The Saudis con­tem­plate an­other move against Iran: Tak­ing oil gi­ant Aramco pub­lic

Saudi Aramco could be­come the world’s big­gest pub­lic com­pany The oil gi­ant’s thirst may “dry up the cap­i­tal mar­kets”

Bloomberg Businessweek (Europe) - - CONTENTS - −Peter Wald­man, Javier Blas, and Matthew Philips

Saudi Ara­bia is con­sid­er­ing a new strate­gic ally in its cold war against Iran: The world’s 330 mil­lion own­ers of pub­licly traded stock.

Saudi Ara­bian Oil con­firmed on Jan. 8 that it’s study­ing op­tions for a pos­si­ble ini­tial pub­lic of­fer­ing. Why would Saudi Aramco, as the world’s big­gest oil com­pany is known, auc­tion off part of it­self amid the low­est oil prices in 12 years? Some Saudi watch­ers say the king­dom needs cash for eco­nomic di­ver­si­fi­ca­tion. Oth­ers be­lieve that Deputy Crown Prince Mo­hammed bin Sal­man, King Sal­man’s swash­buck­ling 30-year-old son, is hop­ing that out­side share­hold­ers and di­rec­tors can force the state-owned be­he­moth to be­come more ac­count­able and ef­fi­cient. He’s the one who first dis­closed the IPO idea, in an in­ter­view with the Econ­o­mist. “Emir Mo­hammed is try­ing to redo things very quickly, from the bot­tom up,” says Sadad al-Hus­seini, who ran Aramco’s ex­plo­ration and pro­duc­tion op­er­a­tions from 1985 to 2003.

An­other ex­pla­na­tion is the geopol­i­tics of sur­vival. If it in­cludes a

stake in Aramco’s vast oil re­serves, a pub­lic sale of even a tiny frac­tion of the com­pany could be the big­gest IPO in his­tory, likely dwarf­ing Alibaba’s $25 bil­lion share sale in 2014. The Saudi monar­chy would give in­vestors from Peo­ria to Shang­hai a vested in­ter­est in the regime’s se­cu­rity.

A share sale might also at­tract in­vest­ment money that would oth­er­wise go to com­peti­tors. “Riyadh could dry up the cap­i­tal mar­kets avail­able to the oil in­dus­try,” says Danilo Onorino of Dogma Cap­i­tal in Lugano, Switzer­land. “They will ef­fec­tively leave oth­ers, from Mex­ico to shale pro­duc­ers, short of equity and debt ac­cess.” For in­vestors, a piece of Aramco would be prized be­cause the com­pany has a very low cost of pro­duc­tion.

The chief ri­val on the Saudis’ minds is Iran. It was prob­a­bly not a co­in­ci­dence that Prince Mo­hammed de­cided to drop the IPO news just two days af­ter Saudi Ara­bia ex­e­cuted 47 pris­on­ers, in­clud­ing the Shi­ite cleric Nimr al-Nimr, a fierce critic of the Sunni monar­chy’s treat­ment of Saudi Ara­bia’s mi­nor­ity Shi­ites. Nimr’s ex­e­cu­tion en­raged Ira­ni­ans, who set fire to part of the Saudi em­bassy in Tehran, lead­ing Saudi Ara­bia and some of its Gulf Arab al­lies to break diplo­matic re­la­tions with Iran. The stand­off was quickly eclipsed, at least in the busi­ness press, by the prince’s IPO bomb­shell. Es­ti­mates of Aramco’s to­tal value range widely, de­pend­ing in part on the per­ceived risk of hav­ing a govern­ment as co-owner. The low could be $100 bil­lion, us­ing Rus­sia’s Ros­neft as a bench­mark; Fadel Gheit, an an­a­lyst at Op­pen­heimer, es­ti­mates Aramco is worth at least 15 times ExxonMo­bil’s mar­ket value, or $5 tril­lion.

Iran des­per­ately needs to jump-start its sanc­tions-racked econ­omy and is try­ing to at­tract for­eign in­vestors for when its in­ter­na­tional sta­tus nor­mal­izes (page 62). The Saudi move would put Aramco ahead in the line. “Part of the fi­nan­cial weapon they’re us­ing here is to tar­get fund man­agers and hedge funds around the world and to give them a choice of do­ing busi­ness with Saudi Ara­bia or do­ing busi­ness with Iran,” says Mark Dubowitz, ex­ec­u­tive di­rec­tor of the Foun­da­tion for De­fense of Democ­ra­cies, a Wash­ing­ton ad­vo­cacy group that cam­paigned against the nu­clear deal with Iran.

Aramco is also jostling with Iran as well as Rus­sia to se­cure its mar­ket share in Asia, the fastest­grow­ing oil-con­sum­ing re­gion, by ex­pand­ing its re­fin­ery busi­ness there. In a re­peat of the strat­egy the king­dom used in the 1980s and ’90s to se­cure U.S. mar­ket share by in­vest­ing in re­finer­ies in Texas and Louisiana, Aramco is putting money into plants from China to In­done­sia. Asia ac­counts for al­most 70 per­cent of Saudi Ara­bia’s oil ex­ports, ac­cord­ing to the U.S. En­ergy In­for­ma­tion Ad­min­is­tra­tion.

In­dus­try an­a­lysts and Saudi watch­ers say Aramco might de­cide not to sell shares in the full com­pany and in­stead let in­vestors buy into th­ese re­finer­ies and other down­stream as­sets. The pro­ceeds of a down­stream IPO could fund more re­finer­ies, bol­ster­ing the king­dom’s in­ter­na­tional re­la­tion­ships.

“The king­dom’s refining ties pro­mote deeper in­te­gra­tion with pow­er­ful im­port­ing coun­tries,” says Jim Krane, en­ergy re­search fel­low at the Baker In­sti­tute at Rice Univer­sity in Hous­ton. “Those coun­tries, in turn, are be­com­ing stake­hold­ers in Saudi Ara­bia’s sta­bil­ity and se­cu­rity.”

With oil prices down and the Saudi bud­get deficit way up, plus a costly war in Ye­men that isn’t go­ing very well for Saudi Ara­bia, the money from a share sale would be wel­come. But the back­drop for the Saudis’ think­ing to­day is their sense that they’ve been cut loose by the U.S. af­ter last year’s in­ter­na­tional nu­clear agree­ment with Iran, says Dov Zakheim, a for­mer U.S. un­der sec­re­tary of de­fense un­der Pres­i­dent Ge­orge W. Bush. Saudi Ara­bia joined Is­rael in lob­by­ing against the ac­cord. One thing “they never en­vi­sioned was that the Amer­i­cans would let them down,” says Zakheim, “and that’s what they per­ceive has hap­pened.” The bot­tom line Tak­ing Saudi Aramco pub­lic would help the govern­ment in Riyadh strate­gi­cally. The coun­try could also use the cash.

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