Saudi Aramco Shows Problems Ahead of Anticipated IPO

By Spencer Mann,
Money and Investing Writer

When former Deputy Crown Prince Mohammed bin Salman announced that the Saudi owned oil company, Saudi Aramco, was going to sell shares to the public, the news interested much of the financial world. Saudi Aramco’s sheer size led the Saudi government to announce that the company would perform its IPO at a $2 trillion valuation.

With oil reserves fifteen times larger than ExxonMobil (NYSE: XOM), Saudi Aramco would become a mammoth in the private oil industry. Since the initial announcement in January, however, news of the expected 2018 IPO turned sour.

The Saudi government has been seeking funds to diversify its economy, and the capital funds are primarily expected to derive from the anticipated IPO. One concern that analysts have noticed right away is the appraisal from a macroeconomic point of view.
Saudi Aramco is only expected to sell off 5% of its ownership, yet at a valuation of $2 trillion, the market would have to come up with $100 billion in funds to fulfill the offering.

Besides any investors individual concern about the return, Saudi Aramco will have to work hard to pool enough interest together to get the total volume of funds at its quoted value. According to Bloomberg, $206 billion has been invested in initial stock sales in the past twelve months. Should Aramco seek that $100 billion amount, they would be looking to take approximately half of the total stock investment during that time, not a simple task for a single company. Despite this, the Prince Mohammed bin Salman remains committed to completing such a feat.

As the Saudi government tries to raise funds, concerns of the Aramco IPO do not stop at the valuation. According to The Economist, officials within the government disagree where to issue shares when the time comes. Some view the issuance of equity solely on Saudi Arabia’s own exchange (and to select private investors) as a way to keep certain people in the kingdom content that foreigners are not taking too much investment.
With that in mind, it is worth noting that Saudi Aramco may not have another choice, as listing itself on an American or London exchanges contains more difficulty.

According to The Economist, appearing on the NYSE could leave Saudi Arabia, as a country, open to lawsuits regarding its involvement in the September 11 attacks.

Additionally, the United States is joined by England as countries that may give Saudi Aramco a problem in its IPO. The Financial Conduct Authority, a governmental agency in the U.K. seemingly agreed with proposed rule changes to allow Saudi Aramco to list itself on the exchange more effortlessly.

Despite this apparent consent, critics have fired back stating that this corporation should not receive exceptions to the rules and that these changes could hurt the legitimacy of the London exchange. Critics of the rule changes indicate the 5% equity share as being too small, and voice concerns that the rule changes would not require companies to think in favor of all of its investors, just the majority.

With a young, anxious prince holding the reigns, it is not as easy to predict the decisions of Mohammed bin Salman as a more experienced politician.
His apparent micromanagement of the Saudi Aramco IPO process may end up being detrimental to its success, despite his attempts to modernize his country. Losing capital funds for the Saudi economy due to mismanagement is something that the Prince hopes to avoid.

 

A version of this article appeared in the Tuesday, October 24th print edition.

Contact Spencer at
spencer.mann@student.shu.edu

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