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Charles Kennedy

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Run On Aramco Bonds Could Sideline IPO

The Saudi plan to use their state-run oil giant, Aramco, as a piggy bank panned out fabulously for the Kingdom on Tuesday, with international investor demand topping $100 billion in Aramco’s first-ever foray into international debt markets.

According to various media citing sources close to the transaction, based on demand--which can sometimes be inflated by investors--the bond sale will raise at least $10 billion, and possibly $12 billion.

And from a purely investment standpoint, financial analysts seem to think that hitting the debt market makes more sense for Aramco than an initial public offering, which has been in the works for some time and much-delayed over issues of transparency and valuation.

The main question now is whether Aramco even needs to go public, or whether the unusual acquisition of a nearly 70-percent stake in Saudi Arabia’s Sabic petrochemicals giant means it’s sidelined IPO plans altogether.

The IPO was announced with a great deal of fanfare by the Saudi Crown Prince, Mohammed Bin Salman (MBS), and the success of the bond sale may mean that he can forego the IPO plan without losing face.

“To the degree to which the goal of the IPO was seen as providing more funding for the Public Investment Fund ... if you can do this with a bond offering, the question is do you need an IPO?” CNBC quoted Helima Croft, global head of commodity strategy at RBC Capital Markets, as saying.   Related: The ‘Marginal’ Producer Driving The Oil Price Rally

The massive demand for the Aramco bond sale also will prove a feather in Saudi Arabia’s cap in its rivalry with Qatar, which is under economic blockade by the Kingdom and its allies, yet still managed a $12-billion bond sale of its own last year. The Qatar bond sale saw just over $50 billion in orders, and the Saudi $100 billion will be seen as a victory in that respect.

According to the Guardian, the $100 billion demand is an emerging market record, with the highest so far being $69 billion for Argentina’s 2016 bond sale.

The stampede to pick up Aramco debt is seen as a vote of confidence by investors, just months after Khashoggi was killed in a Saudi consulate in Istanbul last October.

By Charles Kennedy for Oilprice.com

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  • Mamdouh Salameh on April 09 2019 said:
    The original Saudi Aramco’s IPO is dead and buried. So whether there was a run on Aramco bonds or not, the IPO will not be resurrected now or ever.

    One must remember that Saudi Aramco was forced to withdraw its IPO because of two major reasons. The first is the risk of American litigation related to the 9/11 destruction of the World Trade Centre in New York. The second reason is persistent question marks about the true size of Saudi proven oil reserves. When Saudi King Salman called off the IPO, he justified his decision by saying that he didn’t want to expose Saudi Aramco’s finances or reserves to scrutiny. His words speak volumes about Saudi reserves.

    And despite Saudi Oil Minister Khalid Al-Falih saying that Aramco’s long-delayed IPO will occur in 2021, the IPO will never see the light of day. Any new IPO Saudi Aramco may offer will be a petrochemical IPO since investors can see petrochemical assets but they can’t see or verify Saudi claimed oil reserves.

    Still, with a net income of $111 bn and a free cash flow of $86 bn against a total debt of $27 bn in 2018, Saudi Aramco was assured with excellent reception in its first-ever foray into international debt markets.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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