What's behind the stalled Saudi Aramco IPO?

What's behind the stalled Saudi Aramco IPO?
Comment: The IPO would have meant increased international scrutiny, and with other funding sources emerging, Saudi Arabia can afford to sidestep it a while longer, writes Courtney Freer.
5 min read
27 Aug, 2018
Reuters reports that financial advisors working on the proposed IPO listing have been disbanded [Getty]
On 22 August, Reuters reported that Saudi Arabia had scrapped its plans to publicly list five percent worth of shares of Saudi Aramco. 

The IPO of Aramco has, since Crown Prince Mohammed bin Salman's announcement of it in January 2016, been a central piece of the kingdom's Vision 2030.

The announcement has also led to competition among Hong Kong, London, and New York to attract the offering, which, some speculated could be the largest ever. 

Stories had emerged in March that the offering could potentially be made only on the domestic market, potentially in light of the degree of transparency required for an international offering, and possibly as a face-saving measure if valuation on international markets were not as high as expected. Yet the latest report from Reuters, citing "insiders," suggested that the IPO would be scrapped altogether.

One explanation for canceling or delaying the IPO is that the capital injection it was expected to generate is less urgent due to a partial recovery of oil prices that now stand above $70 per barrel.

current price is, notably, the result of an OPEC-wide agreement to limit output as well as the result of considerable production problems in Iran, Libya and Venezuela; even taking into account these issues, however, the per barrel price remains $40 lower than it was less than five years ago, meaning that a steady oil price cannot be taken for granted, nor can it fix issues with the Saudi economy.

Further, the Aramco IPO, though important symbolically, would not help create jobs that are urgently needed in a country facing 12.5 percent unemployment. Because Vision 2030 remains a major policy point for the Crown Prince, one on which his reputation as a leader is largely already fixed, the IPO would be replaced by other measures, such as the issuing of sovereign bonds as well as a greater focus on privatisation on the smaller scale.

The capital injection it was expected to generate is less urgent due to a partial recovery of oil prices

Another potential reason for the delay in the IPO is the realisation that making the offer on international markets would undoubtedly lead to further international scrutiny - something that Saudi Arabia is particularly keen to avoid following the very public diplomatic rift with Canada that emerged earlier in August. 

Further, if the IPO did not generate the type of money or interest anticipated, Saudi Arabia would be embarrassed on a global stage. A $2 trillion valuation has been projected, but if this fails, potentially due to investor hesitance to deal with Saudi Arabia, it would be a major blow to Mohammed bin Salman's ambitious diversification programme. Indeed, The Guardian cited that there were widespread doubts in financial circles about the degree to which the valuation matched fundamentals.

Notably, there was also some domestic discontent about the initial announcement of the Aramco IPO, since it is one of the country's biggest assets.

Selling it off, then, understandably provoked fears among many Saudis, reflected on Twitter using the hashtag "golden chicken," that their country's assets would effectively be sold to foreigners. The so-called April 21 Movement emerged, with aims of halting the IPO of Aramco, creating a constitutional monarchy, and restoring full powers to the religious police.

The demands of the so-called movement, which was more or less a loosely coordinated social media campaign, clearly reached government decision-makers since the government ended up reinstating allowances, benefits and bonuses that had previously been rolled back.

The officially cited explanation for the potential scrapping, or at least delay, of the IPO of Saudi Aramco is that Aramco is now focussed instead on 
acquiring a portion of petrochemical giant Saudi Basic Industries (SABIC), potentially worth as much as $70 billion.

Indeed, after the release of the Reuters report on the scrapping of the IPO, Saudi Energy Minister and Chairman of Aramco issued a statement that the government "remains committed to the IPO of Saudi Aramco at a time of its choosing when conditions are optimum."

He went on to add that the timing would depend on market conditions and a downstream acquisition, presumably the SABIC deal, which Aramco is pursuing in the coming months. Interestingly, al-Falih had previously stated, with regard to the IPO, that "The timing isn't critical for the government of Saudi Arabia" and that completing it in 2019 would be useful but not essential.

Read more: Is Saudi Arabia selling off Aramco for peanuts? 

Meanwhile, the Saudi sovereign wealth fund PIF is meant to borrow from international banks up to $12 billion as a means of financing the major economic reforms.

The loans signal a shift in strategy away from the IPO of Aramco and towards financing through loans from firms like J.P. Morgan, Morgan Stanley and Goldman Sachs; 16 banks in total are said to be under consideration, with the lead banks to be selected shortly. Proceeds from the sale were meant to accrue to the PIF to maintain its investments in companies like Tesla and Uber.

Valuation concerns became clearer after Bloomberg released in April 2018 the first accountings of Aramco publicly, through a leak, since it was nationalised four decades earlier.

Aramco is the world's most profitable energy company. With a net income of $33.8 billion in the first half of 2017 before taxes, a considerable amount of the income goes to the government budget, which could change. Indeed, 
Riyadh  changed the royalty scheme so that the government gets more cash as crude rises. So oil prices are very much linked to state foreign policy, which likely worries potential international investors.

Other issues like the growing market for electric vehicles and greater pressure to mitigate climate change remain potentially problematic for the Saudi oil market.

What is certain when little else is, however, is that the decision to, at least delay the IPO indefinitely, will likely 
undermine investor confidence, particularly since there is very little information about the exact reasons for and potential length of the delay.

Dr Courtney Freer is a senior advisor at Gulf State Analytics and a research officer for the Kuwait Programme at the London School of Economics and Political Science.

Follow her on Twitter: @CourtneyFreer

Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.