Last week Saudi Arabia’s deputy crown prince, Mohammed bin Salman, confirmed the speculations surrounding an initial public offering (IPO) of Saudi Aramco, the world’s largest – and most secretive – oil company. In a wide-ranging interview with Bloomberg, bin Salman confirmed that the House of Saud is preparing an IPO for 2017, when roughly 5% of the company, though none of its oil reserves, will be available to the public. He went on to explain that the sale is part of the Kingdom’s broader plans to create a Public Investment Fund (PIF) aimed at diversifying the country’s economy.
Banks and investment funds are already scrambling for a slice of the pie, with some calling the IPO the ‘sale of the century‘. Not only is the company valued in the trillions, making it far more valuable than Alphabet (formerly Google), the world’s largest public company. The sale may also mark the beginning of the end for the golden age of oil in which giant state-owned firms have reigned supreme. In light of this, GRI presents 3 things you need to know about the upcoming IPO.
1. What will the IPO look like?
The House of Saud is yet to release official details of the IPO, but the deputy crown prince gave some details of the make-up and timeline of the deal. According to bin Salman, Saudi Arabia plans to sell ‘less than 5 per cent’ of the state oil company. The listing will take place no later than 2018 on the Tadawul stock exchange in Riyadh. Further offerings may follow, though a major controlling stake is off the table, at least for the next few years.
Crucially, Aramco ‘s most prized assets – including around 260 billion barrels worth of oil reserves – will not be up for sale. This means the offering will involve shares in a subsidiary company that will include some of Aramco’s lucrative downstream assets, such as its burgeoning refinery empire. Most likely, the company would still be run by Saudi Arabia. That may disappoint those hoping to buy a stake in the country’s upstream activities. But its refinery assets still represent a major global business, with plants scattered across the world.
The total value of the IPO remains unclear, not least because Aramco’s inner workings are a closely-guarded secret. Not surprisingly, estimates of the company’s total value vary wildly, ranging between 1 and $10 trillion US dollar. In 2010 the Financial Times claimed assessment the worth at $tn USD, though that was a peak year for valuations of energy companies in emerging market. It was also well before the shale revolution saw oil prices plummet to near-record lows. But one thing is clear: even a partial IPO of around 5% would be worth hundreds of billions of dollars, dwarfing all others before it.
2. Opportunities for investors?
Despite its sheer size, analysts are divided as to whether the IPO will present a good value. Whereas state-owned oil companies are generally marred by inefficiencies and widespread corruption, Aramco is perceived to be the zenith of all state oil firms, according to Jim Krane, an energy expert at Rice University.
As well as being run efficiently to maximise profits – the main concern of shareholders – it has also proven remarkably resilient of late, weathering the current crisis while expanding its production. Recent statements by the newly appointed CEO, Amin Nasser, that Aramco is striving to become the world’s biggest refiner by 2025, should also entice the appetite of prospective investors.
But the outlook is not all rosy. Whereas the company is well run, shareholders will likely hold little sway over its operations and strategy, a scenario that has irked investors in Russia’s Gazprom, another state-owned behemoth that is sometimes used as an arm of the Russian foreign ministry. With Saudi Arabia historically cutting production in order to rebalance prices and pursue the country’s national interests, this could be become a problem. And elsewhere, The Economist warns, selling stakes in national oil companies has had mixed results.
Investors should also be mindful that the world is ushering in a new oil paradigm, with the shale revolution and a shift to renewable’s likely to keep supply high and demand low. That means low oil prices for the time being. This bleak outlook might spook investors despite Aramco’s significant assets.
And ultimately, the Saudis may be offloading their assets before oil becomes the new coal. As one senior analyst told Bloomberg earlier this year, ‘Saudi Arabia is lining up some funding sources in anticipation of a very prolonged environment of low oil prices… If I’m running an oil company, I’m running for the hills.’
3. What will the IPO mean for the Saudi economy?
It also remains to be seen what the IPO will do for Saudi Arabia’s economy. In his interview, bin Salman was quick to shoot down suggestions the IPO was simply a way of gaining liquidity to cover Saudi’s short-term financial needs. Instead, he rattled off a range of competitive advantages the sale would bring, including diversifying the nation’s economy; raising capital for new projects such as renewable energy, construction, and petrochemicals; and hopefully becoming a major economic hub in the region.
The sale of Aramco, he said, will contribute to a $2 trillion Public Investment fund – the largest in the world – where investments, rather than oil, will form the main source of government revenues. With petrostates facing a perilous future amid lower prices and a shift towards cleaner energy, many feel that oil’s heyday is coming to an end, and the need to diversify is apparent.
But concerns have been raised about Riyadh’s ability to shift its economy away from oil. The country’s other major exports, including petrochemicals, are still heavily dependent on demand for oil, while its audacious plans to become a leader in solar energy have proved too ambitious. In January last year, Saudi officials announced they were pushing back a planned scheme from 2032 to 2040, with some saying its aim of becoming a leader in solar power is more a mirage than inspired vision.
Meanwhile, Saudi Arabia’s gigantic public sector – and the high wages it bestows on comfortable employees – makes the Kingdom’s labour markets ineffective, with individuals discouraged from engaging in entrepreneurial or private-sector employment. King Abdullah Financial District, a newly created financial hub in Riyadh, was meant to change this and attract foreign banks and investors – but it stands mostly empty, a shadow of Dubai’s the International Financial Center.
This is not to say that Saudi Arabia cannot prove its numerous critics wrong; the partial sale of Aramco shows that it is reshuffling its financial hand to move away from the one resource that has made it fabulously wealthy. But it will not be easy.
