With so much at stake — the IPO is the centerpiece of the Vision 2030 strategy — and so many stakeholders — government, 65,000 employees and armies of advisers — it is not surprising that there is both a need to get the share sale right and a difference of opinion about how to do that.
At the World Economic Forum (WEF) in Davos last week, Aramco was represented by its chairman and chief executive, as well as a number of senior executives, and a phalanx of actual or potential advisers. The debate about the company’s future was reflected in a series of background conversations, semi-official briefings and public statements.
So what can we say with certainty about the IPO? Two things came across loud and clear.
First, there is a commitment to get a share sale away this year. Khalid Al-Falih, Aramco chairman and Saudi Arabia’s energy minister, left the WEF in no doubt about this. “Aramco will be listed. There are no ifs and buts about it,” he said.
Al-Falih was also reported as saying the listing was “on schedule,” backing up other ministerial commitments that there would be an IPO of some sort this year.
Second, there was a commitment that financial markets would determine what price the Kingdom gets for Aramco. “The valuation is for the market to decide, not the company or the government,” Al-Falih said.
It is fair to say a certain degree of debate surrounds Saudi Aramco at the moment, focused mainly on the prospects for its initial public offering (IPO), which has been planned, and indeed pledged, for later this year.
Frank Kane
So there will be a sale of shares on a stock exchange at a market-determined price this year. That is as much as you can say for certain. After that, the debate begins in ernest, revolving around two questions: Where and how much?
Taking the second question first, some analysts interpreted Al-Falih’s comments about market-led pricing as a retreat from the official estimate of $2 trillion put on Aramco when the IPO was first announced in 2016.
Most analysts, using a variety of sophisticated financial analysis techniques, cast doubt on that figure and struggle to get it much above $1.5 trillion. The fear is that if the figure is substantially below the official estimate, the owners will decide against an IPO, scrapping the public sale and maybe opting for a private arrangement.
But Aramco has two variables in its favor that could help persuade markets the oil and gas giant is worth $2 trillion, or close enough to that figure to make little difference to the IPO. One is the oil price, which Aramco itself — as the traditional swing producer in global crude markets — goes a long way to setting. The trend, and most of the forecasts for 2018, remain upward.
The other is the estimate of Saudi Arabia’s reserves. These have been officially calculated at around the 260 billion barrel mark for at least the past decade, but two independent American organizations are working on a revised estimate.
The 260 billion barrel level is likely to be exceeded, though it is hard to say by how much. More oil at a higher market value translates directly into a higher corporate valuation for Aramco.
The other crucial question is: Where? On which market will Aramco list its shares? Again, the Saudi government is committed to the Saudi Stock Exchange, or Tadawul, for at least some of the IPO, but on the global front, the options multiply.
The accepted wisdom is that New York is vying with London for the right to stage the IPO, with Hong Kong as another possibility.
The New York Stock Exchange has been regarded as the leader in this contest, partly for political reasons — Saudi Arabia has a close relationship with Trump’s US — but also because it is the biggest and most liquid market in the world, and most other oil giants, Aramco’s peer group, are listed there.
What was surprising in the conversations with bankers — even those at the big Wall Street banks — at Davos was that many seemed to prefer London. New York was seen as just too difficult because of regulation (the Sarbanes-Oxley rules that apply to corporate disclosures, for example) and litigation (climate change lawsuits and potential action under US terrorism funding laws).
Hong Kong will become a player in this contest if another option is pursued: The possible plan to sell a stake in Aramco outside a global market, with Chinese and Russian investors (possibly acting jointly) as the most likely buyers.
The final complicating factor in the whole affair is that of timing. If the IPO is to happen this year, as has been promised, there is a cut-off point at which all these issues have to be resolved and decisions taken. That point must surely be approaching fast. The time for debate is almost over.
- Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai