Friday, December 13, 2019

Tullow Oil Stock Stages a Recovery. But for How Long?

Tullow Oil: What does boardroom blitz mean for small cap partners?

Shares in Africa-focused Tullow Oil rose nearly 6% on Wednesday just two days after the oil producer slashed its production outlook for the fourth time this year and said it had ousted its chief executive and head of exploration, after weak performance of its main producing assets in Ghana.

The back story. The London-listed company (ticker: TLW.UK), which was founded in 1985 by Irish businessman Aidan Heavey, has suffered a series of setbacks in Ghana, Uganda, and Kenya. Demand for Jubilee field gas from the Ghana National Gas Company has been much lower than expected, and Tullow has experienced technical problems on two new wells at one of its other fields. The company also failed to sell a $900 million stake in a Ugandan project to Total and Cnooc in August. 

Tullow now expects production for 2020 will be a third lower than previously forecast, averaging between 70,000 and 80,000 barrels of oil a day, down from around 87,000 barrels in 2019.

What's new. Shares in Tullow have recovered for a second day in a row—a welcome reprieve for shareholders after the stock experienced a 70% crash and hit a 16-year low Monday, valuing the company at just £560 million. On Wednesday, shares had recovered slightly and were trading almost 6% higher in London at 48.32 pence, valuing the company at around £676 million. Still, that’s a long way from the £13 share price in 2012.

Looking Ahead. Tullow has started a strategic review of the business, with the aim of cutting the cost base to match the production profile and boost execution on existing operations. Dorothy Thompson, Tullow’s interim executive director, will give investors a full financial and operational update at Tullow’s full-year results on Feb. 12, 2020. 

However, the company’s lower output will have a knock-on effect on the company’s free cash flow, which it now anticipates will be $150 million next year. To pay down its debt load of around £2.3 billion, management may have to sell some parts of the business—or indeed put the whole company on the block.

IEA: An Oil Glut Is Inevitable In 2020

Sohar oil tanks

Despite the OPEC+ cuts, the oil market is still facing a supply surplus in 2020, according to a new report from the International Energy Agency (IEA).

OPEC+ announced additional cuts of 500,000 bpd, which sounds more impressive than it is because the group was already producing under its limit. In November, for instance, OPEC was producing 440,000 bpd below the agreed upon ceiling.
Saudi Arabia agreed to shoulder an additional 400,000 bpd of voluntary cuts. But the deal also exempts 1.5 million barrels per day (mb/d) of Russia’s condensate production, allowing Russia to actually increase condensate output by 0.8 mb/d.

Still, the deal should take supply off the market. “If all the countries comply with their new allocations and Saudi Arabia delivers the rest of its voluntary cut of 0.4 mb/d, the fall in production volume versus today will be about 0.5 mb/d,” the IEA said.

OPEC said in its own report that the oil market would be largely in balance in 2020, albeit with a temporary glut in the early part of the year. The IEA sees inventories building at a rate of 0.7 mb/d in the first quarter.

The IEA cut its forecast for non-OPEC supply growth from 2.3 mb/d to 2.1 mb/d, due to weaker growth from Brazil, Ghana and the United States. The U.S. typically gets all of the attention, but disappointing news from Brazil and Ghana also led the IEA to revise forecasts lower.
Notably, Tullow Oil revealed a major disappointment from its Ghana operations, causing a complete meltdown in its share price this week. Its stock fell nearly 70 percent in a single day as investors overhauled their valuation of the company. Tullow admitted that its production from Ghana would decline in the years ahead.

But even the combined effect of slower non-OPEC production growth and the OPEC+ cuts is not enough to erase the glut entirely. “[W]ith our demand outlook unchanged, there could still be a surplus of 0.7 mb/d in the market in 1Q20,” the IEA said.

“Even if they adhere strictly to the cut, there is still likely to be a strong build in inventories during the first half of next year,” the IEA warned. Related: Can Argentina Replicate The U.S. Shale Boom?

But the forecasted glut largely depends on ongoing production growth from U.S. shale drillers. The IEA admits that there will be a slowdown, but is still optimistic on production growth, with gains of 1.1 mb/d in 2020, compared to 1.6 mb/d this year.

The agency has consistently been at the optimistic end of the spectrum regarding shale growth, even as major investment banks long ago slashed their forecasts. The IEA cut its U.S. supply forecast by 110,000 bpd from last month’s report, but at 1.1 mb/d, its figure still seems generous. The IEA is betting that the oil majors, who are less responsive to lower prices and problems with cash flow, will continue to scale up drilling.

