IPO of the Century
Saudi Arabian Oil Company, commonly known as Aramco, is Saudi’s national petroleum and gas company. Pumping over 10 million barrels per day, Aramco is easily the largest company, beating ExxonMobil, Chevron or any Russian or Chinese state-owned energy firms. Owned by the world’s wealthiest autocracy, Aramco has traditionally kept its books out of public scrutiny. However, since the announcement of a potential IPO last year, its valuation and political implications have become an important issue of study and discussion.
The biggest deal
The valuation is the first hurdle to launching any deal smoothly. The unknown conditions of its financial and operational health has already left outsiders enough room for speculation. Aramco operates the largest proven oil reserves, 260 billion barrels, and wields significant power in the global oil market. Positive estimates put the value of the company at 10 trillion dollars.
But investors tend to be less confident in state-owned companies. As a Bloomberg article pointed out, Russia’s Rosneft (ROSN) and Brazil’s Petrobras (PBR) are both valued lower than their American counterparts. Russia’s Gazprom, once in the ranks of ChinaPetro and ExxonMobil, has been used by Putin as a diplomatic weapon with little consideration about the financial interests of shareholders. Petrobras just went through the largest scandal and crackdown in Brazil’s history. Risks of state interference, corruption and political instability all need to be factored in when valuing Aramco.
Macroeconomic-wise, oil price fluctuations could materially change valuation. According to a Reuters article, a 20% year-on-year increase in average oil price will add a $23 billion revenue to Aramco. An inflation-adjusted chart of historical oil price will prove that this level of fluctuation is perfectly possible. Such estimates are even before taking into consideration recent geopolitical events affecting oil price, such as the nerve-wrecking OPEC meetings, or the anti-import and anti-ally President Trump and his reckless cabinet. This means the timing of the IPO in relation to geopolitical factors should be a strategic consideration in designing the deal.
What complicates the valuation even further is the nature and ties of Aramco’s operations. The company accounts for nine-tenths of the government’s revenue and is central to the ruling Al Saud family’s survival. Besides oil and gas extraction and sales, it runs various commercial projects for Saudi government, including hospital services and football stadiums. To what extent these complications will affect valuation depends on how the deal is structured. For example, what percentage of Aramco or which operations will be sold, and how the Saudi government protects its majority control.
Saudi modernization
Despite all the risks mentioned above, the Deputy Crown Prince, Mohammed Bin Salman, seems determined to go through with the IPO. Meeting with senior officials, giving interviews to the media, and hiring advisors for the IPO, Prince Salman is moving forward with his National Transformation Program. The programs’ plan was designed and approved last year following an ambitious vision of economic liberalization. Serving as chairman of the Council for Economic and Development Affairs (CEDA), the prince is working towards economic modernization as his central piece of contribution on the post.
The IPO of Aramco is thus not about giving up economic control, but partially cashing out its oil reserves before the decarbonization trend diminishes their value. Currently, 87% of Aramco’s output is crude oil. The company has yet to adapt to increasing demands for cleaner energy such as gas. In addition to being vulnerable and under-diversified, Saudi’s economic strength is built upon a non-sustainable strategy: dominance through increasing production, pushing down price, and driving out high-cost foreign competitors. An economic reform is therefore inevitable before low extraction cost reserves run out, or oil as an energy source loses its status.
IPO-ing Aramco is how the Saudi government plans to finance its new adventures into non-oil sectors. Saudi Arabia’s Public Investment Fund (PIF) will take over Aramco as well as the proceeds from the IPO, making it the biggest sovereign wealth fund. The PIF, like many funds operated by autocratic regimes, owns controlling interests in national companies key to economic control, including Saudi’s national Commercial Bank. Gigantic as the size of the PIF’s assets under management, selling shares in these Saudi companies is the main way to achieve liquidity in order to venture into foreign markets. The PIF has already demonstrated its appetite in acquiring interests in Uber, and in co-investing with Japan’s SoftBank in London.
A grand plan
Liberalizing an economy is more complex than a single IPO plan plus a few foreign acquisitions. The National Transformation Plan also includes cutting utility subsidies and public sector jobs; the private sector and foreign investments will benefit from increased transparency and contract enforcement; infrastructure spending will be decentralized; female participation in workforce will increase from 23% to 28%. The targets set in the plan are quite ambitious, but very few are as confident as Prince Salman is.
Saudi as an autocracy has been remarkably stable, especially compared to the uprisings and sectarian conflicts that plague the region. The Saudi royal family are able to consolidate power with Wahhabism, a strict interpretation of Sunni Islam, to its Sunni majority population. Gradual acceptance of certain secular norms, such as women working and driving, is necessary in the long run; but any mismanagement could be unsettling.
Besides, the Saudi government once gave out generous subsidies and public sector job opportunities to keep economic grievances under control. With one of the highest concentration of ultra-rich households, Saudi needs to closely monitor the de-nationalization and liberalization process and its impact on income inequality. After all, the IPO of Aramco is only the first step, and perhaps a comparatively easy one.
