Saudi’s Never Ending IPO: Is 2 Trillion Aramco Oil Valuation Edging Closer? – Analysis

By Sebastian Rees

This week the who’s who of the global energy industry are meeting in Abu Dhabi to take part in the 24th World Energy Congress, a triennial event organized by the London based World Energy Council. It is the first time that the event has been held in the Arabian Gulf, despite the region’s prominence in the global energy market.

Organizers estimate that 15,000 delegates are in attendance, including 70 international energy ministers, and 500 chief executives from 150 countries. On the sidelines of the event, representatives of OPEC countries and non-OPEC member oil producers are set to meet on Thursday to discuss production targets and potential fixes to disappointingly stagnant and low oil prices.

The focus of this year’s congress is appropriately ‘A Future Beyond Hydrocarbons’ as oil and gas producers, particularly in the Arab world seek to reduce their dependence on once reliable commodity sales. Addressing the Congress on its opening day, Saeed Mohammed Al-Tayer, the CEO of Dubai’s Electricity and Water Authority argued that the United Arab Emirates was at the forefront of the global energy transition: ‘despite possessing one of the largest oil reserves in the world the UAE has prepared to deliver the last barrel of oil’. Echoing these sentiments, the World Energy Council’s Chairman, Younghoon David Kim, lauded the UAE as ‘the frontier of a sustainable energy future’.

States and multi-national corporations with a large stake in global energy politics weren’t the only actors using the Congress as a forum to advance their interests. A range of new players took the opportunity to make their mark. 100 energy start-ups are attending this year’s congress. Zeleros, a Spanish start up sees ‘hyperloop technology’ as ‘the future of transportation’ and hopes to use renewable energy to carry passengers and cargo at speeds over 1000 km/h inside low-pressure tubes, whilst producing no carbon emissions.

Glowee, a biotechnology company based in Paris hopes to lead a revolution in lighting the streets of the cities of the future using the bioluminescent qualities of certain living organisms such as fireflies and glow-worms. Pyro-E, a US energy firm claims that ‘Perpetual Power’ can be harnessed through the ambient vibrations that are present all around us. They hope to use electromechanical devices to extract energy from low-frequency, intermittent vibrations produced by buildings, train lines and gas pipelines.

Yet in spite of the excitement offered by new firms committed to an energy future defined by quantum computing, artificial intelligence, smart technology, and renewable sources one of the most staid players in global energy production has proved of most interest to observers of the event.

Saudi Arabia’s new Energy Minister Prince Abdulaziz bin Salman made his first appearance in his new role at the event raising significant interest in the Kingdom’s ongoing energy outlook, its plans for a transition away from hydrocarbon dependence, and, most pertinently for investors and financial analysts, long floated plans for the Initial Public Offering of a share of the Kingdom’s energy behemoth, the Saudi Arabian Oil Company, better known as Aramco.

The appointment of Prince Abdulaziz to Saudi Arabia’s most important ministry marks an important waypoint on the ongoing fall from grace of previous minister Khalid al-Falih. Al-Falih also lost his position as Chairman of the Board of Aramco early last week to Yasir al-Rumayyan, who heads the country’s sovereign wealth fund, the Public Investment Fund.

Though Prince Abdulaziz and Amin Nasser, Aramco’s CEO both insist that no radical changes have occurred and business as usual reigns in the Kingdom’s most important corporation and government ministry, experts suggest that recent steps suggest an acceleration of the long-awaited public listing of Aramco.

Mr Nasser suggested on Tuesday that an IPO would be occurring very soon’ and that the company is ‘ready for listing whenever the shareholders make the decision to list.’ Addressing one of the major interests of investors, Mr Nasser noted that ‘one of the primary listings is going to be local, but we are also ready for listing outside’.

Crown Prince Muhammad Bin Salman, the Kingdom’s de-facto ruler first announced plans for a potential IPO in 2016, saying that up to 5% of the company would be sold publicly. If, as the Crown Prince suggests, the company is to be valued at $2 trillion, such a move would potentially raise as much as $100 billion. The Crown Prince hopes that capital raised by such a sale could be reinvested in non-oil industries to diversify Saudi Arabia’s lagging and hydrocarbon dependent economy.

The appointment of Mr Al-Rumayyan, the head of the country’s wealth-fund which is spearheading this project, to a senior position within Aramco is important in this regard. Prince Abdulaziz’s appointment as Energy Minister, ousting the charismatic Mr al-Falih who has pursued consensual policies in regard to production cuts within OPEC, may signal a more assertive approach to raising oil prices by the Crown Prince.

Muhammad Bin Salman hopes to pressure other oil producers to engage in wide ranging production cuts to inflate the price of oil, a move that the Saudi economy depends upon and would augur well for a high valuation of Aramco. The appointment of Prince Abdulaziz comes just days after the Crown Prince made a personal call to Iraq’s energy minister to further pressure production cuts.  

These important personnel decisions have been matched by increased financial transparency of the world’s most valuable company. In April, Aramco gave a rare glimpse into its financials, revealing net profits of $111 billion and revenue of close to $356 billion. Early this month, Aramco released its first ever half yearly financial report, which showed that the company’s net income slipped by nearly 12% on the back of lower crude prices.

Yesterday, Aramco announced that the US Investment bank JP Morgan Chase would be preparing the company for listing on the Saudi stock exchange, the Tadawul, later this year. Despite lobbying by international exchanges, it remains unclear where the company hopes to list overseas. Fears have been raised that stringent regulatory regimes of overseas securities agencies may disincline the opaque company from seeking entry into exchanges abroad.

A number of concerns continue to exist over the viability of an Aramco IPO at the present moment. While replacing Mr al-Falih may signal to overseas investors that Saudi Arabia has achieved an effective separation between the government energy department and a nominally private corporation, appointments of the head of the sovereign wealth fund to Aramco’s board chairmanship and the Crown Prince’s half-brother, Prince Abdulaziz, to head the energy ministry will do little to allay investors’ suspicions of political interference in Aramco’s operations.

Low oil prices and a lack of confidence in future oil demand mitigate against the success of an IPO at this stage and government hopes of raising significant revenues from this initiative. Though Prince Abdulaziz flagged in Abu Dhabi that he was not concerned by dire forecasts of future oil demand and price levels by the International Energy Agency he did point to the fears they could potentially raise, suggesting to reporters: ‘If I were to be concerned with IEA projections, I would probably be on Prozac all the time’.

Disappointments in regard to Aramco’s valuation and a lower than expected revenue increase resultant from an IPO would prove both financially and politically damaging for the Crown Prince as he attempts to further consolidate power.

The much delayed public offering of Aramco will remain at the centre of discussions of the political economy of the Saudi state for the foreseeable future. To best understand the potential benefits and pitfalls of this initiative, we must dig deeper into the global factors which dictate the future of hydrocarbons and the opaque political structures of the Kingdom, for whom failure could prove disastrous. 
 

The views expressed in this article do not necessarily reflect those of Al Bawaba News.