Meanwhile, a new report from IHS Markit highlights the accelerating rate of decline among the U.S. shale complex, a decline rate that grows in tandem with production increases. “Oil and gas operators in the Permian Basin, the most prolific hydrocarbon resource basin in North America, will have to drill substantially more wells just to maintain current production levels and even more to grow production, owing to the high level of recent growth,” IHS said in a statement. The base decline rate in the Permian has “increased dramatically” since 2010.

“Base decline is the volume that oil and gas producers need to add from new wells just to stay where they are—it is the speed of the treadmill,” said Raoul LeBlanc, vice president of Unconventional Oil and Gas at IHS Markit. “Because of the large increases of recent years, the base decline production rate for the Permian Basin has increased dramatically, and we expect those declines to continue to accelerate. As a result, it is going to be challenging, especially for some companies with cash constraints, just to keep production flat.”

The firm sees U.S. production growth of only 440,000 bpd in 2020, before flattening out in 2021. If this proves accurate, OPEC+ might not need to worry as much.

By Nick Cunningham of

Thursday, December 12, 2019

The world has its first $2 trillion company. But for how long?

 Saudi Crown Prince Mohammed bin Salman aka MBS: Since his father became king in early 2015, MBS has made powerful enemies. Photograph: Fayez Nureldine/AFP/Getty Images
 Saudi Crown Prince Mohammed bin Salman aka MBS: Since his father became king in early 2015, MBS has made powerful enemies. Photograph: Fayez Nureldine/AFP/Getty Images

London (CNN Business)Saudi Aramco shares zoomed higher on Thursday, turning the massive state oil producer into the world's first $2 trillion company and achieving the valuation long sought by Crown Prince Mohammed bin Salman.

The stock gained 10% for a second consecutive day, reaching 38.70 riyals ($10.32) per share before giving up some of its gains.
Saudi Aramco has gained roughly $300 billion in value since its shares debuted on the Riyadh stock exchange on Monday in the biggest initial public offering on record. It's by far the most valuable company in the world, dwarfing runner up Apple, which is worth around $1.2 trillion.
The vast majority of buyers for the stock are in Saudi Arabia. Samba Capital, which managed the IPO, said Tuesday that 97% of retail investors who received shares were from the country. And more than 75% of shares sold to institutional investors went to Saudi companies, funds and government institutions.
The $2 trillion valuation was a priority for the crown prince ever since he first touted the partial privatization in 2016, but many analysts considered the figure a stretch despite Aramco's monopoly on oil production in Saudi Arabia, the world's largest exporter of crude.
Analysts at Bernstein Research said Thursday that the $2 trillion valuation was "too much, too soon" given weak expected earnings growth and little upside for global oil prices. The company looks expensive, they said, compared to peers such as Exxon (XOM) and Royal Dutch Shell (RDSA)
"Aramco should trade at a discount rather than premium to international oil majors," the analysts said. More than 98% of the company is still owned by the kingdom, they noted, suggesting that investors should be concerned about corporate governance. Bernstein reckons the company is worth as little as $1.4 trillion.
"Aramco could trade in a league of its own for some time, but the stock market is a weighing machine in the long term and the laws of economic gravity will eventually apply," said the Bernstein analysts. They recommended that investors sell Aramco shares now.

The long road to an IPO

International skepticism over the valuation, combined with low oil prices, the climate crisis and geopolitical risk, forced Saudi Arabia to scale back its initial ambitions for the flotation. 
The IPO was supposed to usher in a new era of economic liberalization and foreign investment in Saudi Arabia. The Saudi government discussed floating 5% of the company in 2018 in a deal that would raise as much as $100 billion. It was looking at international markets such as New York or London, as well as Riyadh.
But the deal was hampered by concerns about the valuation and potential legal complications in the United States. It was shelved after the murder of journalist Jamal Khashoggi in a Saudi consulate in Turkey sent a chill through business ties with the kingdom. 
Yet the listing was revived earlier this year, and Aramco moved ahead despite receiving muted interest from international investors. Aramco ultimately raised $25.6 billion by selling 1.5% of the company at a valuation of $1.7 trillion. 
Gianna Bern, an energy expert who teaches at the University of Notre Dame's Mendoza College of Business, said the local offering was able to attract a "friendly audience" of Saudi nationals. International investors will watch how the company handles disclosure and regulatory requirements before considering whether to buy into a potential future international listing.
"The real test will be a global offering, in another jurisdiction, such as London or Asia with more stringent regulatory requirements," said Bern, who is also the founding principal of energy consultancy Brookshire Advisory and Research.

