Stalled Aramco IPO is a global embarrassment for the Saudis
Saudi Aramco’s proposed initial public offering is in danger of turning into an embarrassment for all concerned and the kingdom only has itself to blame. This week’s denial that the IPO of the world’s largest oil company had effectively been cancelled was the latest in a long list of rebuttals that officials have been forced to roll out.
Repeated delays in the listing process – initially planned to go ahead this year – and confusion over how to achieve a desired $2 trillion valuation have sent out all the wrong signals to prospective international investors about Saudi Arabia’s reliability.
Crown Prince Mohammed bin Salman cannot entirely escape carrying some of the responsibility for the repeated delays to the proposed sell-off, which he announced with a great fanfare two years ago, shortly before he replaced his cousin as heir to the Saudi throne.
In principle, listing a minority stake in Aramco on a foreign exchange to raise $100bn (£77.8bn) to be reinvested by the kingdom’s sovereign wealth fund made perfect sense, but this strategy has latterly been criticised.
What once seemed to some an encouraging sign of new visionary leadership from the thirtysomething princeling to reform the oil-rich kingdom’s economy now looks more like impulsive rashness to grab headlines rather than a calculated business decision.
The Aramco IPO plan catapulted the then little-known Saudi royal on to the international public stage and captured the attention of the world’s investment community.
But uncertainty surrounding the listing now brings his credibility into question, along with that of Saudi Arabia itself, some experts warn.
“He will come out of this not unscathed but still legitimised within the kingdom,” said Christopher Davidson, reader in Middle East politics at Durham University and author of several books on the region. “The IPO was the linchpin of his economic vision.”
The crown prince may have caused much of the uncertainty surrounding the IPO. By stating a desired valuation of $2 trillion without first completing a detailed analysis of its viability now looks like a major error on his part. Also, the initial short time frame for taking Aramco to market without conducting any of the required financial accounting behind the scenes now looks a misstep.
Both issues could have easily been avoided if the IPO had been presented entirely separately from the much bigger plan known as “Vision 2030” to wean the Saudi economy off its dependency on oil.
Failure to pick an international exchange to host the IPO quickly also needlessly politicised the process. In addition, it opened up Aramco to increasing legal scrutiny over its ability to meet listing rules.
President Donald Trump publicly urged Riyadh in late 2017 to pick New York ahead of London and Hong Kong. Trump has since shifted his focus on to pressuring the kingdom to pump more oil to ease higher prices.
“The ongoing ambiguity and ‘mystery’ surrounding the IPO of Saudi Aramco have somehow dampened enthusiasm about what was initially perceived as a major event to be watched closely,” said Carole Nakhle, the founder and chief executive officer of consultancy Crystol Energy. “Today, the predominant perception is that the IPO will not happen, at least not in the foreseeable future.”
If the crown prince was premature in announcing the IPO in the first place, his advisers and ministers are also partly responsible for the current mess. An army of western consultants parachuted into Aramco’s Dammam headquarters has been largely ineffective in delivering the desired results and preparing the company to float. Neither do Saudi Arabia’s oil minister and chairman of Aramco’s board Khalid Al-falih, or the company’s chief executive Amin Nasser, emerge entirely unmarked by the unfolding debacle.
Of course, an alternative view is that delaying the IPO demonstrates good governance on the part of Saudi Arabia and a flexible leadership willing to listen to advice.
Denying reports that the listing had been entirely scrapped, Al-falih said last week that the kingdom was simply waiting for the best market conditions to obtain the best price before it pulls the trigger.
This makes sense given the strategic importance of Aramco, which is responsible for pumping almost 10.5 million barrels per day of crude.
“Delay to the IPO demonstrates not that there is a lack of commitment to reform but rather the ability to change course if circumstances change,” said Hasnain Malik, Dubai-based global head of equity research and strategy at Exotix Capital.
“The higher oil price certainly qualifies as that, as the country’s reform programme transitions from an aspirational speech to detailed implementation. Saudi Aramco is already a well-run company so privatisation was not a step toward efficiency gains.”
There are also implications for Saudi Arabia’s oil policy. Higher prices would have been advantageous in achieving a higher valuation for the world’s single largest exporter of crude.
“It may not come as a surprise to many, but rumours that Saudi Arabia could cancel the Aramco IPO would have significant consequences for the crude market,” said Joshua Mahony, market analyst at IG.
Meanwhile, Aramco is increasingly getting on with its other business. The company now plans to buy a major strategic stake in state-owned petrochemical giant Sabic, which could see it borrow heavily and siphon billions from its coffers into the country’s sovereign wealth fund.
However, the benefits of this deal are unclear and it certainly doesn’t paper over the cracks of the company’s stalled IPO.
Andy Critchlow is head of energy news for EMEA at S&P Global Platts
‘Stating a desired valuation of $2trn without detailed analysis of its viability now looks like a major error’