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Page added on September 15, 2017

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Why Aramco Delayed Its IPO

Business

The long-awaited Saudi Aramco IPO, scheduled for mid-2018, could be delayed to 2019.

International news reports have stated that the Saudi government is currently putting together contingency plans for a possible delay to the biggest IPO ever. The listing of 5 percent of Saudi Arabia’s crown jewel, the world’s largest oil company Saudi Aramco, could bring in around $300-$400 billion, based on a valuation of Aramco at between $1.5-2 trillion.

The cash generated by the IPO has already been earmarked for the coffers of the Saudi Public Investment Fund (PIF), to be used as financial support for Saudi Vision 2030, the economic diversification program proposed and pushed for by Crown Prince Mohammed Bin Salman (MBS).

Doubts about the valuation have been strong, but a success story for this particular once-in-a-lifetime IPO is all but guaranteed. International interest is growing and media reports are stumbling over each other to assess, criticize or support the IPO strategy. Presently, international advisors and banks have already been appointed, but no decision (officially) has yet been made on where Aramco will be listed. New York, London, Frankfurt and Hong Kong are leading the race, but no white smoke has plumed from the chimney of the Saudi Royal Palace.

Some analysts view the possible IPO delay as a sign of the problems Aramco and the Saudi government currently face. A lack of transparency, issues with its oil and gas reserves, and the role of the Saudi government as the main stakeholder have all been suggested as the reason for this possible delay. Most of these suggestions, however, are based purely on issues surrounding the IPO itself. The true reason for this delay, however, likely hides among the intricate societal and economic problems in the Kingdom.

One obvious reason for a delay is the still-fledgling global oil price. A higher price setting—above $60 per barrel—would surely drive up the overall interest in the IPO. As long as OPEC and non-OPEC members, such as Russia, are still struggling to get a grip on the oil market, the potential for disaster looms. Needless to say, an oil price slump would have a detrimental effect on the expected revenues of the IPO.

The analysts, it seems, feel no need to look any further than this simple oil price explanation, but several other key factors should be addressed…

The impact of an influx of $1-2 trillion into the current Saudi economy is bound to have a significant impact. The implementation of Saudi Vision 2030 is broad and ambitiously planned. A full diversification of the economy is needed to guarantee work and salaries for future young Saudis, with the end of government subsidies or handouts.

A multitrillion investment scheme in a rather small local economy will likely result in total disorder, inflation and possibly ineffective investment schemes. The attractiveness of investing the total amount could lead to staggering inflation, higher costs and superfluous projects being realized.

A delay of such an influx of cash seems to be more and more attractive, giving the Saudi government and local industries more time to adjust and put in place the right steps for a sustainable and commercially attractive economic future.

The crown prince’s future, and that of his supporters, also depends on the whole endeavor. A fully-fledged economic revival and restructuring could threaten power brokers and religious entities in the Kingdom. MBS has appeared to misunderstand the significance of these issues, but is currently stepping up to remove some of the apparent hurdles. His current policy to remove hardline fundamentalist religious leaders (partly under the name of Muslim Brotherhood allegiances) is a step he needs to take to control the opposition and solidify his own position.

At the same time, MBS’ future will also be decided soon, as rumors are growing of an upcoming abdication of the throne by King Salman. For MBS, as the new heir, stability is needed to prepare for this unprecedented move. Internal security is put in place, which could be impacted by the Aramco IPO not going according to plan. Opposition groups will take the opportunity to protest against his new status under the umbrella of an unsuccessful sale of the key company, while also dealing with Iranian tensions. A delay of the IPO could be a sign that for MBS, stability and the future of House of Salman has taken precedent over the Aramco IPO.

Taking this all into account, delaying the Aramco IPO until 2019 could be an astute move. The enormous task that the Saudi government has established under the umbrella of Saudi Vision 2030 will be incredibly difficult to achieve. Last week’s statements about an extension of the National Transformation Program (NT), the basis of Vision 2030, was the first sign of this.

Change is always difficult, but Saudi Arabia faces a daunting task. An implementation slowdown is needed in order to reduce the risk to the Saudi government. Aramco’s attractiveness is undebatable, and will be there, whatever happens. The future of the Kingdom of Oil however, is at risk if this transition is not carefully controlled.

Without MBS as captain of the Vision 2030, there will be no Vision 2030.

By Cyril Widdershoven for Oilprice.com



11 Comments on "Why Aramco Delayed Its IPO"

  1. Sissyfuss on Fri, 15th Sep 2017 2:04 pm 

    I wouldn’t touch this IPO with a ten foot beheader blade.The House of Saud is so corrupt they admire Trump as a shrewd business man.

