{"id":1197,"date":"2018-07-15T18:09:15","date_gmt":"2018-07-15T18:09:15","guid":{"rendered":"http:\/\/euromenaenergy.com\/?p=1197"},"modified":"2018-07-15T18:09:15","modified_gmt":"2018-07-15T18:09:15","slug":"why-saudis-aramco-ipo-wont-happen-its-a-bad-investment","status":"publish","type":"post","link":"https:\/\/emimer.com\/?p=1197","title":{"rendered":"Why Saudi\u2019s Aramco IPO won\u2019t happen: It\u2019s a bad investment"},"content":{"rendered":"
\n

Bloomberg\/London<\/p>\n<\/div>\n

It was the moment Saudi Arabia\u2019s reforming young prince told the world he meant business. In early 2016, Mohammed bin Salman said he planned to sell shares in the kingdom\u2019s crown jewel: Saudi Aramco, the giant energy company that produces 10% of the world\u2019s oil and finances the Saudi state. The initial public offering \u2014 planned for 2018 \u2014 would be the deal to end all deals, raising more than $100bn for a new sovereign wealth fund, creating the world\u2019s most valuable listed company, and funnelling hundreds of millions of dollars in fees to Wall Street\u2019s elite banks. MBS, as the 32-year-old crown prince is known, said the company would be worth at least $2tn \u2014 more than double the current market valuation of Apple Inc \u2014 and perhaps as much as $2.5tn.
\nTwo years later, things look very different. A combination of hubris on the valuation, an overambitious timetable, and indifference \u2014 if not derision \u2014 from global investors doubtful that an IPO would benefit them, has forced Riyadh to delay the sale until at least 2019. And many observers \u2014 including members of the company\u2019s senior leadership \u2014 doubt whether it will happen at all. Aramco has become the zombie IPO.
\nAdd Donald Trump to the mix. While the US president has said he\u2019s excited about the idea of Aramco selling shares in New York, keeping the price of gasoline under control seems far more important. With Republicans facing tough midterm elections in November, he\u2019s pressured Saudi Arabia to pump more oil, and cheaper crude means a lower valuation for the company.
\nFor MBS, the IPO has faded in importance as he grapples with an agenda crowded with social and economic reforms at home and an assertive foreign policy. He may also not need the money as much as he did at the outset of his mission to change the country. Saudi authorities this year reached agreements to recover more than $100bn (the same amount the Aramco IPO was supposed to provide) from a controversial corruption investigation that saw many of the kingdom\u2019s most prominent subjects imprisoned at the five-star Riyadh Ritz-Carlton.
\nAlready, senior officials have started to soften expectations for the IPO. \u201cThe timing isn\u2019t critical for the government of Saudi Arabia,\u201d Khalid al-Falih, the energy minister, told an industry conference in June. While \u201cit would be nice if we can do it in 2019,\u201d the minister said, \u201cthere is a lot more at stake than just ticking a box and say, \u2018We got this out of the way.\u2019 \u201d Aramco didn\u2019t respond to requests for comment for this story.
\nDelaying the IPO beyond 2019 \u2014 or even shelving it \u2014 would be a setback to MBS\u2019s plan to transform Saudi Arabia and leave the kingdom open to suggestions that it\u2019s not truly serious about overhauling its economy. But it would also be a victory for environmentalist in Europe and America who say international investors should begin turning their back on oil and prepare for the switch to an electric transport system.
\nAramco is a company like no other. Its profits easily outstrip those of every other company on Earth, from Apple to Exxon Mobil Corp. The billions of petro dollars it pumps out every month underpin the kingdom\u2019s decades-old social contract: generous state handouts in return for the political loyalty that maintains stability in the country. Those dollars also finance the lavish lifestyles of hundreds of princes. For decades, diplomats have joked that Saudi Arabia is the only family business with a seat at the UN. As the world\u2019s largest petroleum producer, Aramco is key for global economic growth and international security. At one point during the Arab oil embargo in the 1970s, the US even considered the possibility of seizing the company\u2019s oil fields by force, according to declassified British intelligence papers.
