Saudi Aramco ready to Launch IPO: Do the Risks Overshadow the Rewards?

Despite uninspiring oil prices, after months of uncertainty, Saudi Aramco plans to go public, launching what could be the highest value IPO ever. To grasp the potential, consider that the massive company, which by itself accounts for some 40.0% of Saudi Arabia’s GDP, reported $111 billion in earningson revenues of $356 billion in April 2019. And the Kingdom still boasts some 268 billion barrels of oil reserves. Evidently, whether Aramco’s earnings are based on so-called ‘fossil fuels or not, they surpass by far anything that the FANG (Facebook, Apple, Netflix, Google) companies can deliver.  Given the potential – and the uncertainties in the Middle East – the Saudi government has chosen a gradual approach. It will begin by floating a mere two percent of the gigantic company, expected to be valued at $40 billion, on the Riyadh stock exchange first. Consider also that, according to Bloomberg, analysts estimate Aramco to be worth some $2.0 trillion.Al-Arabiya, the Saudi TV channel, reported that the final details of the  transaction will be published on November 17, with trading to begin on December 11.

This will serve as a barometer for investor interest in a much more significant offering, potentially on Wall Street; and potentially the largest IPO in history (even if only two percent of the company is floated, considering that the highest IPO to date was $25 billion set by Alibaba).

The Aramco IPO, however, is wrought in geopolitical intrigue. It is a key piece in the puzzle of the course of socio-economic transformation known as ‘Vision 2030’, upon which Crown Prince Mohammed Bin Salman has set the Kingdom. The proceeds of the IPO are intended to fund projects such as the $500 billion futuristic NEOM city to be built along the northern coast of the Red Sea, featuring flying taxis and talking robots: the Jetsons do Saudi Arabia.

If the Saudis can entertain the idea of bringing fantasies such as Vision 30or NEOM to light by floating their oil company in the public markets, the prospects for investors should be fantastic. However, it’s always best to exercise caution – if not skepticism. The planned Aramco IPO is a rose with many needles. Should shares of Aramco drop after the IPO, it would deal a blow to Mohammed bin Salman’s (MBS) plans, reforms and even his very legitimacy, considering the sudden opening to tourism and, odd (for Saudi Arabia that is), fixation on hosting rock concerts, boxing and even women’s wrestling events (WWE). The Crown Prince – whose international reputation has already suffered in connection with assassination of journalist the Jamal Khashoggi assassination. International investors will pay close attention to how Aramco will perform at Home to get a better idea of how a possible Wall Street debut might be received.

Saudi Aramco extracts some ten percent of the world’s oil – and it does this in Saudi Arabia alone in the desert sands near the eastern shores, the infamous “Empty Quarter” and a few offshore oil fields. There’s no doubt that the Company holds many cards in the future of global energy supply. Nevertheless, MBS’s ultimate vision is for the Kingdom to diversify its economy and reduce its reliance on oil.The idea is to make Saudi Arabia the tenth largest world economy by 2030 by attracting foreign investment over the next decade. Indeed, the persistent low oil prices, and the competition from the United States (so long as fracking and similar techniques are permitted), have forced the imposition of a five percent value-added-tax along with higher fuel and electricity prices. In that sense the Aramco IPO has put Saudi Arabia on the world stage and its valuation would appear to be linked to the future of Saudi society itself.

A Poor Performance Is Not An Option.

One factor that could cool investors’ appetite for Aramco is the tenuous security and geopolitical risk associated with the Company, and the fact that its future is intimately tied with that of the Kingdom itself; especially, given the number of socio-economic outbursts in the Middle East. Indeed, a new series of protests ‘Arab Spring’ – this being the genuine article, as opposed to the 2011 protests, which unleashed a wave of Islamism – appears to be brewing from Egypt to Lebanon to Iraq. And the grievances the protesters are expressing, are not exclusive; many Saudis share the burdens of their Arab neighbors. Their common complaints include corruption, underemployment, unemployment, lack of basic services, huge inequality of wealth. Despite the image of unbridled wealth, poverty exists in Saudi Arabia and the cures that the government has suggested to improve its economy and contain popular discontent may soon prove insufficient. Saudi wealth has allowed the authorities to ‘buy’, or co-opt, the general populace, maintaining subsidies on key consumer goods and energy prices, but the over-reliance on those same oil prices is one of the main contributing factors, which render the Kingdom highly vulnerable to social shock.

There’s much wealth in the Kingdom, but it’s badly distributed, and much social anger is eager to be released like the proverbial genie of the Lamp. Moreover, Saudi oil facilities have proven to be highly vulnerable to attacks, whether from Yemeni Houthi rebels or from Iranian gunboats and rockets. Aramco is the kind of company that needs major armies to protect it. The United States, the Saudis’ main military ally, has enhanced anti-missile defenses. Still, the Iranians and their allies have proven to be far more effective at guerrilla and stealth warfare. And any confrontation will affect Saudi oil production and oil prices.

Aramco started operating in 1933, when the Saudi monarchy signed an agreement with the California Standard Oil Company. It started drilling in 1935, producing oil by 1938. The name Aramco itself was first adopted in 1949: it’s a contraction of ‘Arabian American Oil Company’. Among its prize assets is the Ghawar oil field, the largest in the world, with estimated reserves of some 60 billion barrels of oil, while Safaniya is the largest offshore field with reserves of 35 billion barrels. Aramco’s IPO would be the company’s biggest corporate milestone since nationalization, following the OPEC oil embargo of 1973, when the Saudi monarchy (the State) bought over 25% of Aramco, adding to its existing 35% and becoming the majority shareholder at 60%. Seven years later, in 1980, Aramco was nationalized, formally becoming Saudi Aramco in 1988. Since then, Aramco has spent billions of dollars to expand, form joint ventures (expanding in petrochemicals as well) and increase production to achieve the current record of some 12 million barrels per day.

Alessandro Bruno

Alessandro Bruno, born in Naples, (BA and MA in International Relations, University of Toronto). Alessandro is a research analyst and writer in various business sectors and international politics. He was a Programme Officer for the UN in North Africa and a senior for one of the first international sustainable investment...
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