Wednesday, December 11, 2019

Saudi Aramco spikes 10% in first day of trading, now valued at $1.9 trillion

Markets Insider
  • Saudi Aramco shares spiked 10% on Wednesday soon after the company started trading its shares publicly for the first time. That's the daily limit on the exchange. 
  • The surge in share price means the company is now worth $1.9 trillion.
  • That massive market capitalization dwarfs giant publicly listed Goliaths like Apple and Alphabet. 
  • Crown Prince Mohammad bin Salman had been seeking a valuation of $2 trillion.
  • View Business Insider's homepage for more stories.
Saudi Aramco shares spiked 10% on Wednesday on their first day of trading publicly on the Tadawul exchange.

The surge hit the exchange's daily limit and means the company, which earlier this week was valued at $1.7 trillion after raising $25.6 billion in its initial public offering, is now worth a whopping $1.9 trillion. That dwarfs the market capitalizations of the biggest US giants, including Microsoft, Apple, and Google's parent, Alphabet. 

Crown Prince Mohammad bin Salman had been seeking a valuation of $2 trillion for the state-owned oil giant, whose public offering was meant to help finance his Vision 2030 plan of diversifying the Saudi economy away from oil.

According to The Wall Street Journal, Saudi officials had been pushing for the country's wealthy to buy shares in the company when it went public, and according to the Financial Times, that was happening until Tuesday evening.

The stake in Aramco that was actually offered in the IPO, however, was tiny compared with listings from other companies. Apple, Amazon, and Alphabet have over 84% of their shares held by public investors, according to Bloomberg data. For Facebook, public holders own about 98.8% of its shares. That compares with just 1.5% for Aramco.

Tuesday, December 10, 2019

Monday, December 9, 2019

Saudi Aramco IPO proceeds rise to $29.4 billion after option exercised: TV

The Saudi Tadawul exchange will host the shares
Riyadh stock exchange

RIYADH (Reuters) - The proceeds from Saudi Aramco’s record initial public offering have risen to $29.4 billion after the oil company exercised an option to sell 15% more stock, an executive at one of the banks leading the deal told Al Arabiya news channel on Monday. 

Wassim Al Khatib, head of investment banking at the investment arm of Saudi Arabia’s biggest bank, National Commercial Bank (1180.SE), said the state-controlled oil giant had exercised the so-called over-allotment option.

Aramco’s main IPO raised $25.6 billion on Thursday. 

“The final number of shares sold is 3.450 billion shares, and the final value of the deal is $29.4 billion,” Khatib said. 

Aramco is listing its shares on Wednesday on the Saudi exchange after completing the largest IPO on record. 

Reporting by Marwa Rashad and Davide Barbuscia, Editing by Louise Heavens and Mark Potter

Sunday, December 8, 2019

How Aramco’s Huge I.P.O. Fell Short of Saudi Prince’s Wish

Credit...Tasneem Alsultan for The New York Times

By Kate Kelly and

As investors balked, some bankers and Saudi officials still hoped to achieve the crown prince’s target price of $2 trillion. They wound up settling for less.

Early on Oct. 15, a group of international investment bankers delivered some unwelcome news to top executives of Saudi Arabia’s giant oil company, Saudi Aramco. 

The bankers, gathered at Aramco’s headquarters in Dhahran, reported that global investors weren’t as bullish on the company’s initial public offering of stock as the officials had expected, said two people who were in the room and three who were briefed on the meeting. That meant Aramco appeared unlikely to reach the $2 trillion valuation wanted by Saudi Arabia’s crown prince, Mohammed bin Salman.

Instead, a banker from JPMorgan Chase, presenting on behalf of the group, explained that investors viewed Aramco as worth $1.1 trillion to $1.7 trillion. 

Aramco executives, who hadn’t seen the news coming, were angry. Saudi Arabia was counting on the I.P.O. to attract foreign investment to help diversify its economy away from oil. An Aramco I.P.O. valuation reduced by forecasts of weakening global demand for oil and geopolitical jitters could hurt that effort.