\nThe company finds itself caught in geopolitical crosswinds once again. Riyadh needs higher oil prices to fund its national budget and get the Aramco valuation closer to the $2tn target MBS wants. But that\u2019s antagonising Trump \u2014 Saudi Arabia\u2019s most important ally \u2014 and other customers, notably China and India, the world\u2019s second- and third-largest oil consumers.
\nOn April 20 the US president took to Twitter to lambaste the Saudis\u2019 push for higher oil prices. \u201cLooks like Opec is at it again,\u201d Trump tweeted. \u201cOil prices are artificially Very High!\u201d Since then, Trump has issued more tweets about oil, Saudi Arabia, and the Organisation of Petroleum Exporting Countries. In one, he said he\u2019d persuaded Saudi King Salman to raise production in order to lower prices.
\nThe problem isn\u2019t just Washington, Beijing, and New Delhi. Moscow, which for the last two years has supported the Saudis in boosting oil prices by curbing oil output, has called time on the production cuts. Vladimir Putin said at the end of May that Moscow would be happier with $60 a barrel than the $80-plus the Saudis are aiming for.
\nThe Saudis duly delivered. In late June they announced that Opec and its allies will increase production by as much as 1mn barrels a day \u2014 equal to about 1% of global demand. At the St Petersburg International Economic Forum, al-Falih pledged to do \u201cwhatever is necessary to keep the market in balance,\u201d echoing the famous pledge made by Mario Draghi, the head of the European Central Bank, to save the single currency at the height of the euro crisis in 2012.
\nAll of a sudden, Riyadh couldn\u2019t push for the higher oil prices it needs to achieve the Aramco valuation it wants. \u201cThis is a pivotal change from recent months,\u201d says Olivier Jakob, managing director of Swiss-based consultant PetroMatrix GmbH. \u201cWe are back to the days when Saudi Arabia had to respond to US requests for a cap on gasoline prices.\u201d
\nThe IPO process started in January 2016, when MBS told the Economist that Riyadh was considering selling shares in Aramco, which the kingdom nationalised in 1976 when it took over the stake of its American owners. \u201cPersonally, I\u2019m enthusiastic about this step,\u201d he said. \u201cI believe it is in the interest of the Saudi market, and it is in the interest of Aramco.\u201d Nowhere was the surprise greater than at Aramco itself, where senior officials weren\u2019t expecting the announcement, according to people with direct knowledge of the events who asked not to be named to avoid damaging their relationships with the kingdom.
\nFor months, Saudi officials said again and again the IPO was \u201con track, on time\u201d for the second half of 2018, with a sale on both the Tawadul, the local stock market, and a foreign stock exchange, most likely New York or London. Late last year, Saudi officials poured cold water on the foreign exchange, sketching a plan for a far less ambitious IPO just in Riyadh.
\nThen, earlier this year, when it became obvious the process was delayed, officials shifted their narrative, saying the sale would happen \u201cmost likely\u201d in 2019. Now the guidance has weakened again. The Saudis are adamant the IPO has simply been delayed rather than cancelled. Yet signs the deal is deep in the long grass abound.
\nInside Aramco, key executives working on the project have left or moved. Abdullah bin Ibrahim al-Saadan, a 30-year veteran who as chief financial officer was the most senior executive working on the IPO\u2019s day-to-day preparations, left in June to become the chairman of the Royal Commission for Jubail and Yanbu. Aramco has yet to announce a permanent replacement for al-Saadan; another executive is working in an acting capacity as CFO. Motassim al-Maashouq, another key executive on the IPO project, has been asked to take on new responsibilities.
\nWall Street is also feeling the delay. In January, Aramco called global banks to pitch for IPO roles, joining the lenders that have so far done most of the preparatory work \u2014 JPMorgan Chase, Morgan Stanley, HSBC Bank, Moelis, and Evercore. Nearly six months later, banks hoping to win new mandates, including Goldman Sachs Group and Citigroup, are still waiting for a call from the company. \u201cWithout explanation, they\u2019ve gone quiet,\u201d says a banker who\u2019d hoped to participate.
