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Analysis: Uncertain market outlook keeps Saudi Arabia waiting on Aramco IPO

Highlights

Saudi Arabia examining alternatives to funding Vision 2030

Falih says Saudi Arabia still committed to IPO

Need to appease allies conflicted by desire for higher prices

London — Saudi Arabia says it is still searching for the best market conditions to float shares of its state-owned oil giant Aramco. Finding the right time looks tricky.

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A 30% rise in the price of oil since OPEC and its allies began production cuts in January 2017 is apparently still insufficient.

But with US sanctions on Iran set to take effect in November and many forecasters predicting a tight market ahead, Saudi Arabia may yet find its optimal price for what would likely be the world's largest initial public offering.

For now, Saudi Arabia is content to stay patient.

"Saudi Arabia doesn't need the IPO as much as it needed it few years ago," said Sara Vakhshouri, who heads the consultancy SVB International and closely follows Saudi oil policy. "Oil prices are higher, and due to Iran sanctions, [Saudi] market share and ultimately their income will increase further."

In a statement overnight Wednesday, Saudi energy minister Khalid al-Falih firmly refuted a Reuters report that the country had shelved its long-mooted plans to list Aramco shares.

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"The government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum," Falih said. "This timing will depend on multiple factors, including favorable market conditions, and a downstream acquisition which the company will pursue in the next few months, as directed by its board of directors."

Saudi Aramco recently announced its intent to acquire a strategic stake in Saudi petrochemicals firm Sabic from the state Public Investment Fund, with Aramco CEO Amin Nasser saying that this could delay the share floatation to 2020 or later.

Aramco also said in its annual review last week that it was launching a chemicals subsidiary.

INVESTMENT CREDIBILITY

The IPO of Aramco is the centerpiece of Saudi Arabia's ambitious economic reforms, known as Vision 2030, and the brainchild of Crown Prince Mohammed bin Salman.

The plan, announced to much fanfare in January 2016, is to use the proceeds from listing up to 5% of the company's shares to fund programs that would diversify the economy and reduce Saudi Arabia's reliance on oil revenues.

The crown prince has said the IPO could value the state energy giant at $2 trillion, though many analysts have doubted the figure.

However, the listing has been repeatedly pushed back as Saudi Arabia sought a higher oil price environment and officials clashed over how to proceed, including on disclosure requirements and the venue for the listing.

With the IPO now apparently indefinitely delayed just as the kingdom is starting to implement many of the Vision 2030 initiatives, the government is having to shift to alternative strategies to fund its reforms, such as bond offerings and the Sabic transaction that could pump $70 billion into the PIF's coffers.

"I never saw an Aramco IPO as vital to the success of Vision 2030, but as a political setback it could be a significant hurdle for the Saudi leadership," said Ellen Wald, an energy consultant and senior fellow at the Atlantic Council, who has written a book on the history of Aramco. "After all, it was Mohammad bin Salman's first big announcement to the media."

COMPETING PRIORITIES

In the meantime, Saudi Arabia finds its oil production policy at a crossroads, with the need to appease allies countered by its desire for higher prices to balance its books.

Urged by US President Donald Trump to cool what was then a heating market, Saudi Arabia pledged June 23 along with the rest of OPEC, Russia and nine non-OPEC partners to boost crude output by a collective 1 million b/d, in anticipation of supply shortages caused by US sanctions on Iran and Venezuela's spiraling economic crisis.

After an initial surge in output in June, Saudi Arabia said it was forced to cut production by some 200,000 b/d in July due to lackluster demand, in what analysts said was likely an attempt to prevent prices from falling too far too quickly.

The pressure from Trump may ease after the November 6 midterm elections in the US, but that is just a day after the sanctions on Iran go into effect, with many experts expecting up to 1 million b/d or more of Iranian crude exports to be shut in.

The six-country Joint Ministerial Monitoring Committee overseeing the OPEC/non-OPEC supply accord, chaired by Falih, will meet September 23 in Algiers to discuss output plans and assess market conditions.

"In a more uncertain environment, Saudi Arabia is in need of flexibility in its output policy, but this has the effect of diluting its signals at times, to the dismay of many in the market," said Bassam Fattouh and Andreas Economou of the Oxford Institute for Energy Studies in a recent note.

-- Herman Wang, herman.wang@spglobal.com

-- Edited by Derek Sands, newsdesk@spglobal.com