Saudi Aramco IPO leaves few unscathed: Fuel for Thought

Saudi Aramco’s proposed initial public offering is in danger of turning into an embarrassment for all concerned, and the kingdom only has itself to blame.

Last week’s denialthat the IPO of the world’s largest oil company had effectively been cancelled was the latest in a long list of rebuttals officials have been forced to roll out.

Repeated delays in the listing process — initially planned to go ahead this year — and confusion over how to achieve a desired $2 trillion valuation have sent out all the wrong signals to prospective international investors about Saudi Arabia’s reliability.

Crown Prince Mohammed bin Salman cannot entirely escape carrying some of the responsibility for the repeated delays to the proposed sell-off, which he announced with a great fanfare two years ago, shortly before he replaced his cousin as heir to the Saudi throne.

In principle, listing a minority stake in Aramco on a foreign exchange to raise $100 billion to be re-invested by the kingdom’s sovereign wealth fund made perfect sense, but this strategy has increasingly been criticized.

What once seemed to some an encouraging sign of new visionary leadership from the 30-something princeling to reform the oil-rich kingdom’s economy now looks more like impulsive rashness to grab headlines rather than a calculated business decision.

The Aramco IPO plan catapulted the then little-known Saudi royal onto the international public stage and captured the attentions of the world’s investment community. But uncertainty surrounding the listing now brings his credibility into question, along with that of Saudi Arabia itself, some experts warn.

“He will come out of this not unscathed but still legitimized within the kingdom,” said Christopher Davidson, reader in Middle East politics at Durham University and author of several books on the region. “The IPO was the linchpin of his economic vision.”

POLITICIZING THE PROCESS

The crown prince may have caused much of the uncertainty surrounding the IPO.

By stating a desired valuation of $2 trillion without first completing a detailed analysis of its viability now looks like a major error on his part. Also, the initial short timeframe for taking Aramco to market without conducting any of the required financial accounting behind the scenes now looks a misstep.

Both issues could have easily been avoided if the IPO had been presented entirely separately from the much bigger plan known as “Vision 2030” to wean the Saudi economy off its dependency on oil.

Failure to quickly pick an international exchange to host the IPO also needlessly politicized the process and opened up Aramco to increasing legal scrutiny over its ability to meet listing rules. US President Donald Trump publically urged Riyadh in late 2017 to pick New York ahead of London and Hong Kong.

Trump has since shifted his focus onto pressuring the kingdom to pump more oil to ease higher prices.

“The ongoing ambiguity and ‘mystery’ surrounding the IPO of Saudi Aramco have somehow dampened enthusiasm about what was initially perceived as a major event to be watched closely,” said Carole Nakhle, founder and chief executive officer of Crystol Energy.

“Today, the predominant perception is that the IPO will not happen, at least not in the foreseeable future.”

WILLINGNESS TO CHANGE COURSE

Of course, an alternative view is that delaying the IPO demonstrates good governance on the part of Saudi Arabia and a flexible leadership willing to listen to advice.

Denying reports the listing had been entirely scrapped, Al-Falih said last week the kingdom was simply waiting for the best market conditions to obtain the best price before it pulls the trigger. This makes sense given the strategic importance of Aramco, which is responsible for pumping almost 10.5 million barrels per day of crude.

“Delay to the IPO demonstrates not that there is a lack of commitment to reform but rather the ability to change course if circumstances change,” said Hasnain Malik, Dubai-based global head of equity research and strategy at Exotix Capital. “The higher oil price certainly qualifies as that, as the country’s reform program transitions from an aspirational speech to detailed implementation. Saudi Aramco is already a well-run company, so privatization was not a step toward efficiency gains.”

Aramco is increasingly getting on with its other business. The company now plans to buy a major strategic stake in state-owned petrochemical giant Saudi Basic Industries Corp., which could see it borrow heavily and syphon billions from its coffers into the country’s sovereign wealth fund. But the benefits of this deal are unclear and it certainly doesn’t paper over the cracks of the company’s stalled IPO.