Saudi thinks the unthinkable

Saudi Aramco – which can be safely estimated to be worth upwards of $2trn dollars – is a symbol of power and influence. With crude oil reserves of about 265bn barrels – more than 15% of all global oil deposits – and about 290tn standard cubic feet of natural gas, Aramco is undisputedly the world’s largest oil producing company. Just an IPO (initial public offering) of the enterprise itself would exceed the GDP of most nations on earth in terms of value, analysts say.

The Kingdom is in no hurry to go to market with its most prized possession, with Prince Mohammad telling The Economist that just the decision on whether to float shares of Saudi Aramco will be reached within the ‘next few months’.
Saudi Aramco Chairman Khalid al-Falih also echoed Prince Mohammad’s words, telling The Wall Street Journal in an interview that there was no specific timeline yet for the listing, adding it ‘cannot be done overnight’. “There is no plan that is concrete at this stage to do the listing. There are studies ongoing. Serious consideration,” Falih said.

‘Unthinkable’ or ‘inevitable’?

Just the very word that shares of the world’s biggest company can be up for grabs in the future, has stirred the global economy. While some have offered exalted opinions of Saudi’s move, terming it ‘the unthinkable’ and ‘the biggest sale known in the human financial system’, many others believe the move was ‘inevitable’.

The energy heavyweight has been heavily burdened by the impact of declining crude oil prices, ever since it led the cartel to decide (late in 2014) on pumping hard to sideline the US, Russia and other non-OPEC oil producers from the world’s energy marketplace. The horizon appears gloomy for oil prices – occasionally trading under $30 a barrel currently – as the US lifting its 40-year-old ban on oil exports and Iran vowing to drill 500,000 barrels each day in its post-sanctions era, are only set to worsen the global supply glut (not to mention the diplomatic standoff between Saudi and Iran, which has the potential to deal more blows to oil prices).

Saudi Arabia posted a record $98bn budget deficit in 2015, due to the free fall of oil prices, the highest budget deficit in the history of the Kingdom. Revenues were estimated at $162bn, well below projections and 2014 income, while spending came in at $260bn, the Finance Ministry announced in December. Saudi’s oil revenues, which have nosedived in the past few months, leads the country to project $87bn in fiscal deficit for the year ahead.

The monetary crunch forced the Saudi government to discontinue its decades-old lavish fuel subsidies, and hiked prices for fuels, water and electricity as well as gas feedstock used by industry, to save much-needed cash. Most believe Saudi contemplating going to market with Aramco shares is part of that same ardent drive to raise liquidity.

“I think Saudi Arabia is desperate for cash. For them now it is difficult to survive the low oil prices. Saudi Aramco is one hell of an asset and that will fetch them huge amounts of money. It is the world’s biggest company and it will be the world’s biggest IPO,” Chris Faulkner, CEO of US-based Breitling Energy, told Oil & Gas Middle East.

“They could raise capital by selling some shares and make money. But I think, in the long run. they do need a lot of money to cover their deficits, to survive the oil price shocks. The way in which Saudi Arabia has been involved in this game of chicken with Russia, Iran and the United States, means it needs significant amounts of money to pay for survival,” he stated.

However, there are other experts who seem to think that even if the Saudi government does float Aramco shares on a stock exchange, it would only be a normal thing. “I think Saudi Arabia’s sole motivation for the move reflects governments’ intention to list their assets from time to time to just raise some cash, and bring in some international expertise,” Dave Ernsberger, an oil expert at Platts, told Oil & Gas Middle East.

There are still others who think Saudi Arabia’s announcement in January was an effort to assure the world that it has enough wealth to weather the low oil prices-driven cash crunch. A quarter of respondents (24%) to a survey of 250 energy professionals operating in the Middle East, conducted during the 7th Gulf Intelligence UAE Energy Forum in Abu Dhabi in January, said a possible Aramco listing is a message from the Kingdom to the world that it has enough valuable energy assets to easily navigate the current era of falling oil prices.

“Saudi Aramco can navigate lower oil prices without even resorting to these sort of assets (Aramco shares),” Marios Maratheftis, global chief economist at Standard Chartered bank told the Forum. “The foreign exchange reserves in Saudi Arabia are 1.5x the money they have in circulation domestically on the ground,” Maratheftis added.

What and where can the offer be?

Since the value of an Aramco IPO, should a public listing ever become a reality, is unprecedented, answers to crucial questions surrounding it remain unanswered. What share will Aramco offer, for instance?

Soon after Prince Mohammad’s disclosure, Aramco itself issued a brief statement saying it was considering options including the stock market listing ‘of an appropriate percentage of the company’s shares and/or the listing of a bundle (of) its downstream subsidiaries’.

