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Oil report

MIDEAST DEBT-Aramco risk seen as higher than Saudi sovereign ahead of new bonds

DUBAI, Nov 16 (Reuters) - Saudi Aramco’s planned bond issuance will likely price around 10 basis points wider than the government of Saudi Arabia’s debt curve, financial sources said, the small difference suggesting that investors see its risk profile as slightly higher after oil prices dropped this year.

The oil giant said on Monday it was considering issuing multi-tranche U.S. dollar-denominated bonds in what would be its second foray into the international debt markets.

Last year, in Aramco’s jumbo debut bond issuance of $12 billion, the world’s largest oil producer priced its paper inside the sovereign’s curve, as investors put the oil producer - if unconstrained by its sovereign links - in the same league as independent oil majors such as Exxon Mobil and Shell.

The bonds widened when they started trading and their gap to Saudi government paper of the same maturity narrowed.

But Aramco’s yields on its bonds due in 2029 remained generally below their Saudi government counterparts until oil prices collapsed earlier this year because of the coronavirus crisis, at which point their differential practically disappeared, suggesting the market priced Aramco’s risk at par with the Saudi sovereign during that bout of volatility.

“The Saudi government is the majority shareholder in Aramco and can decide where to allocate Aramco capital and how much to leverage its balance sheet,” said Hasnain Malik, head of equity strategy at Tellimer.

“That should rightly influence where Aramco pricing is relative to the sovereign and perhaps that is happening now in a way that it did not a year ago.”

Lower oil prices this year due to the coronavirus pandemic and crude production cuts agreed under an OPEC+ agreement have weighed on Aramco’s profits.

“The government’s decisions regarding crude oil production and spare capacity, and Saudi Aramco’s costs of complying with such decisions, may not maximise returns for Saudi Aramco,” the Aramco bond prospectus said.

The Saudi government owns 98.18% of Aramco following the oil giant’s blockbuster initial public offering a year ago.

Aramco’s outstanding U.S. dollar-denominated bonds due in 2029 were trading at 2.1% on Monday, about 9 bps higher than Saudi government paper with a similar maturity, Refinitiv data showed. Their bonds due in 2049 were both trading at 3.2%.

Ratings agency Fitch revised its outlook last week on Aramco to negative from stable, a day after similar action on the sovereign, the finances of which are heavily reliant on the hydrocarbon industry.

Reporting by Yousef Saba; Editing by Alex Richardson

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