FT Lex : Saudi Aramco: pachyderm politics

Saudi Aramco: pachyderm politics
Only the largest stock markets will do for the Middle Eastern oil group

Elephants: that is what hunters for oil call the very largest reservoirs holding 1bn barrels or more. One famous elephant burial ground is Saudi Arabia. The country states its reserves at 260bn barrels, unchanged since 1989. Its government has a plan to privatise and list its national oil company, Saudi Aramco. Valuing this state enterprise will be hard enough. Deciding where to list Saudi Aramco, likely to be one of the largest beasts among oil producers, will bring its own weighty problems.

Depending on the final valuation — estimates spread from $2tn to just a fifth of this — Saudi Aramco would likely be one of the largest privatisations ever. Selling even 5 per cent would make it too big to list in its home market alone. The Saudi Tadawul stock market has a total market capitalisation of $440bn, peanuts compared with the New York Stock Exchange, 50 times larger, or even London, still almost seven times that of the Tadawul.

Moelis & Co, a US boutique, is Saudi Aramco’s key adviser. It will need to decide where it is best to list a minimum of $20bn worth of stock. Only the largest securities markets will do, given the sums involved.

In the end, the most sophisticated investors, whether generalists or sector specialists, should find either New York or London palatable. Hong Kong is another possibility, given the large pools of cash in the region. A dual listing is possible, but will increase the cost and complexity of the float.

Yet listing in New York would force discussion about another elephant, the one in the room. Last year, the US Congress overruled a presidential veto to allow lawsuits against countries perceived to be funding terrorist acts. They included Saudi Arabia. Fifteen of the 19 hijackers in the 9/11 attack were of Saudi origin. Lawsuits against the country are under way.

Bankers will need large trunks to carry the Saudi Aramco prospectus to come. Expect a thick section on risks. London looks a safer choice for a listing.

FT : The global stock exchange battle for Saudi Aramco’s IPO

The global stock exchange battle for Saudi Aramco’s IPO
Saudi oil group has much to weigh up about competing venues for record flotation

Saudi Arabia’s initial public offering of state energy giant Saudi Aramco planned for late next year is likely to be the largest ever, surpassing the $25bn raised by Alibaba in 2014.

Deep and active markets are essential for the one or two foreign stock exchanges chosen to host the shares, alongside a listing on the kingdom’s domestic market, the Tadawul.

Amin Nasser, chief executive of Saudi Aramco, this week said the company was evaluating different venues.

While New York and London are favourites to lead an international listing, according to sources, the company is studying others, including Hong Kong and Tokyo. Smaller rivals in Toronto, Europe and Singapore are also pitching for a role.

The big four offer access to great reserves of investor cash, but they also come with different sets of rules and requirements for officials to consider as they prepare a sprawling state enterprise for life as a public company.


New York

Saudi Aramco’s history might lead it stateside. Before nationalisation in the 1980s, it was controlled by a consortium of US oil companies. The company has ExxonMobil governance structures, and generations of Saudi executives attended American universities.

The pageantry of ringing the opening bell at the New York Stock Exchange is also a lure, alongside commercial arguments. “NYSE has historically been the deepest market and deepest not just in terms of trading volume, but also deepest in terms of the [investor and analyst] communities that assist the listed company,” says Ettore Santucci, a partner at law firm Goodwin.

As a foreign private issuer, the company would also be exempt from some onerous reporting requirements imposed on US companies: for instance, the need to avoid selective disclosure of non-public information to analysts and investors.

Home country or international accounting is acceptable, with a reconciliation to a US-style presentation. Practices can differ from US requirements, such as the need for a majority of independent board members, with an explanation where home market regulations differ from those of the US.

However, the Sarbanes-Oxley Act, passed in 2002 after several accounting scandals, requires robust internal controls at US listed companies. Regulators are strict on calculation of proven and probable oil reserves, requiring an independent review process to test the figures.

Saudi Arabia’s oil reserves have long been a state secret, beyond an unchanging published reserve number, but Khalid al-Falih, the energy minister, has said the kingdom will reveal the figures. He confirmed this week the partial completion of a third-party audit.

Politics could still intervene. A recent ruling to allow families of 9/11 victims to sue the kingdom — 15 of 19 hijackers were Saudi citizens — cannot be ignored. President Donald Trump has opened the door to better relations, but the fluidity of US foreign policy, particularly towards Middle Eastern countries, is seen as a potential wild card.