\nThe main problem is valuation. There\u2019s a wide gulf between MBS\u2019s ambitious $2tn target \u2014 which the prince says is non-negotiable \u2014 and the $1tn to $1.5tn that most analysts and investors see as more realistic, according to two persons directly involved in the internal discussions. The gap between what the market thinks Aramco is worth and what the Saudi royals want is so wide that, even at the narrowest end it would overshadow the combined value of America\u2019s two largest oil companies \u2014 Exxon Mobil and Chevron Corp In May, al-Falih said the company was ready for an IPO but investors weren\u2019t. \u201cWe are ready,\u201d he said. \u201cWe\u2019re simply waiting for a market readiness for the IPO.\u201d
\nThe valuation problem has become more visible after Bloomberg News disclosed the first accountings of Aramco since its nationalisation almost 40 years ago. The leaked documents included the company\u2019s tax regime, until now secret. The accounts showed that Aramco was the world\u2019s most profitable company, churning out $33.8bn in net income the first six months of 2017 \u2014 before taxes. Much of the cash the highly taxed company generates is channelled as royalties into the Saudi government budget. How can investors be sure the government won\u2019t raise taxes on the company to pay for more social or military spending, especially when the government already needs a price of about $80 a barrel to break even?
\nEven higher oil prices won\u2019t help the valuation as much as they might, because Riyadh has overhauled the royalty system to mean the government gets more cash as crude rises. A marginal rate of 20% of revenue is due for oil prices up to $70 a barrel, 40% between $70 and $100, and 50% above $100. The government also widened the volume of crude covered by the royalties. Previously, the royalty was applied to exports. Now, it\u2019s on production. The increase is almost a third to a fourth of the previous volume covered.
\nFor potential investors, the Aramco conundrum goes beyond the valuation. They may also be spooked by the politics involved in the way oil is priced. Aramco\u2019s production has always been determined by the state; it must fit into what\u2019s decided by Opec, where Saudi Arabia is the leading member. That creates potential conflicts between what works for the government in Riyadh and what maximises investor returns.
\nFund managers also worry that the value of oil fields could dwindle as governments ramp up their efforts to reduce fossil fuel consumption to fight climate change. The spread of electric vehicles, for example, will reduce demand growth over the next two decades. In May a group of investors including Standard Life Aberdeen, Fidelity Investments, and Legal & General Group warned oil companies about the risk of global warming. \u201cAs long-term investors, representing more than $10.4tn in assets,\u201d they said in an open letter, they believed \u201cthe case for action on climate change is clear.\u201d
\nThe government has options should it decide to get the IPO done quickly. It could slash tax rates on the company to juice its valuation and look to take the money back in dividends. A face-saving private placement \u2014 selling a stake in Aramco to a Chinese enterprise without the public exposure of how much money was actually raised in the transaction \u2014 is also possible. Officials have openly discussed a sale \u2014 in effect, a distribution of a few shares each to Saudi citizens \u2014 that would take place only in the country\u2019s stock market. \u201cI\u2019m sure there will be a form of sale of Saudi Aramco in a market, but it\u2019s unclear which market and exactly how,\u201d says John Browne, who ran British oil giant BP Plc for more than a decade.
\n\u201cI\u2019m reluctant to use the word IPO.\u201d
\nThe once-in-a-generation deal MBS promised in 2016 seems a long way off.<\/p>\n","protected":false},"excerpt":{"rendered":"

Bloomberg\/London It was the moment Saudi Arabia\u2019s reforming young prince told the world he meant business. In early 2016, Mohammed bin Salman said he planned to sell shares in the kingdom\u2019s crown…<\/p>\n","protected":false},"author":1,"featured_media":1198,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[46,57,90,96,107,137,139,174,201,202,209,232,233,244,246,249,256,277,279,288],"class_list":["post-1197","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","tag-aramco","tag-baroudi","tag-democracy","tag-doha","tag-embargo","tag-gas","tag-gazprom","tag-lebanon","tag-offshore","tag-oil","tag-opec","tag-putin","tag-qatar","tag-rosneft","tag-roudi","tag-russia","tag-saudi","tag-total","tag-trump","tag-usa"],"_links":{"self":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/1197","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1197"}],"version-history":[{"count":0,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/1197\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/media\/1198"}],"wp:attachment":[{"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1197"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1197"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1197"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}