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A long way to go for Aramco

The successful initial domestic listing of Saudi Aramco cannot disguise potential challenges—not least security and geopolitical threats—facing the IPO further down the line

Oil producing heavyweight Saudi Aramco auctioned an additional 450mn shares on 12 January via a greenshoe option— the provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than initially planned by the issuer if the demand for a security issue proves higher than expected. The move drove up the value of its December 2019 IPO, already a world record, to $29.4bn for 1.725pc of the company sold. 

Yet the spectacular success of the auction, which surprised many observers, has been clouded by spiralling regional tensions which drove Aramco’s share price down in early January 2020, even as the value of international oil companies (IOCs) briefly soared on rising oil prices. The Middle Eastern uncertainties spotlight complex vulnerabilities of Aramco’s domestic flotation—which threaten to undermine the overall vision behind it and to saddle the Saudi oil behemoth with many of the traditional IOCs’ challenges without necessarily endowing it with the advantages they possess.  

Regional tensions 

There are the immediate geopolitical challenges: Saudi Arabia risks being sucked into a continuing confrontation between the US and Iran which experts say is unlikely to subside any time soon. Aramco demonstrated both vulnerability and resilience in September 2019, when missiles thought to have originated from Iran—albeit Iran never admitted responsibility but its hand, rather than that of Yemeni rebels, looks plausible—briefly took out half the country’s oil production. 

The ability to restore output quickly after the attack contributed to the initial success of Aramco’s IPO. On 12 December, the company was valued at $2.04tn, defying the expectations of many analysts who had believed it to be worth closer to the $1-1.5tn range.

Lingering fears over a Middle East conflict and the ensuing jitters among global investors the only problem

Yet the apparent ease with which Iran evaded Saudi and US air defences near the affected sites in September is now weighing down the company’s shares, while Iran mulls its next move following the assassination of the man unofficially considered its second-most powerful leader. Aramco lost more than $200bn of value even while oil prices spiked by 4pc after a US drone killed General Qassem Soleimani alongside a top Iraqi Shia militia leader in Baghdad on 3 January. 

In a sign that tensions had cooled somewhat in the second half of January, Saudi Arabia received more than $20bn in orders for a $5bn international debt issue on 21 January. But the intense regional standoff involving Riyadh and Tehran continues and analysts see a potential flashpoint around 11 February, when the 41st anniversary of the Iranian Revolution coincides with the end of a religiously important 40-day mourning period for Soleimani. 

Not just security fears

“The Middle East region has been historically volatile and the kind of tensions that we are currently seeing between the US and Iran, with Iraq plagued by domestic instability of its own and in doubt over the future nature of its relationship with the US, is not conducive to greater investor confidence in Aramco and the Saudi oil industry. This will not change any time soon,” warns George Voloshin, a senior analyst at Aperio Intelligence, a UK-based strategic intelligence company. 

Nor are lingering fears over a Middle East conflict and the ensuing jitters among global investors the only problem. The thus far domestic-only IPO faces other longer-term structural issues, including the risk that the success of the domestic flotation may not be replicable on international stock markets.

Increasing the company’s transparency and accountability and transforming it into an entity that more closely resembles an IOC has been a key element of the whole listing process. But this restructuring also brings disadvantages, such as a stronger focus on quarterly returns and a more limited ability to plan ahead amid volatile oil prices.

“There is no way the Saudis will ever consider relinquishing control over Aramco” Voloshin, Aperio Intelligence

Some of the typical advantages of a public listing, including spreading the risks among a wider group of investors, have so far been largely negated by the fact that few international players participated in the auction, says Randy Bell, the director of the Global Energy Center at the Atlantic Council, a Washington-based think tank.

Rich Saudi investors, motivated both by the desire to support their government beyond their narrow financial interest and by bonus shares offered to those domestic buyers who hold their investment for more than 180 days, may have helped push the value of the company artificially high.

The difficulty of replicating this support among international investors not provided with such sweeteners could in turn undermine the Saudi government’s ultimate stated goal of raising hundreds of billions of dollars for Vision 2030, a masterplan to diversify the country’s economy and break its heavy dependence on cheap upstream production.  

International uncertainty  

“While this initial portion of the Aramco IPO has been quite successful—and at the very least made some of the more vocal critics think twice—it does not achieve the ultimate goal of raising $100bn for the Public Investment Fund and its efforts to diversify the Saudi economy,” says Bell. “There may be far less interest if Aramco decides to list the shares internationally—we simply do not know yet.”

On paper, the Saudi vision for the future, spearheaded by Crown Prince Mohammed bin Salman (MbS), is both coherent and mesmerically ambitious. It includes dozens of refineries, port facilities, power plants and other infrastructural and industrial mega-projects designed to add value to the Saudi economy—by both fuelling engineering and petrochemical growth at home and forging a vast network of partnerships, worth tens of billions of dollars, across the entire hydrocarbons value chain abroad. Some of those relationships, in countries as diverse as the US, China, Russia, India and South Korea, could in turn be leveraged to bring back investment in Aramco—or so the thinking goes. 

$200bn – loss to Aramco’s value following Soleimani strike

In reality, many international investors may be spooked by the prospect of bearing the burden for those projects after putting their money into Saudi Aramco, says Voloshin.

“I think that the main problem of either a retail or institutional investor considering a medium-to-long-term bet on Aramco has to do with the way the Saudi government wants to use the company to fuel economic growth outside of the oil sector,” says Voloshin. “There is no way the Saudis will ever consider relinquishing control over Aramco. Given the nature of problems we have seen elsewhere with respect to NOCs, it is likely that minority investors in Aramco will have to bear the cost of a growing, and mostly unpredictable, tax burden and extraordinary dividend payments aimed at making the majority owner happy.”

Aramco’s IPO is a key milestone of Vision 2030, and the funds raised from it are intended to fuel a virtuous cycle of diversification in Saudi Arabia’s economy, where the risks are spread across many different industries and investors across the globe. Yet, a vicious cycle where the risk remains concentrated within the region, mega-projects lag behind and the restructuring saddles the Saudi crown jewel with new burdens is also possible.

Despite the headline success of the domestic flotation, only a fraction of the 5pc stake in the company originally planned for auction has been sold, and there is no international listing even planned. More ambitious plans will have to wait—at least until regional tensions subside. 

(UPDATED - 28 January, 2020)


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