Saudi Aramcos Stalled Ipo Will Dent Investor Confidence

Saudi aramcos stalled ipo will dent investor confidence

 If Saudi Arabia truly wanted to let the world know how serious it was about surviving life after oil, then nothing could have send out a stronger message than the listing of Saudi Aramco.

Saudis Look to Make Aramco IPO a 'Friendly' Process for Investors, Palissy's Kapadia

An abbreviated version of Saudi Arabian Oil Co., the state-owned producer is valued at more than $2 trillion by many analysts and controls more than one-fifth of global petroleum reserves.

It pumps more crude than the top four listed oil firms in the world and, most importantly, it gener­ates about 90% of the Saudi government’s income.

Saudi aramcos stalled ipo will dent investor confidence

So why would the Gulf country go public with one of its best run state firms that also gives it the power to become the swing producer in the global oil market?

The answer can be traced back to the American frackers who flooded the world’s oil market, caus­ing a supply glut while making the U.S.

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energy sufficient. Frackers’ ability to produce crude at a relatively cheaper price gave them a competitive edge over the cartel Organization of Petroleum Exporting Countries (OPEC).

Saudi aramcos stalled ipo will dent investor confidence

While the American frackers could easily exist when oil prices range between $50 and $60 per barrel, the traditional OPEC members—led by Saudi Arabia—have been finding life hard to scrape through when Brent crude price dipped low for a prolonged period.

But an IPO of Saudi Aramco is the world’s top crude producer’s way of responding to the current oil price rout.

The listing of about 5% of Aramco was part of an economic shakeup announced by the influen­tial Deputy Crown Prince Mohammed bin Salman in order to wean the local economy off petrodol­lars and to better diversify the national income.

For Saudi Aramco’s IPO, ‘Slowly’ Will Do the Job

Proceeds from the Aramco sale—which analysts estimate could reach around $100 billion—will be diverted to a public investment fund (PIF) that would act as a cover for post-oil days for Saudi Arabia. The IPO is expected to occur in 2017 or early 2018, according to officials.

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The kingdom’s plan to sell off parts of Aramco has been greeted with mixed reactions, with some incredulous about the plan while others giving a conditional nod of approval.

A report from State Street Global Advisors (SSGA) noted that listing Aramco could be helpful in capital market de­velopment and in “distributing wealth to Saudi investors; accelerating the development of Saudi Arabia’s equity market; and promoting wider structural reforms, especially among state-owned enterprises.”

Meanwhile many experts are adopting a wait and watch approach on whether a stake sale of Aramco could heavily alter the kingdom’s eco­nomic prospects.

“It depends on whether the Saudis can sell it, for how much and for whom,” says Dr Carole Nakhle, non-resident scholar at the Carnegie Middle East Center. “The value that the Saudis have given seems to be overly optimistic, especially when compared to the value of other national oil companies (NOC).” She adds that how the government redirects the funds from the sale is also paramount to gauge the impact of it.

“If they put the money in a SWF to invest it abroad and shield it from political interference, then the im­mediate impact on the economy from that sale will be very limited but in the longer term more ben­eficial.

What's behind the stalled Saudi Aramco IPO?

If, however, they poorly invest it, then the impact will be negative. If it is sold to sharehold­ers that don’t agree with the policy of the country, then conflict can arise.”

The impact of the stake sale will also be depen­dent on where the money is invested and in which sectors.

Dr Nakhle opines that to achieve economic diversification the fund needs to look at the non- oil sector. This might be the government’s plan if its recent $3.5 billion investment in ride share firm Uber is anything to go by.

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However, its true im­pact would only come to light later, according to experts. “Currently the role of the PIF is ill defined and its rules are rather opaque. We have to wait and see how the fund will look once the reform agenda is implemented fully,” says Dr Nakhle.

It is not that the move to list Aramco does not have its benefits.

Saudi aramcos stalled ipo will dent investor confidence

If anything, it could bring in some transparency to the operation of Aramco, especially with the scale of privatization. Unlike what many presumed, Aramco’s downstream assets were not the only ones to be up for sale.

Addressing investor concerns

According to Crown Prince Mohammed, the gov­ernment is looking to sell off parts of the “mother company” too and not just limit it to the subsid­iaries. That could mean opening up the company to much more public scrutiny and making its in­ternal procedures a lot more transparent to instill investor confidence.

Analysts agree conditionally.

Saudi aramcos stalled ipo will dent investor confidence

“When selling in public tender, Aramco will have to publish its books—something that the company hasn’t done before. So in this sense the process will enhance transparency. But Aramco is one of the few suc­cessful and respectable NOCs so the additional benefit this will bring to the company is unclear.

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It is rather a nice to have, not a must. Besides, the 5% is not much to change a company,” says Dr Nakhle.

Saudi aramcos stalled ipo will dent investor confidence



Depending on where it lists—London or New York—Aramco might have to reveal information such as its reserves, produc­tion capacity and more importantly account for how its reve­nues are being used.

For a company that has thrived on secrecy for so many years, how Aramco will deal with finally letting out its secrets is yet to be seen.

Saudi aramcos stalled ipo will dent investor confidence

Selling the Crown Jewel

Riyadh’s decision to proceed with the Aramco IPO might also be a way to invigorate the local market and not neces­sarily because the government is cash strapped as many seem to assume. The kingdom’s local exchange, Tadawul, has been feeling the effects of lower oil prices and has failed to pick up, despite opening to foreign investors in June 2015.

The stock market, which is also harboring ambitions to upgrade from frontier market to emerging market status by 2017, could ben­efit from a stellar listing like Aramco.

According to a blog post written by Yasser Al Saleh, senior research fellow at INSEAD Innovation and Policy Initiative, the move also puts out a broader message to the economy.


“Listing Aramco is not about raising money as such; it is more a bold political message that no sector is immune from priva­tization. Announcing these plans—irrespective of whether they bear fruit or not—is part of an unprecedented economic overhaul that has been enthusiastically labeled a ‘Thatcherite revolution’ for Saudi Arabia,” Al Saleh writes.

On the other hand, the Aramco listing could also be a pragmatic step, with the government trying to get the best val­ue for the company. “One can argue that the Saudis are taking a long term perspective, understanding that over time, their oil in the ground will be worth less than today as global demand decreases, primarily because of climate change concerns,” says Dr Nakhle.

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“After all what is the point of sitting on some of the largest oil reserves when nobody wants them? By selling part of Aramco the Saudis are safeguarding some of that value. The other option would have been to produce more and more but that would cause prices to crash.” A more emphatic step for Saudis, however, would have been to open its oil sector to international investors like many other countries rather than to list Aramco, she allows.

“This could have generat­ed many benefits, includ­ing substantial revenues, because Saudi Arabia can afford to impose high tax rates given the size of its reserves and its low production costs among others.”

Even as experts debate the merits of the IPO, it is defi­nitely going to leave an imprint on the markets.

With the company valued at about $2 trillion, it could land banks a windfall as arranging fees.

Ipo kick off meeting

But most importantly, an IPO of star performer Saudi Aramco signals a new era for Riyadh and its ruling elite as they shred the cloak of secrecy and pre­pare for the post oil era.