of the IPO, now that this has been postponed until 2021 at least, the company seems to not see any need to stick to its disclosure pledge. Related: The Impending Endgame In Oil Markets
Yet disclosure is not the only factor stopping Aramco from tapping international bond markets. The company’s only asset is oil and oil has not been doing so well in the past few weeks. In fact, over the past month, crude oil benchmarks dived down so sharply they lost over a fifth of their value over the four-week period. What must have additionally stung the oil industry in general and Aramco in particular was the fact that virtually everyone expected a price rise during that time as U.S. sanctions against Iran came into effect. Instead, amid assurances, including from Saudi Arabia, that there will be enough oil, prices went the other way.
There aren’t many options left for the acquisition of the 70 percent in Sabic. As per a Reuters report from October, a leveraged buyout was also on the table as Aramco discussed strategies with advisers JPMorgan and Morgan Stanley. The other option is debt. And yet the lack of enthusiasm for bond issuance is likely to have reverberations: opening up the Saudi bond market was one facet of the sweeping economic reforms that Crown Prince Mohammed has been pursuing over the last couple of years.
What’s more, Aramco’s unwillingness to disclose financial reports and other information is unlikely to sit well with prospective investors, if we assume the IPO is really still an option. This unwillingness, after all, was one of the main factors that caused a rather lukewarm interest among investors during Prince Mohammed’s roadshow the he undertook to promote the IPO. Finally, the combination of unwillingness to disclose information and the uncertainty surrounding oil prices, might make it harder to borrow. True, this is Aramco we’re talking about and Aramco’s reputation means a lot for bankers. Still, after the backlash Saudi Arabia received after the murder of dissident Jamal Khashoggi—something unthinkable a few years ago—chances are bankers might have become more cautious when approving loans.
By Irina Slav for Oilprice.com
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And whilst the Sabic deal would have transformed Saudi Aramco into a giant fully-integrated oil company, the public disclosure condition of international bond sales has made Aramco think twice. Bond issuing requires disclosure of three years of audited financial results as well as detailing any obstacles that could affect the bond sale. Saudi Aramco , however, will not submit to exposing its financial situation to scrutiny.
The refusal to expose Saudi Aramco’s financial situation and proven reserves to independent auditing was one major reason why King Salman of Saudi Arabia ordered the call off of the IPO altogether. Another major reason was the risk of American litigation.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London