Saudi Aramco's IPO: A case of bad timing?

Saudi Aramco's IPO: A case of bad timing?
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What better way to commence this year’s “Davos in the Desert” than with a new date for Saudi Aramco’s much anticipated IPO. Finance heavy hitters and global leaders stayed away from last year's conference. The timing being too close to the murder of Saudi journalist Jamal Khashoggi made many decline invitations for fear of public backlash. One year later, the story is different. The appetite for deals lured many back for what has become Crown Prince Mohammed bin Salman’s (MBS) signature conference. His desire to remake Saudi Arabia into his Vision 2030 requires investments and confidence. To pay for his vision, he needs a blockbuster Aramco IPO. Many doubt it will ever materialize beyond Saudi’s own domestic exchange.   

It’s hard to imagine Aramco not wanting to turn back time to an easier period when getting an IPO to market seemed feasible. This week’s announcement seems like a soft launch for what was supposed to be the largest and most anticipated IPO in history, dwarfing Apple and Amazon. In the days since a December date was suggested, it now looks like the crown prince is once again hedging and backtracking on timing, letting the world know he’ll decide when the time is right.

The initial IPO was meant to be the beginning of the larger IPO, starting with offering 2-3 percent to be listed on Riyadh’s Tadawul Exchange. Not to downplay the kingdom’s exchange, but it’s not London, New York or Tokyo. The success of a domestic offering depends on Saudi investors and regional sovereign wealth funds, and MBS is already at work steering friends, family and pressured enemies to participate. The IPO may never reach foreign exchange shores. 

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The IPO road hasn't been an easy one for Saudi Aramco, and many of the problems can be traced back directly to MBS. The fanfare and grand expectations of a Saudi Aramco IPO started in 2016 with a 2018 projected start to the sale of shares. But a series of events, including last year’s murder of Khashoggi, delayed the IPO. The C.I.A. has assessed with medium to high confidence that MBS personally ordered Khashoggi’s murder. MBS has denied the claim but admits it happened under his leadership watch. 

The most recent setback for Aramco’s IPO was the attack against two of its oil infrastructure facilities, Abquaiq and the field at Khurais. The drone attacks took 50 percent of the company’s oil production off line, which translated into 5 percent of global supply. The company was able to make up for the loss of production and illustrated incredible resiliency to what was to date the largest single disruption to global oil supply. The attacks, however, raised a new specter of doubt around how secure Saudi Arabia’s oil production actually is and the growing geopolitical related risks for the oil giant. Before the attacks, many analysts believed Saudi Arabia’s operations to be almost foolproof. But the missile hits exposed the company’s critical infrastructure vulnerabilities. 

In the six weeks since the attacks, Saudi’s crown prince has said war with Iran would collapse the global economy and send oil prices to unimaginably high numbers. Not exactly comments that bode well for instilling confidence and stability around the Aramco IPO. To make matters worse, the kingdom was downgraded by Fitch from an A+ to an A rating over insecurity and growing risks of conflict in the Gulf region. There’s also the problem of growing domestic debt compounded by a large population under the age of 24 and the country’s military incursions in Yemen.  

On paper, this should be a winning IPO for investors and a unique opportunity to invest in the world's largest and most profitable integrated oil company. But downside risks are becoming increasingly problematic. The more prolonged the process to get to an initial public offering takes the more unlikely it will be to get close to the desired valuation of $2 trillion. In 2016 the company was valued at $2 trillion. Today it’s at $1.5 trillion, but with each delay the sky-high valuation appears to be in jeopardy. Analysts outside of MBS’s power orbit believe $1.2 trillion is a more accurate assessment. 

The headwinds are gathering with the global economy looking less and less robust and the price of oil not expected to recover from what is a deepening bearish outlook. According to the IMF, global growth is set to fall to its lowest since the financial crisis of 2008. Add to that rising geopolitical uncertainty within the Gulf and surrounding region, and what we see is increasing risk for Aramco and the Kingdom.

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Another challenge for Aramco will be its principal shareholders, the Kingdom, King Salman, and Crown Prince Mohammed bin Salman. MBS currently serves as chairman of the Supreme Aramco Council, which has oversight even above the board of directors. The company answers to the government and must also hand over a large portion of its annual revenues. In 2017 the amount of corporation tax Aramco payed to the state fell from a high of 85 percent to 50 percent, and a tax much higher than other oil and gas majors. Separating the company from the government poses challenges and conflicts of interest; the Saudi budget doesn’t work without the revenues from Aramco. 

MBS wants and needs a win. For today, the IPO appears to be back on, and scheduled for December. But with each new delay, the optics surrounding the IPO become more problematic.

Carolyn Kissane is academic director and clinical professor of global affairs at the Center for Global Affairs at NYU's School of Professional Studies. She is a non-resident fellow at the Payne Institute for Earth Resources.