Rumours are swirling that the world’s largest IPO ever, might just slip a few months into 2019. Though Saudi Finance Minister Mohammed al-Jadaan told investors just recently on the 25th of September that the IPO of Saudi state oil giant Aramco will proceed as planned in 2018. Saudi Aramco said in a statement that the IPO remains ‘on track’, underlining that it was committed to ensuring high standards.
However, there are a few big questions that have not been answered. The question of where Aramco will list has still yet to be answered. It will float on the domestic stock exchange in Riyadh, that is certain, but an IPO this size needs a major international exchange. The options for that would be either London or New York. Neither has been selected yet. It appears that Aramco will only formally announce this in late October, when a big investment conference in Riyadh is scheduled.
Once it is confirmed where Aramco will float, then the rest of the preparatory work can continue – having been contingent on this choice. It is a tight timeframe; 12 months is a short span to iron out all details and kinks, which is why the IPO may very well slip into the early months of 2019. But meanwhile, Aramco is taking steps to restructure itself into a contemporary supermajor, instead of the state entity it has always operated as.
In the past few months, Aramco has struck strategic partnerships with several key countries as it moves from simply selling crude, to ensuring its crude has place and space in a competitive world. It is deploying new technology in the Rub al Khalid – the vast Empty Quarter – that could help shore up and increase crude reserves. It has taken full ownership of Motiva in the US, home to the largest refinery in America. Mega-refinery partnerships have been signed in China, India and Malaysia – ensuring captive demand. And just last week, Aramco announced that would be buying and selling non-Saudi crude for the first time even.
That will form the lynchpin of an expanded trading business, which will put crude marketing and refined product trading under the same management. Currently, both are separate. Crude selling is crude selling, done in Singapore and Dahran. And refined products, which already includes non-Saudi fuels, is done out of London. Combining the two under one structure is a shift in policy for Aramco, approximating the arrangement of something like ExxonMobil, PetroChina or Glencore. Trading of Saudi crude will still be a priority, but expanding coverage will help Saudi Trading – set to be based in Singapore – cover its supply chain more efficiently to plug in gaps as they appear, as well as become a strong profit driver in its own right. This would be unthinkable five years ago. But to appeal to international investors, Aramco has to show them that its businesses are on part with the biggest international companies.
At home, Saudi Arabia is also planning to phase out subsidies for gasoline and jet fuel, which would lit them up by almost 80% to international levels. Prices for gasoil and fuel oil – both heavily used in power generation, particularly in summer – will be reformed, at a more gradual pace. Saudi Arabia also plans to introduce value-added tax (VAT), scheduled to be implemented at the start of 2018. Details of the Citizen’s Account, a household allowance scheme intended to reduce the impact of austerity policies on low and middle-income Saudi families would be announced in the coming weeks. While this is mainly focused on balancing the government’s budget, it has a knock-on effect on Aramco. Previously, Aramco only had to answer to the Saudi King when it came to diverting funds from the company to balance out the rest of the economy. As a publicly traded company, this will come under intense scrutiny. By removing subsidies, it removes a drain on the Aramco coffers, which is a necessary change for a publicly-traded company. Too long has the country been dependent on Saudi Aramco as the national bank account. This IPO is a chance to restructure and rejuvenate the entire economy, making it leaner, fitter and more competitive.
All of this makes a delay in the IPO more and more likely. This isn’t just a simple floating of shares. This is an attempt to remake the world’s most valuable company and an entire country to be more dynamic economically and modern. In that context, waiting a few more months to ensure every checkbox is ticked is far, far better in the long run.
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Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b
Headlines of the week
Midstream & Downstream
The world’s largest oil & gas companies have generally reported a mixed set of results in Q1 2019. Industry turmoil over new US sanctions on Venezuela, production woes in Canada and the ebb-and-flow between OPEC+’s supply deal and rising American production have created a shaky environment at the start of the year, with more ongoing as the oil world grapples with the removal of waivers on Iranian crude and Iran’s retaliation.
The results were particularly disappointing for ExxonMobil and Chevron, the two US supermajors. Both firms cited weak downstream performance as a drag on their financial performance, with ExxonMobil posting its first loss in its refining business since 2009. Chevron, too, reported a 65% drop in the refining and chemicals profit. Weak refining margins, particularly on gasoline, were blamed for the underperformance, exacerbating a set of weaker upstream numbers impaired by lower crude pricing even though production climbed. ExxonMobil was hit particularly hard, as its net profit fell below Chevron’s for the first time in nine years. Both supermajors did highlight growing output in the American Permian Basin as a future highlight, with ExxonMobil saying it was on track to produce 1 million barrels per day in the Permian by 2024. The Permian is also the focus of Chevron, which agreed to a US$33 billion takeover of Anadarko Petroleum (and its Permian Basin assets), only for the deal to be derailed by a rival bid from Occidental Petroleum with the backing of billionaire investor guru Warren Buffet. Chevron has now decided to opt out of the deal – a development that would put paid to Chevron’s ambitions to match or exceed ExxonMobil in shale.
