Aramco IPO hangs on same old question: Is it worth US$2 trillion?

Investors leery of potential risk, state control

The trouble with Saudi Aramco’s off-again, on-again initial public offering has always been the valuation. Ever since Crown Prince Mohammed bin Salman insisted the world’s largest oil producer was worth US$2 trillion in 2016, he’s been determined to prove the skeptics wrong.

His optimism met the reality of the global capital markets on Thursday, when the latest plan to float the stateowned company was delayed by at least a few weeks.

At a meeting to give a green light for a deal, bankers made clear that international investors had little appetite to buy at a US$2 trillion valuation, according to people familiar with the matter. To draw widespread interest Aramco’s value would need to be closer to $1.5 trillion, one of the people said, asking not to named discussing private conversations.

What happens now will depend on how keen the crown prince is to attract foreign money to the Aramco offering and whether he’s finally willing to compromise on the valuation to get it.

The outlook for what could be the largest IPO ever is likely to dominate Future Investment Initiative at the end of the month, Saudi Arabia’s annual showcase for the crown prince’s economic agenda that’s been dubbed Davos in the Desert. Many of the Wall Street banks hired to work on the IPO will send senior executives to Riyadh, where they’ll rub shoulders with the crown prince and the rest of the Saudi leadership as well as some of the world’s largest investors.

Aramco said in a statement the timing of the IPO will depend on market conditions and that it continues to engage with shareholders on the listing.

One leading international money manager, who recently met Aramco executives in Saudi Arabia to discuss the IPO, said the main problem is officials in Riyadh believe Aramco should trade at a premium to other international oil companies. Many investors disagree and argue the risks of investing in Saudi Arabia merit a discount — or at very best parity — to the likes of Exxon Mobil Corp. and Royal Dutch Shell PLC.

There’s little question Aramco merits a unique valuation. Drilling in some of the world’s largest fields in the Saudi desert, the company pumps more than twice the volume Exxon does and has some of the lowest production costs in the world.

But there are also concerns for potential Aramco investors that don’t apply to Exxon, Shell and their ilk. Last month’s attack on the company’s largest crude processing plant at Abqaiq showed the political risk associated with the kingdom. There are also governance issues: the IPO would offer only a sliver of Aramco’s equity, leaving strategy in the hands of the Saudi state. As OPEC’s most important member, Saudi oil production would remain a political decision.

If the crown prince doesn’t want to compromise on valuation, he has another option. He can rely on Saudi money by securing big pledges from rich Saudi families — some of whom had members held in the Ritz-Carlton hotel during 2017’s corruption clampdown — pitching a retail offering to small investors and leaning on banks to lend to potential buyers.

Bloomberg