Saudi Aramco IPO appears to be a mirage in the desert — for now

Saudi Aramco IPO appears to be a mirage in the desert — for now
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The Saudi Aramco initial public offering (IPO) has been a mirage in the desert for an army of investment bankers, lawyers and other advisers.

The prospect of an issue in the range of $100 billion also led to competition among stock exchanges from New York to London, Hong Kong and Riyadh. The fees on such a transaction whetted appetites around the globe.

In this scrum, details have been lacking, including the not-insignificant one of what precisely buyers would get for their investment. Those who know are not talking, including the non-Saudi members of the Aramco Board of Directors.

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In 2016, the rationale for the huge IPO, which would represent a small part of Saudi reserves, was to fund the ambitious vision outlined by Crown Prince Mohammed bin Salman. It was a recognition that the future of the kingdom’s economy can no longer rest so heavily on oil production. 

Also driving the idea was the oil price collapse of 2014-17. Every company in the industry was challenged, as were countries with a heavy dependence on oil revenues. U.S. shale production had surged into the market, disrupting longstanding trading and investment patterns.

Saudi Aramco initially took aggressive measures seemingly intended to cripple the surge in U.S. production. Prices then fell even further — to below $30. This was a lose-lose proposition for all parties, but it did not break the Americans’ “shale play.”

With hundreds of independent companies producing in the U.S., only the market could serve as a brake on their production.

Low prices forced U.S. producers to dramatically reorganize the way they operated to drive out costs. Hundreds of companies declared bankruptcy and hundreds of thousands of jobs were lost during this period, but the survivors found ways to operate profitably and generate cash flow even with prices in the $50 range. Production, especially in the Permian Basin in West Texas, continued to grow.

Saudi Aramco, regularly cited as one of the best-managed national oil companies, shifted strategy. Aramco cut its own production and persuaded others in the Organization of the Petroleum Exporting Countries (OPEC) and even Russia to do the same.

To the surprise of many observers who had seen previous agreements fail, this one has held for an extended period, bringing international oil prices above $70.

Last week, reports have circulated that the IPO had been canceled, but Saudi Energy Minister Khalid al-Falih said that it is still on, subject to optimal market conditions.

Concurrently, Saudi Aramco is in discussions to buy a large stake in Sabic, a publicly traded chemical company. Sabic’s controlling shareholder is Saudi Arabia’s sovereign wealth fund, the Public Investment Fund.

While the size of that potential acquisition is unclear, media reports say it could be as big as $70 billion. The Sabic acquisition would diversify Aramco further “downstream” into processing their hydrocarbons. The government could reach into its Sabic pocket to fund the national transformation plan, known as Vision 2030, in the near term.

It would then have the option of an Aramco IPO later. This would better facilitate the initiation of projects to diversify the economy. 

This development has certainly taken pressure off Aramco and the Saudi government — as my Rice University colleague and Middle East expert Jim Krane told media, the “IPO’s transparency requirements would expose the monarchy’s internal workings, perhaps revealing details of the royal family’s financial stake.”

Investors are left betwixt and between market conditions and Saudi priorities. As this chimera continues, the bankers, lawyers and advisers will have to focus on 2020 or beyond.

Bill Arnold is a professor in the practice of energy management at Rice University’s Jones Graduate School of Business. Previously, Arnold was Royal Dutch Shell's Washington director of international government relations and senior counsel for the Middle East, Latin America, and North Africa.