London

Saudi Arabia has long shopped in the UK for everything from racehorses to fighter jets — it is the largest buyer of British arms. Extensive diplomatic ties suggest the London Stock Exchange, home to some of the world’s biggest resource companies, is a natural choice.

The Financial Conduct Authority is also consulting on a new form of foreign listing, an “international segment” with looser rules than for the premium listing almost every company seeks. “It may be there is slightly more keenness to be open as an exchange following Brexit,” says Nicholas Holmes, partner at law firm Ashurst.

A premium listing usually requires board independence and other investor protections: equivalence between ownership and voting rights, pre-emption rights requiring UK shareholders be offered stock in future rights issues or sales of new shares.

Some flexibility in these rules already exists. Companies can take a comply or explain approach to the corporate governance code, and the authorities can waive a requirement to sell at least 25 per cent of shares if the market will be deep enough to operate properly, as it would probably be with Saudi Aramco. Merlin Entertainment, owner of Madame Tussauds, listed with an initial free float of 20 per cent in 2013, for instance.

A question, however, is the importance officials place on membership of prominent stock market indices. For a group incorporated outside the UK, a 50 per cent free float is required to join the FTSE 100. “Would it all be in vain if they can’t get suitable indexation?” asks Mr Holmes.

Hong Kong

Charles Li, head of the Hong Kong Stock Exchange, said last month that the world’s largest listings venue for the past two years was working “very hard” to secure a part in the Saudi Aramco float.

Positioned as the gateway for China, Hong Kong’s Stock Connect trading scheme is the only direct link between the outside world and the Shanghai and Shenzhen markets — the world’s second-largest pool of equity capital after New York.

The city already hosts three state-owned energy champions in PetroChina, Sinopec and Cnooc. “Hong Kong, London and New York are frankly the only markets with the knowledge of the sector, the peer group and the depth of liquidity to handle a float like this,” says Keith Pogson, senior partner in EY’s Asia-Pacific financial services practice.

“Hong Kong’s added advantage is we have tradition of working with state-owned enterprises and managing through the governance issues of that,” he said.

Bankers also say Hong Kong’s political stability may be an attraction, and technical requirements are unlikely to be an issue. Hong Kong demands a free float of 25 per cent of a company’s equity but this is regularly waived for deals over $1bn. Last year for example, Postal Savings Bank of China floated 15 per cent to raise $7.4bn in the biggest IPO worldwide since Alibaba.

One sticking point could be the strict one-share-one-vote stance, which saw Hong Kong lose Alibaba to a New York market tolerant of a self-selecting management structure.

Tokyo

Japan is going all out for Saudi Aramco, with orders from “very high in the government” to make it happen, if at all possible, say officials.

>>> Asia Update

Asia Mid-Session Market Update: Court unanimous in upholding South Korea President Park impeachment; PBOC officials justify use of reserves to prop up CNY

***US Session Highlights***
- (US) FEB IMPORT PRICE INDEX M/M: 0.2% V 0.1%E; Y/Y: 4.6% V 4.4%E
- (US) INITIAL JOBLESS CLAIMS: 243K V 238KE; CONTINUING CLAIMS: 2.06M V 2.06ME
- ECB leaves rates and QE targets unchanged, as expected
- (EU) ECB’s Draghi: Reiterated view that interest rates to stay low or lower for extended period; Signs that the cyclical recovery may be gaining momentum; risks surrounding euro zone growth outlook have become less pronounced but remain tilted to the downside
- ECB raises 2017/2018 GDP and inflation forecasts (inflation stays below 2% target)

***US markets on close: Dow flat, S&P500 +0.1%, Nasdaq flat***
- Best Sector in S&P500: Healthcare
- Worst Sector in S&P500: Real Estate
- Biggest gainers: SIG +8.7%, MRO +8.1%, FTR +4.4%, NRG +4.0%, EW +3.9%
- Biggest losers: SPLS -5.3%, PPG -3.7%, AAL -3.5%, RIG -3.1%, SPG -3.1%
- At the close: VIX 12.3 (+0.4pts); Treasuries: 2-yr 1.38% (+1bps), 10-yr 2.60% (+5bps), 30-yr 3.18% (+4bps)

***US movers afterhours***
- PAY Reports Q1 $0.21 v $0.21e, R$457M v $449Me; +0.8% afterhours
- ALR Loses in effort to immediately regain Arriva's Medicare billing rights - press; -3.2% afterhours
- LOCO Reports Q4 $0.12 v $0.13e, R$92.5M v $90.8Me- Guides initial FY17 $0.65-0.69 v $0.69e, SSS 0-2%; -4.4% afterhours
- ULTA Reports Q4 $2.24 v $2.13e, R$1.58B v $1.54Be; Adds $425M to buyback plan (2.5% of market cap); Guides Q1 $1.75-1.80 v $1.80e; R$1.24-1.27B v $1.28Be; -5.0% afterhours
- SGRY Reports Q4 $0.35 v $0.20e, R$306.0M v $298Me; Guides initial FY17 EBITDA +10-15% y/y, Rev +9-11% y/y, implies $1.25-1.27B v $1.29Be; -9.8% afterhours
- ZUMZ Reports Q4 $0.74 v $0.66e, R$263.6M v $262Me- Guides Q1 -$0.21 to -$0.17 v -$0.03e, R$178-182M v $185Me, SSS 0% to +2%; -14.3% afterhours
- FNSR Reports Q3 $0.59 v $0.61e, R$380.6M v $389Me; Guides Q4 $0.50-0.56 v $0.57e, R$360-380M v $389Me; -16.5% afterhours

***Politics***
- (US) Washington State joining Hawaii in requesting that US federal judge bans the latest Executive Order restricting travel from the Middle East - US press
- (US) Jon Huntsman accepts Pres Trump's offer to become ambassador to Russia - NY Times

***Asia Key economic data:***
- (JP) JAPAN Q1 BUSINESS SURVEY INDEX (BSI) LARGE ALL INDUSTRY Q/Q: 1.3 V 3.0 PRIOR; BSI LARGE MANUFACTURING Q/Q: 1.1 V 7.5 PRIOR
- (AU) AUSTRALIA JAN HOME LOANS M/M: 0.5% V -1.0%E; 3rd straight increase
- (NZ) NEW ZEALAND FEB CARD SPENDING M/M: -0.6% (first decline in 6 motnsh; biggest decline in 22 months) V -0.4%E; TOTAL M/M: -1.0% V 2.5% PRIOR

***Asia Session Notable Observations, Speakers and Press***
- Asian equity indices are markedly higher as more positive sentiment has resurfaced in Asia; Nikkei225 is the best performer, as higher US yields continue to support the greenback at the expense of the Yen; Risk-on flows have also put a bid in US equity futures going into tomorrow's NFP report, as traders bet the risk of a strong print following blow-out ADP numbers earlier this week. USD/JPY was up over 40pips above 115.30, a fresh 6-week high. In other FX majors, AUD/USD and NZD/USD are also higher by some 25pips from the lows, reversing some of the USD-strength driven weakness.
- Among key speakers, PBoC Gov Zhou and Dep Gov Yi Gang covered a range of topics at a local conference. Zhou forecast more stability in CNY this year, calling the recent volatility as normal, while also advocating for more open bond market to foreign investment. Zhou also said FX reserves had grown too fast over the past 15 years, and the recent use of funds in normalizing Yuan is acceptable. Dep Gov Yi added China will not devalue Yuan to stimulate exports after this week's surprise trade deficit.
- South Korea has taken a big step in normalizing its political situation at a time when extra vigilance is needed to deal with North Korea provocations. South Korea Court Justices unanimously uphold Pres Park's impeachment, and a new election is expected to be held in the next 60 days. Finance officials are closely monitoring for any protracted impact on the markets, while analysts with NAB note the political transition is constructive as candidates for the post are all in favor of reforming the chaebol system.

China
- (CN) PBoC Gov Zhou Xiaochuan: Fed factor contributing to volatility in FX; CNY expeted to be stable this year - press
- (CN) Goldman Sachs raises China 2017 GDP forecast to 6.6% from 6.5% prior guided

Japan
- (JP) According to one survey, analysts are unanimous in expectation for BOJ to leave all policy settings unchanged next week - press

Korea
- (KR) South Korea Court Justices unanimously upholds Pres Park impeachment; South Korea to hold a special presidential election within 60 days
- (KR) South Korea Finance Ministry: Closely watching financial markets
- (KR) NAB: Impeachment ruling for Korea's Pres Park is a positive for Korean stocks - press

***Asian Equity Indices/Futures (00:30ET)***
- Nikkei +1.4%, Hang Seng +0.2%, Shanghai Composite flat, ASX200 +0.6%, Kospi +0.3%
- Equity Futures: S&P500 +0.2%; Nasdaq +0.3% Dax +0.1%; FTSE100 +0.1%

***FX ranges/Commodities/Fixed Income (00:30ET)***
- EUR 1.0570-1.0600; JPY 114.90-115.35; AUD 0.7500-0.7525; NZD 0.6890-0.6915
- Apr Gold -0.5% at $1,197/oz; Apr Crude Oil +0.6% at $49.61/brl; May Copper flat at $2.58/lb
- SLV iShares Silver Trust ETF daily holdings fall to 10,268 tonnes from 10,303 tonnes prior; 11-month low
- GLD: SPDR Gold Trust ETF daily holdings fall 2.7 tonnes to 834.1 tonnes; lowest since Feb 9th; 3rd straight decline; Apr Gold extending decline below $1,200; 5-week lows
- (CN) PBOC SETS YUAN MID POINT AT 6.9123 V 6.9125 PRIOR; first stronger setting in 4 sessions
- (CN) PBoC skips open market operations for 2nd straight session; Drains net CNY110B this week vs CNY280B
- (JP) BOJ announces amounts to buy in upcoming QE operation; lowers 1-3-yr JGB purchases to ¥300B from ¥320B
- (AU) Australia MoF (AOFM) sells A$600M in 5.75% 2021 Bonds; avg yield: %; bid-to-cover: 5.26x

***Asia equities / Notables / movers by sector***
- Consumer discretionary: TWE.AU Treasury Wine +3.2% (Seeks to maintain earnings margin in Asia); DLX.AU Dulux Group +2.3% (Ellerston initiates holding); RFG.AU Retail Food Group +2.5% (UBs initiates holding)
- Consumer staples:090430.KR Amorepacific Corp +0.4% (South Korea court ruling)
- Financials: 665.HK Haitong International Securities Group -0.9% (FY16 result); 4.HK Wharf +8.8% (FY16 result, to scrap i-CABLE); 8795.JP T&D Holdings +4.2%, 8750.JP Dai-Ichi Mutual Life Insurance +3.0% (Nomura raises rating)
- Industrials: 368.HK Sinotrans Shipping -7.5% (FY16 result); CSR.AU CSR +5.1% (JPMorgan raises rating); 9202.JP ANA Holdings Inc +3.5% (Tier 1 firm raises rating)
- Technology: 2038.HK FIH Mobile -1.9% (FY16 result); 6502.JP Toshiba Corporation +1.2% (asset sale consideration); 1097.HK i-Cable Communications -35.5% (Wharf scraps interest); 732.HK Truly International Holdings -13.9% (profit warning)
- Materials: JSP.IN Jindal Steel +4.7% (India court rejects pleas on coal block bid); ILU.AU Iluka -1.8% (Gearing likely to remain elevated among increased capex outlook)
- Healthcare: NRT.AU Novogen Limited -8.6% (CFO resigns)

>>> Emerging-Market Rally Has Room to Run, Morgan Stanley Says

Emerging-Market Rally Has Room to Run, Morgan Stanley Says
Valuations of EM assets aren’t looking “frothy” and dips present opportunities to buy, Morgan Stanley analysts, led by Hans Redeker, global head of fx strategy, write in report.
  • This week’s wobble in EM is not due to sensitivity to a more hawkish Fed but more related to drops in stocks and commodities
  • Morgan Stanley forecasts 7 Fed hikes through the end of 2018, compared with around 5 priced in by the market at the moment
  • Not every Fed tightening cycle results in EM weakness and USD strength, as seen in the 2004-2006 period
  • Near-term weakness in EM is possible, and should global markets struggle Morgan Stanley is adding a long USD/KRW position
  • NOTE: EM stocks have fallen 1.6% in past 3 days, while EM currencies dropped 0.9%: MSCI indexes

>>> US After Hours Summary: INTT +26%, ABTL +5% higher following earni


After Hours Summary: INTT +26%, ABTL +5% higher following earnings/guidance... FNSR -17% and weighing on optical names after missing quarterly estimates/issuing downside guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: INTT +25.5% (thinly traded), COGT +8.2%, MYRG +7.4% (ticking higher), CDXS +5.4% (light volume), ABTL +5.2%

Companies trading higher in after hours in reaction to news: CRIS +6.2% (continued strength), SKLN +3.2% (light volume, schedules call to provide business update and discuss recent/upcoming milestones for March 15 at 4:30pm ET)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: FNSR -17.4%, SMSI -16.4% (very thinly traded), ZUMZ -14.3%, XTNT -13.6%, RGSE -11.8%, SGRY -11.7%, MED -7.8%, BVX -7% (very thinly traded), EYES -6.5%, CARA -5.7%, ULTA -4.8%, LOCO -4.4%, ROKA -2.5%, FRPT -1%

Companies trading lower in after hours in reaction to news: MEET -9.5% (commences common stock offering), ARE -3.3% (commences an underwritten public offering of 6,100,000 shares of common stock; updates guidance in connection with offering), ALR -3.2% (attributed to unfavorable court hearing), OOMA -1.1% (to offer 2,861,290 shares of common stock in secondary offering by certain stakeholders)

Optical names are lower following Finisar (FNSR) earnings/guidance: FN -3.4%, OCLR -3%, AAOI -3%, LITE -1.9%

(Handelsblatt) Stada Chairman Won’t Rule Out Strategic Investor Bid

https://global.handelsblatt.com/companies-markets/report-chinese-competitor-to-join-battle-for-stada-722866

  • Stada Chairman Won’t Rule Out Strategic Investor Bid
Carl Ferdinand Oetker, speaking in an interview, couldn’t confirm reports that China’s Shanghai Fosun Pharma was planning to make a move on Stada, but said he wouldn’t rule out a bid by a strategic investor.
If the latest reports are to be believed, then the race to acquire Stada is starting to heat up.
The Chinese drugmaker Shanghai Fosun Pharma plans to enter the fray and make a bid for the Hesse-based drugmaker, sources told Reuters news agency. A bid from China would create a three-way competition for the mid-cap drugmaker, setting Stada up for a bidding war.
But Stada’s supervisory board chairman, Carl Ferdinand Oetker, couldn’t confirm to Handelsblatt on Thursday that Fosun intended to make an offer, though he also wouldn’t rule out a bid by a strategic investor.
“I’ve have also only read about it up until now,” Mr. Oetker told Handelsblatt. “We’ll see whether or not there will be other bidders. It can never be ruled out that a strategic investor comes at the end of such a process and makes an interesting offer. That’s also happened with finance investors.”
Two sources had told Reuters that Fosun Pharma is in discussions with the private equity firm CVC Capital Partners, headquartered in Luxembourg, to make a joint offer for Stada. Fosun could, however, decide to go at it alone in the end, the sources said.
A spokeswoman, talking to Reuters, had said Fosun has nothing to make public at this time.

>>> US Close Dow +0.01% S&P +0.08% Nasdaq +0.02% Russell -0.43%

Closing Market Summary: Energy Shakes Off Crude Oil's Decline to Lead Stocks Higher on Thursday

The bulls and the bears slugged it out on Thursday until the energy sector (+0.6%) gave the bulls a slight edge in the final stretch. The S&P 500 finished with a slim 0.1% gain while the Nasdaq and the Dow closed flat. Meanwhile, the Russell 2000 underperformed, posting a loss of 0.4%.

Crude oil followed up its 5.3% Wednesday plunge with another disappointing performance on Thursday as investors continued to digest yesterday's bearish EIA reading. The energy component closed its trading day 2.1% lower at $49.24/bbl, but regained a good portion of that loss in electronic trade. The energy sector appreciated the belated effort, leading the late afternoon rally and finishing near the top of the day's leaderboard after holding the bottom spot for much of Thursday's action.

One of the reasons energy stocks rebounded so sharply in the afternoon session is that few people expected it given the continued drop in oil prices. The weakness in crude oil likely spurred some participants to short the energy stocks, so when they started to exhibit relative strength, weak-handed short sellers likely got nervous, covered their positions, and effectively aided in the sector's recovery effort.

Outside of the energy world, the European Central Bank (ECB) captured investors' attention for a while this morning with its latest policy decision to leave rates unchanged. More notably, the ECB raised its 2017 GDP forecast to 1.8% from 1.7%, but did not suggest an impending reduction to stimulus. This gave a boost to the euro, helping the currency climb 0.4% against the dollar to 1.0587.

Back in the U.S., the health care sector (+0.6%) finished with the energy group at the top of the day's leaderboard. Similarly, the financial (+0.3%), consumer staples (+0.2%), and telecom services (+0.4%) sectors also outperformed the broader market.

The financial sector held the top spot on the day's leaderboard going into afternoon action, but comments from White House Press Secretary Sean Spicer were met with some backtracking in bank stocks. During today's press briefing, Mr. Spicer said that President Donald Trump remains committed to restoring the Glass-Steagall Act.

On the flip side, the lightly-weighted real estate group (-1.3%) finished at the bottom of the sector standings while the industrials (-0.5%) and materials (-0.4%) groups also finished solidly lower.

The consumer discretionary space (unch) closed just below the broader market as retailers pushed the SPDR S&P Retail ETF (XRT 41.83, -0.54) lower by 1.3%. Despite its small market cap, Tailored Brands (TLRD 15.84, -7.53), the parent company of Men's Wearhouse and Jos. A. Bank, contributed to the bearish sentiment among retailers after the company missed top and bottom line estimates and issued downbeat guidance. TLRD shares sank 32.2%.

In the Treasury market, U.S. sovereign debt finished Thursday's session lower as investors eyed tomorrow's Employment Situation Report, which is regarded as the last potential barrier to a March rate hike. The benchmark 10-yr yield finished four basis points higher at 2.60%.

Today's economic data included February Export/Import Prices and Initial Claims:

  • Import prices excluding oil rose 0.3% in February after ticking down 0.1% in January (revised from -0.2%). Export prices excluding agriculture increased 0.3% in February after rising 0.2% in January (revised from +0.1%).
    • The key takeaway from the report is that it won't alter the market's newfound belief that the Fed is likely to raise the target range for the fed funds rate at its March meeting since there are evident signs of increasing inflation in the year-over-year readings for both import and export prices.
  • The latest weekly initial jobless claims count totaled 243,000 while the consensus expected a reading of 240,000. Today's tally was above the unrevised prior week count of 223,000. As for continuing claims, they declined to 2.058 million from the revised count of 2.064 million (from 2.066 million).
    • Despite the jump in initial claims, which was not influenced by any special factors, the key takeaway from the report is that there was no discernible change in the long-term trend in initial claims, which held below 300,000 for the 105th straight week.

Tomorrow's economic data will include the Employment Situation Report for February (consensus 188,000), which will be released tomorrow at 8:30 ET while the February Treasury Budget will follow at 14:00 ET.

  • Nasdaq Composite +8.5% YTD
  • S&P 500 +5.6% YTD
  • Dow Jones Industrial Average +5.5% YTD
  • Russell 2000 +0.2% YTD

(SG) Global Strat. Who remembers Orange County 1994? (A.Edwards)

Who remembers Orange County 1994? Prepare for another bond rout.

Make no mistake. Unlike most in the markets, I remain a secular bond bull and do not think this 35 year long bull bond market is over. I believe the US Fed has created another massive credit bubble that will, when it bursts, lay the global economy very low indeed. Combine this with the problems of a Chinese economy dependent on increasingly ineffective injections of credit to produce increasingly pedestrian GDP growth and you have a right global mess. The 2007/8 Global Financial Crisis will look like a soft-landing when the Fed blows this sucker sky high. The seeds for that debacle have already been sown with the Fed having presided over one of the biggest corporate credit bubbles in US history. All that is needed now is for the Fed to sprinkle life-giving rate hikes onto these, as yet dormant, seeds of destruction. Accelerated Fed rate hikes will cause tremors in the Treasury bond markets, forcing rates up, most especially in the 2 year – just like 1994. But as yet another central bank-inspired global recession unfolds, I believe US 10y bond yields will ultimately converge with Japanese and European yields well below zero – in other words, buy 10y bonds on weakness!