Might stalled Saudi oil IPO deliver silver lining for Irish lawyers?

Market Beat: Irish Continental Group continues to find itself in choppy waters

 

Saudi Arabia’s decision this week to stall what would have been the world’s largest-ever stock market flotation will be felt everywhere from Sotheby’s art auctions in London to the Hamptons property market on Long Island in New York.

Investment bankers had been falling over themselves courting Saudi Arabia’s Mohammad bin Salman since he first flagged in early 2016 that Riyadh was looking at selling shares in Saudi Aramco.

Known as “MBS” in boardrooms from JP Morgan to HSBC and Morgan Stanley as they eyed a share of some $200 million (€172 million) of flotation fees, the modernising ruler-in-waiting had planned an initial public offering (IPO) of a 5 per cent stake in the group in the second half of this year.

But it had become increasingly clear in recent months that momentum had been lost as key Saudi figures working on the project left the company or were reassigned. Confirmation that the deal is postponed will rein in 2018 bankers’ bonus expectations across Wall Street and the City of London.

While the Saudis have said they remain committed to an IPO, many now question whether the deal – caught between US president Donald Trump’s meddling and overly optimistic price views among members of the House of Saud – will ever see the light of day.

The Saudi royals, who nationalised the business four decades ago as they took over the shares of four US oil companies, appear wedded to a $2 trillion (€1.7 trillion) valuation for Aramco. It would make it easily the most valuable company on Earth – double the market value of Apple, which earlier this month became the first publicly-listed company to breach the $1 trillion mark.

However, analysts reckoned Aramco is worth $1.5 trillion at best, and that oil prices would have to hit $80 a barrel to support Riyadh’s valuation expectations. West Texas Intermediate oil is currently trading below $69 a barrel.

The problem is that the Organisation of Petroleum Exporting Nations (Opec) agreed in late June to increase oil production by as much as a million barrels a day (the equivalent of 1 per cent of global demand) as Trump piled pressure on the Saudis and other Opec to curtail prices.

Trump went one step further on June 30th when he tweeted: “Just spoke to King Salman of Saudi Arabia and explained to him, because of turmoil & disfunction [sic] in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference...Prices to [sic] high! He has agreed!”

While the White House would later row back, saying that the Saudi leader was ready to raise output, if needed, there’s little doubt about the influence of the country’s largest ally on its actions in global oil markets.

With the Aramco IPO off the table, Saudi Arabia’s sovereign wealth fund is reportedly set to raise $11 billion from international banks to drive MBS’s economic reforms. And there is talk that the country may return to international bond markets.

With the Irish Stock Exchange selected two years ago for the listing of Saudi Arabia’s first ever bonds, the Dublin market – now part of the Euronext group – would be in line to pick up some more fees. Law firm Matheson, the Irish listing agent on the 2016 deal, is also likely be in the frame again.

The fees won’t be enough to move the dial on house prices in Dublin’s swankier south suburbs, but they may fund a few chalkstripe suits.

ICG’S ‘annus horribilis’

Not since 2006, when Irish Continental Group (ICG) shed half its then 1,000-plus workforce following a protracted dispute over plans to rely increasingly on outsourced, cheaper eastern European labour, has the owner of Irish Ferries experienced such a public mauling.

News in late April that the company had cancelled more than 2,000 bookings for two July weeks as the delivery of a new €144 million luxury ferry – originally targeting the Dublin-to-Cherbourg route – was delayed triggered a slew of reports of ruined holiday plans in newspapers and on social media.

Then, ICG was forced to warn in mid-June that “due to extraordinary circumstances beyond its control”, the German shipbuilder Flensburger Schiffbau-Gesellschaft would not be able to release the vessel from its shipyard until September – hitting another 6,000 bookings.

Industry sources have told The Irish Times that it will now be early October before the ship arrives in Dublin with its space for 1,885 passengers and crew, 435 cabins and three kilometres of cars.

The WB Yeats fiasco is just one part of an unpleasant picture that will be revealed when ICG’s chief executive of more than a quarter of a decade, Eamonn Rothwell, unveils interim results next Thursday.

The impact of Storm Emma in March, rising fuel costs and the technical issues at Irish Ferries’ Ulysses ferry – leaving it out of service for more than four weeks – have all conspired to turn 2018 into something of an “annus horribilis” for ICG, Davy analyst Stephen Furlong said in a note to clients last month. Goodbody Stockbrokers sees the group’s first-half pretax profit falling almost 30 per cent on the same period last year, to €13 million.

Shares in ICG have fallen by as much as 16 per cent since they hit an all-time high of €6 apiece in mid-March, as analysts have taken red pens to their estimates for the group a number of times.

Rothwell is likely to face questions next week about whether Flensburger Schiffbau-Gesellschaft will meet a mid-2020 target for completing an even larger, €165 million vessel it is contracted to build for ICG. Or how ICG might fare in the event of a no-deal Brexit.

Potential choppy waters ahead.