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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, even as the value of international oil companies (IOCs) 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. 

There are the immediate geopolitical challenges: all eyes are on the US-Iran confrontation, into which Saudi Arabia risks being sucked. Aramco demonstrated both vulnerability and resilience in September 2019, when missiles thought to have originated from Iran—albeit Iran has ever 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 $1tn-$1.5tn range. 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 as Iran threatens further retaliation for 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. 

Lingering fears over a Middle East conflict and the ensuing jitters among global investors are not the only problem

Security fears

“There is less appetite to put money into Saudi Arabia in general, and, although higher oil prices are helpful, these are more than outweighed by the risk of a more serious repeat of something like the Abqaiq attacks cutting Aramco’s production,” says Robin Mills, the CEO of Qamar Energy, a Dubai-based consultancy.

Lingering fears over a Middle East conflict and the ensuing jitters among global investors are not the only problem; the thus far domestic-only IPO has other longer-term structural issues. Increasing the company’s transparency and accountability and transforming it into an entity that more closely resembles an IOC has been key to the success of its listing.

Another problem with the domestic flotation is that its success may not be replicable on international stock markets

Yet the restructuring also brings disadvantages, such as a stronger focus on quarterly returns and a more limited ability to plan ahead amid volatile oil prices. 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. And here lies another problem with the domestic flotation: its success may not be replicable on international stock markets. This 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.”

$200bn Loss in Aramco's value following Soleimani strike

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. 

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, despite the glamorous 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 planned. More ambitious plans will have to wait—at least until regional tensions subside. 

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