On Thursday, Saudi Aramco priced the I.P.O at 32 riyals, or $8.53, a share, valuing the company at $1.7 trillion. The offering is expected to raise $25.6 billion — a fraction of the $100 billion that Prince Mohammed originally imagined. The company’s shares are set to begin trading Wednesday on Saudi’s stock exchange, known as the Tadawul.

The result was not what Saudi officials had in mind. Rather than being listed in New York or London, shares of Aramco are being sold primarily to investors in Saudi Arabia and in neighboring countries. Some of the international banks hired to underwrite the deal have instead taken on secondary roles, with the I.P.O. share sales being overseen by two Saudi banks and the British bank HSBC.

“The Aramco I.P.O. was meant to be Saudi Arabia’s debut ball to global investors,” said Karen Young, a resident scholar at the American Enterprise Institute. “Instead, it will be more of a family reunion.”

According to interviews with a dozen underwriters, strategists and others briefed on the I.P.O., who spoke on the condition of anonymity to discuss confidential negotiations, Aramco’s journey from private to public company was an unwieldy and at times fractious deal-making process. It involved 25 banks, three financial advisers, numerous Aramco company officials, at least two Saudi government committees and the crown prince himself.

The idea to sell shares in state-owned Aramco, the world’s most profitable company, which for decades has been an engine of the Saudi economy, was foundational to Prince Mohammed’s Vision 2030 plan to modernize that economy. Released in 2016, that blueprint helped vault Prince Mohammed, then the deputy crown prince, to become the heir apparent to his father, King Salman. JPMorgan, Morgan Stanley and HSBC were brought in to start the long process of preparing the company for sale to public investors.

The I.P.O. was initially proposed to take place in 2018, but then shelved amid concerns over how highly the company would be valued and where it should list its shares. That year also saw Prince Mohammed come under global condemnation after the brutal killing of Jamal Khashoggi, a Washington Post columnist, by Saudi agents in Istanbul. Western intelligence agencies linked the crown prince to the killing, but he has denied involvement.

Then, this year, plans for the I.P.O. were revived.

Over two days of meetings on Sept. 3 and 4, international banks gathered in Aramco’s London offices to pitch the company for roles on the I.P.O. underwriting team. 

Many of the banks said they envisioned situations where the company could be worth $2 trillion or more, said four people who attended the meeting, another three who were briefed on it and documents reviewed by The New York Times. Bank of America’s estimates reached $2.5 trillion on the high end, these people added; JPMorgan’s drifted as low as $1.4 trillion, according to the documents and two people with knowledge of their presentation.

Around the same time, Prince Mohammed installed Yasir al-Rumayyan, a close confidant who favored the $2 trillion valuation, as Aramco chairman, replacing Khalid al-Falih, a former Aramco chief executive with an engineering background. Mr. al-Rumayyan, the powerful governor of the kingdom’s $320 billion Public Investment Fund, had discussed the plans with bank officials over the summer.

Then on Sept. 14, on its path to going public, Aramco was jarred by an aerial attack on its production facilities, blamed on Iran, that temporarily cut its oil output in half. The attack underscored the risk of operating in the Middle East, but it did not deter the march to an I.P.O.

Deal makers soon fanned out over Asia, Europe and North America to gauge interest in Aramco by Fidelity Investments, Capital Group, BlackRock and other major investors. To make Aramco more attractive, the banks persuaded it to establish an enormous investor dividend, or annual payout — $75 billion a year. 

But in meetings with roughly 80 mutual funds, hedge funds and sovereign wealth funds, underwriters and investors said, potential buyers balked at the $2 trillion valuation, which struck them as too high relative to other major oil companies and in light of low oil prices, climate-change concerns and other geopolitical pressures.

“We felt that a valuation in the range of $1.2 to $1.3 trillion would represent fair value,” or a reasonable price, “but it would need to I.P.O. at less than that to offer decent upside,” or investor profit potential, said Tal Lomnitzer, a portfolio manager at the fund company Janus Henderson who participated in the early investor discussions.

His was in some ways the typical buyer’s position at the onset of a negotiation: to argue for the lowest price in hopes of making money on the purchase if Aramco shares went up in public-market trading. But given the wide gap between views like Mr. Lomnitzer’s and the Saudi government’s $2 trillion expectations, some of the bankers were concerned.