  2. MASTERMIND on Fri, 15th Sep 2017 2:26 pm 

    All the Saudi death cult cares about is ‘death to America”

  3. MASTERMIND on Fri, 15th Sep 2017 2:28 pm 

    I can’t wait till the vision 2030 plan is done. So I can take my family to visit a Saudi entertainment hub!

  4. Apneaman on Fri, 15th Sep 2017 2:32 pm 

    MASTERMIND, same as the denier death cult. Death & destruction are trumped by their precious beliefs.

  5. Mick on Fri, 15th Sep 2017 5:00 pm 

    By 2030 S.A will have nearly 40 million people consuming 8.5 m barrels daily. Not sure where they going to get the money to pay for there lavish lifestyles they got plenty of sand mabey that might do.

  6. bobinget on Fri, 15th Sep 2017 5:31 pm 

    The first to reprice crude in Chinese currency, the yuan, Venezuela just published new yuan per barrel. Iraq, Iran possibly KSA may soon follow.

    Don’t go into shock if part or all of telegraphed IPO
    taks place in China.

    My personal investments, telegraphed here over the last few week are now all in place.

    Starting with missing Venezuelan heavy crude.
    My picks were all Canadian usual suspects;
    Suncor, Canadian Natural Resources, Encana,
    all of above similar to Venezuelan sour.

    IMO, Canada will never leave USD exchange due to
    extensive trade and defense agreements.

    In no time at all China & India will soak up every available exportable barrel on offer.
    We should anticipate greater reliance on domestic natural gas replacing ever more liquid fuels.

    Oil shales are slowly reaching break-even pricing.
    IOW’s a person can work 10 hours a day, finding,
    drilling, pumping, piping finite crude, go home not losing or making money.
    Non profit shale may be great for our economy but clearly unsustainable.

  7. bobinget on Fri, 15th Sep 2017 5:35 pm 

    MicK, Saudi are investing billions in Nuclear and Solar projects to generate enough power to keep alive in record breaking heat.

  8. rockman on Fri, 15th Sep 2017 5:36 pm 

    Sissy – No fraud is required. None of these reports ever discuss how a new shareholder will make money owning Aramco stock. OK, you buy $10,000 of the stock…where is your profit going to come from? Dividends? I’ve seen no promise of any dividends planned. There are any number of US pubcos that pay no dividends. And if they eventually promise a 4% what does that mean: dividends are typically based on a % of NET revenue. Aramco had been paying the Saudi govt’s an 80% income tax if I recall correctly. But have promised to reduce it to 50%. Great. But I haven’t seen it confirmed but I’m pretty sure Aramvo has been paying 100% of operations costs as well as capex for all projects. So between paying the govt 50% in tax and utilizes the rest of its income for operations and all future projects then NET INVOME = $0. Which means a 4% dividend on $10,000 of Aramco stock = $0.

    Don’t scoff: I’ve seen more then one US pubco play that $ juggling game. So now the only way to make money on your $10,000 stock purchase is to hope there’s a future buyer out there who will pay more then $10,000 for your stock. And let’s remember many $BILLIONS have been lost in the US stock market by folks who sold their dyovk jolfings got less then they bought them for.

    Of course the Saudis could put a guaranteed dividend on the table when the IPO is offered. Of course once the IPO is sold the board of directors will set any future dividend yield. A board that will be elected by the shareholders. Shares who will be owned 95% by the Saudi govt.

    All of this is understood in more detail by Wall Street and the other markets then I know. Also understand how IPO’s are typically done: the stock is not sold initially at the “retail” level to individuals. They are bought by underwriters (at a previously negotiated price. ) Usually one brokerage house but they typically they lay off some to other houses. They in turn immediately offer to resell at the retail level. Brokerage houses they just can’t wait to tell individual investors what a great opportunity that stock represents.

    So a great many “what ifs” we can’t begin to qualify today. We can just sit back and watch how the Saudis and potential underwriters wrestle with this greased pig of an IPO.

  9. Mick on Fri, 15th Sep 2017 6:00 pm 

    Mabey so bob but there GDP will be extremely low by then so how they going to pay to keep the lights on

  10. joe on Sat, 16th Sep 2017 11:09 am 

    So let me get this. We buy into an oil company whoes nations promise is to move away from oil?

  11. Outcast_Searcher on Sun, 17th Sep 2017 10:51 am 

    “One obvious reason for a delay is the still-fledgling global oil price.”

    From context, I assume the author means still “flagging” oil price. Fledgling makes no sense in this context. (Fledgling means immature, not low).

    When authors can’t be bothered to proof read or use the correct word (a more and more common occurrence in internet “reporting”, including MSM sources), it makes me wonder how much we should trust the rest of what they write/speculate. I saw zero sources or links, just the author’s opinions.

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