“We are considering a listing at the top. So a listing of the main company, and obviously the main company will include upstream,” Falih said in his interview to The Wall Street Journal. “Many of these assets are also with other joint-venture partners so we have to go through the process of reviewing the legal agreements between us and our partners,” he said. “It will take time.”

Aramco’s chief executive officer, while asserting that the Saudi government will firmly remain in control of the state oil giant even if it were to float shares, did confirm that the enterprise’s refining assets were considered for sale. “A range of options are being considered, including the listing in the capital markets of an appropriate percentage of Saudi Aramco shares with the government retaining a controlling interest, as well as the option to list a bundle of downstream businesses and interests,” Amin Nasser wrote in a letter published in Aramco’s weekly magazine The Arabian Sun.

“Saudi Aramco is targeting economic efficiency, so they might just leverage some of its downstream assets to the international market, like some of the IOCs,” Sirine Tajer, managing director, MENA Energy Aspects, told Oil & Gas Middle East. “But I think there is lower likelihood that they will ever touch their upstream operations, as those are their strategic assets; they might never proceed to that.”

According to 33% of the respondents to a relevant survey question during the UAE Energy Forum, Saudi Arabia’s announcement suggests that Aramco is following the global trend of divesting downstream refining assets.

Saudi Arabia has been known to passionately guard state secret. Given the fact that publicly listing Aramco would not just reveal the operations of the unbelievably large company, but also lay bare the inner workings of the Saudi ruling establishment, analysts predict that the government will most likely list Aramco on a stock market within its influence.

“I don’t think they (Aramco) will list in the United States. I don’t think they would want to come under the scrutiny of the SEC (Securities and Exchange Commission). I think they will go for a stock market that is more under their control,” Faulkner says.

Ernsberger sang in chorus saying, “Listing Aramco on the Nasdaq or the London Stock Exchange will not be Saudi Arabia’s priority.” He even goes on to suggest that “Saudi’s decision has also equally to do with developing Riyadh’s stock market, as it has to do with Saudi Aramco.”

Falih himself told The Wall Street Journal that any listing of Aramco would be primarily on the domestic stock exchange but he did not rule out international listings. “I would not exclude at this stage international listings given the potential size,” he said.

Beginning of a trend?

The GCC’s economic and diplomatic policies have mostly been alligned and led by Saudi, as multiple instances in the past and present day prove. The majority of the Gulf countries have taken the unprecedented move to reduce fuel subsidies in a bid to offset growing budget deficits. The United Arab Emirates removed subsides on domestic fuel in August, while Saudi Arabia did in December. Oman and Bahrain have followed suit in January, while Kuwait is expected to take a similar stance on fuel subsidies in the coming months.

Saudi Arabia’s under-consideration floating of shares of Aramco is being interpreted by some in the industry as the beginning of a new era of privatisation in not just the Kingdom, but across the bloc.

Another survey during the Gulf Intelligence Forum also reported that 15% of respondents saying that they believe Saudi Aramco’s move may trigger other state-owned energy companies, including those in the Gulf, to consider IPOs as a way to counter the negative impact of lower oil prices.

“Saudi Aramco’s announcement of a possible IPO could be the thin edge of a wedge of countries and companies across the region that are looking at assets and thinking, ‘How can we free up some capital to navigate this period of lower oil prices?” Trevor Sikorski, head of natural gas, coal and carbon at London-based research consultancy Energy Aspects, said.

Prince Mohammed himself appeared to indicate in his interview with The Economist that Saudi Arabia’s thought of an Aramco IPO, as part of a privatisation drive to raise money in an era of low oil prices. Aramco CEO Nasser, who is chairing a steering committee overseeing the process, also reiterated in his article that the government’s privatisation initiative and broader economic reforms as the two key drivers behind the move to disburse a fraction of Saudi Aramco.

All the analysis and opinions aside, global stakeholders are reportedly vying to claim a share of Saudi Aramco stock. JP Morgan Chase and HSBC are likely to win a role in the preparation and listing of an IPO of Saudi Aramco. According to Bloomberg, both banks boast a ‘presence’ in the country that goes back decades. JP Morgan and HSBC helped arrange a $10bn loan for Aramco last year. Deutsche Bank, which advised Aramco on a $3bn joint venture with Lanxess in September, may also play a role in the system.

Bloomberg reported that Aramco will also likely appoint some of its key local lenders from the Kingdom for the IPO; however, ‘no mandates have been awarded yet and Aramco hasn’t sent out requests seeking advisory roles’, the report added.

With regards to the question of whether international energy or financial institutions, American companies in particular, will show interest or not, Faulkner said, “It depends on what Aramco offers and intend to make public.”

Ernsberger, however, said: “Should Saudi Arabia float shares of Aramco, US energy companies would invest ‘at the drop of a hat.”