Is Aramco Really Worth $2 Trillion?

Market Movers

- Saudi Aramco hit $2 trillion on its second day of trading Thursday, but let’s not get overly excited. Yes, it’s bigger than Apple, technically, but it’s a lot of smoke and mirrors at this point. Aramco saw shares rise 10% at the open, but then pared gains minutes later. That $2 trillion valuation didn’t exactly come about naturally. It took a lot of back-door pleading with GCC friends to get it there; and at home, it took a lot of subtle threatening and shifting of shares between SABIC and Aramco.

- The Tullow share dive this week (LON: TLW and OTCMKTS: TUWOY), which was near 50%, was a painful reminder that it really is make or break for the offshore oil industry. It has had a difficult year, with problems in Ghana, Kenya, and Uganda, and its recent find off the coast of Guyana was a major disappointment: it struck heavy oil—a product that has questionable commercial viability. The oil company earlier this year tried to dump its Uganda assets—and failed—leaving the company with a high debt load of $2.9 billion and no cash for investments. Then more recently, in a disastrous move, Tullow revised its 2020 production outlook downward. After the Guyana disappointment, Tullow scrapped its dividend and promptly ousted critical senior management.

Discovery & Development

- Mexican state oil company Pemex announced that it has discovered a huge oil deposit in Tabasco that could yield 500 million barrels of crude, its biggest find in three decades. Pemex is aiming to extract 69,000 bpd of crude and up to 300 million cubic feet of gas from the site next year and to increase to 110,000 bpd of crude and 410 million cubic feet of gas in 2021.

Deals, Mergers & Acquisitions

- French Total SA and Libyan state-owned National Oil Corporation (NOC) have agreed on a deal that sees the French company formally entering Waha concession in the Sirte basin. Total committed to invest $650 million to increase production by around 180,000 bpd. Last year, Total signed a $450M deal with Marathon Oil for a 16.33% stake in Waha, although it did not secure approval from NOC at that time. Waha currently produces 300,000 bpd, with the NOC holding a 59.18% stake. What this means is that General Haftar, whose forces control the oilfields, did not disrupt these negotiations for Total. But then again, the French have been among Haftar’s key supporters.

- Oman is planning to sell 20-25% of its state-owned Oman Oil Co in an IPO by the end of 2020 in an effort to raise funds to lower debt accumulated as a result of low oil prices. Oman posted a budget deficit of $4 billion for January to September this year. Unlike the Saudi Aramco IPO, the Oman IPO is intending to be an international listing.

- Norway’s Equinor has acquired a 50% stake in the Ba?tyk I offshore wind farm in Poland from Polish energy company Polenergia for an undisclosed sum. Once completed, the wind farm will have the potential to have a capacity of 1,560MW. Equinor now has an interest in all three Ba?tik offshore wind development projects.

- The US Bureau of Land Management collected $11 million in total high bids for about 1 million acres in federal oil leases in Alaska’s petroleum reserve. That is about 25% of the offered tracts, making it the most successful oil and gas lease sale in Alaska in over a decade.

Legislation & Regulations

- ExxonMobil was found not guilty in the New York climate-change securities fraud trial, with the judge ruling that prosecutors failed to prove that the oil giant misled shareholders over the true cost of climate change. The case filed last year was the first of several climate change lawsuits against leading oil companies to go to trial. New York state prosecutors argued that the oil company had downplayed the financial risks it faces from possible climate regulation.

- The US Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) has approved the shipment of LNG from Pennsylvania to a port in South Jersey. This will be the first-ever U.S. LNG rail transportation route approved. Florida-based Energy Transport Solutions LLC has been permitted to move as many as 100 rail cars of fuel a day on this route.

- Iceland is moving to ban the use of heavy fuel oil, requiring ships operating within 12 nautical miles of the coast to use fuel with a Sulphur content of no more than 0.1% by January 2020. While the current limit is 3.5%, the new limit by the International Maritime Organization, coming into effect in January will be 0.5%

Politics, Geopolitics & Conflict

- As we noted last week, the Saudi-led blockade of Qatar has for all intents and purposes ended (quietly) and now it’s moving in an entirely different direction with Saudi King Salman bin Abdulaziz inviting Qatari emir Sheik Tamim bin Hamad Al-Thani to a GCC gathering in Riyadh in late December. The bottom line is that the Saudis need Qatari gas, and not only is the blockade effectively over, but there is every reason to expect that the Qataris will now play a key role in MBS’ Vision 2030, because it’s the most feasible way for the Saudis to reduce their reliance on oil, particularly for power generation.

- In November, Cyprus signed a 25-year deal with Noble Energy, Shell and Israeli Delek Drilling to exploit the Aphrodite field, discovered in 2011, with an estimated 4.1 trillion cubic feet of gas. Israel is now trying to block the development of Aphrodite over a maritime border dispute with Cyprus concerning the Aphrodite-Yishai natural gas reservoir. Israel is advising the three companies involved, one of which is Israel, to refrain from launching exploitation until an agreement is reached between Israel and the Greek Cypriots.

- Iraqi protests are still gaining momentum and the threat over oil production still looms large…

- Boris Johnson’s sweeping win in the UK general election has breathed new life into investors who have been hesitant over Brexit. With signs now pointing to an eventual end to Brexit, the pound is up and gold is likely to lose some recent gains over this.