Then came the meeting on Oct. 15 at Aramco’s headquarters in Dhahran on the kingdom’s Persian Gulf coast, and one that would follow the next day. Of all the crucial moments in the lead-up to the I.P.O., these gatherings may have been the most tense, according to four people who either attended the meetings or were briefed afterward. It was then that some of the bankers — motivated by the promise of enormous fees for evaluating the oil company’s investment potential and then selling shares to respected investors — clashed with kingdom officials and other advisers who were fixating on an increasingly elusive $2 trillion deal. 

The banks, who had been sizing up investor demand for the I.P.O., delivered their findings to Amin H. Nasser, Aramco’s chief executive. Mr. Nasser was angry and taken aback by the news, said two people who were in the room and three others briefed on it later. He pointed out that some of the bankers had promised an Aramco valuation of even more than $2 trillion, and that his company had curbed spending plans and made other changes to accommodate the $75 billion dividend.

After the tense exchange, the bankers piled into cars and drove four hours across the desert to Riyadh to explain their reports, one by one, to Mr. al-Rumayyan, the Aramco chairman, said two of the people who were on the trip.

Mr. al-Rumayyan was also deeply unhappy. During the JPMorgan group’s presentation, according to four people with knowledge of the meeting, he criticized them for talking the valuation down. By the next day, Oct. 16, when the banking syndicate met to regroup, two camps had emerged: Citigroup, Goldman Sachs and Bank of America said that until they could share additional research on Aramco’s finances and hold more detailed conversations with potential buyers, they could not determine what price investors would truly be willing to pay, said three people who were part of the discussion and three who were briefed on it later. 

Bankers from Morgan Stanley and JPMorgan, who had been working on the deal for years, were skeptical that investors would be willing to pay much more than they were already suggesting. The bankers argued that Saudi officials in charge of the I.P.O. should be given more details on why investors were cooler to the deal than expected. Underscoring that point, said three people who were there, was Franck Petitgas, head of Morgan Stanley’s international division, who asked how the underwriters could, in good conscience, not share the dozens of investor comments the bankers received in their initial meetings. (Through a spokesman, Mr. Petitgas declined to comment.)

Michael Klein, a New York investment banker who was hired to advise Aramco, urged the more forward-looking approach. After another meeting with the bankers, a Saudi I.P.O. committee opted to delay the deal to hold additional investor discussions.

Aramco decided to carry on and on Nov. 3 issued its formal plan to go public. Its prospectus reported enormous profit — $68 billion for the first nine months of the year. But there were also caveats: Those earnings were down 18 percent from the year before, and risk factors to investing in the I.P.O. ranged from concerns over the impact of fossil fuels to the possibility of terrorist attacks.

The banks talked with investors, but their prices didn’t fundamentally change; at meetings held Nov. 15 and Nov. 16 with Mr. al-Rumayyan in Riyadh, banks reported that foreign investors were still valuing Aramco somewhere between $1.3 trillion and $1.8 trillion, according to two people who were there. 

Faced with that, the kingdom abruptly canceled a series of more formal investor meetings in Asia, Europe and North America. It relegated most of the American banks to lesser roles and refocused on the plans for a domestic listing.

In the run-up to the I.P.O., interest in Aramco shares in Saudi Arabia appeared strong, buoyed by a substantial marketing campaign and low-interest-rate loans for stock purchases. 

Hussam A. al-Saleh, a financial adviser based in Riyadh, predicted last month that most of his Saudi clients would wind up buying shares. Some of the interest stemmed from Aramco’s reputation in the kingdom as a classic stock, he said: “People believe in the company.” 

And for the Saudi leadership, the pursuit of a $2 trillion valuation continues. 

“It will be higher than the $2 trillion. I can bet that this will happen,” said Prince Abdulaziz bin Salman, the Saudi energy minister, who is the half brother of Prince Mohammed, speaking Friday at an OPEC news conference. 

“It is the proudest day for Prince Mohammed to celebrate,” he said, referring to the offering. “We kept it to our family and friends.”

Kate Kelly is a reporter in the Business section, where she covers big banks, trading and lending, and the crucial players setting financial policy in both politics and business. She is also the author with Robin Pogrebin of "The Education of Brett Kavanaugh: An Investigation." @katekelly
Stanley Reed has been writing from London for The Times since 2012 on energy, the environment and the Middle East. Prior to that he was London bureau chief for BusinessWeek magazine. @stanleyreed12 Facebook
A version of this article appears in print on , Section B, Page 1 of the New York edition with the headline: A $2 Trillion Wish That the Markets Just Couldn’t Grant. Order Reprints | Today’s Paper | Subscribe