Performance was better across the pond. Much better, in fact, for Royal Dutch Shell, which provided a positive end to a variable earnings season. Net profit for the Anglo-Dutch firm may have been down 2% y-o-y to US$5.3 billion, but that was still well ahead of even the highest analyst estimates of US$4.52 billion. Weaker refining margins and lower crude prices were cited as a slight drag on performance, but Shell’s acquisition of BG Group is paying dividends as strong natural gas performance contributed to the strong profits. Unlike ExxonMobil and Chevron, Shell has only dipped its toes in the Permian, preferring to maintain a strong global portfolio mixed between oil, gas and shale assets.
For the other European supermajors, BP and Total largely matched earning estimates. BP’s net profits of US$2.36 billion hit the target of analyst estimates. The addition of BHP Group’s US shale oil assets contributed to increased performance, while BP’s downstream performance was surprisingly resilient as its in-house supply and trading arm showed a strong performance – a business division that ExxonMobil lacks. France’s Total also hit the mark of expectations, with US$2.8 billion in net profit as lower crude prices offset the group’s record oil and gas output. Total’s upstream performance has been particularly notable – with start-ups in Angola, Brazil, the UK and Norway – with growth expected at 9% for the year.
All in all, the volatile environment over the first quarter of 2019 has seen some shift among the supermajors. Shell has eclipsed ExxonMobil once again – in both revenue and earnings – while Chevron’s failed bid for Anadarko won’t vault it up the rankings. Almost ten years after the Deepwater Horizon oil spill, BP is now reclaiming its place after being overtaken by Total over the past few years. With Q219 looking to be quite volatile as well, brace yourselves for an interesting earnings season.
Supermajor Financials: Q1 2019
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions
In its May 2019 edition of the Short-Term Energy Outlook (STEO), EIA revised its price forecast for Brent crude oil upward, reflecting price increases in recent months, more recent data, and changing expectations of global oil markets. Several supply constraints have caused oil markets to be generally tighter and oil prices to be higher so far in 2019 than previous STEOs expected.
Members of the Organization of the Petroleum Exporting Countries (OPEC) had agreed at a December 2018 meeting to cut crude oil production in the first six months of 2019; compliance with these cuts has been more effective than EIA initially expected. In the January STEO, OPEC’s crude oil and petroleum liquids production was expected to decline by 1.0 million b/d in 2019 compared with the 2018 level, but EIA now forecasts OPEC production to decline by 1.9 million b/d in the May STEO.
Within OPEC, EIA expects Iran’s liquid fuels production and exports to also decline. On April 22, 2019, the United States issued a statement indicating that it would not reissue waivers, which previously allowed eight countries to continue importing crude oil and condensate from Iran after their waivers expired on May 2. Although EIA’s previous forecasts had assumed that the United States would not reissue waivers, the increased certainty regarding waiver policy and enforcement led to lower forecasts of Iran’s crude oil production.
Venezuela—another OPEC member—has experienced declines in production and exports as a result of recurring power outages, political instability, and U.S. sanctions. In addition to supply constraints that have already materialized in 2019, political instability in Libya may further affect global supply. Any further escalation in conflict may damage crude oil infrastructure or result in a security environment where oil fields are shut in. Either situation could reduce global supply by more than EIA currently forecasts.
In the May STEO, total OPEC crude oil and other liquids supply was estimated at 37.3 million b/d in 2018, and EIA forecasts that it will average 35.4 million b/d in 2019. EIA assumes that the December 2018 agreement among OPEC members to limit production will expire following the June 2019 OPEC meeting.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions
U.S. crude oil and other liquids production is sensitive to changes in crude oil prices, taking into account a lag of several months for drilling operations to adjust. As crude oil prices have increased in recent months, so too have EIA’s domestic liquid fuels production forecasts for the remaining months of 2019.
U.S. crude oil and other liquids production, which grew by 2.2 million b/d in 2018, is forecast in EIA’s May STEO to grow by 2.0 million b/d in 2019, an increase of 310,000 b/d more than anticipated in the January STEO. In 2019, EIA expects overall U.S. crude oil and liquids production to average 19.9 million b/d, with crude oil production alone forecast to average 12.4 million b/d.
Relative to these changes in forecasted supply, EIA’s changes in forecasted demand were relatively minor. EIA expects that global oil markets will be tightest in the second and third quarters of 2019, resulting in draws in global inventories. By the fourth quarter of 2019, EIA expects that inventories will build again, and Brent crude oil prices will fall slightly.
More information about changes in STEO expectations for crude oil prices, supply, demand, and inventories is available in This Week in Petroleum.