Saudi Aramco’s recent initial public offering (IPO) that helped it raise $25.6 billion, by selling 3 billion (1.5%) of its 200 billion shares, makes it the most valued company in the world at $1.7 trillion surpassing Apple Inc. Though initially expected to do a $100 billion worth IPO by selling upto 5% of its stakes and aiming at a valuation of $2 trillion including listing in the US stock exchanges and also in the UK and Europe, it was later watered down to exclusively in Saudi Arabian stock exchange, obviously due to the tight compliance requirements in the other stock exchanges and any possible legal consequences in the US, like the fallout due to Jamal Khashoggi’s murder among others.
In spite of that, this IPO at $25.6 billion is the largest ever, surpassing the previous high set by Alibaba in 2014 at $25 billion. It could further extend to $30 billion if Aramco exercises its options to sell some more of its shares.
Why is it special?
So what makes this so special apart from the big numbers that are touted? For one, that this would happen in the first place itself makes it a big deal. Ever since the so called “Kissinger deal” in the seventies that made US Dollar the default currency for all oil and gas transactions by Organization of the Petroleum Exporting Countries (OPEC), led by the Saudis resulting in the coining of the term ‘Petrodollar’, the Kingdom of Saudi Arabia with its most prized asset Aramco, became the centre of gravity for all geopolitics in the Middle East over the last four decades cemented by an unbreakable strategic alliance with the US.
The last quarter of the last century and the first decade and a half of this millennium saw the golden era of oil and gas businesses and of Aramco in particular, being the single largest producer in the world with close to 10 million barrels per day. The sheer scale of their operations, and the relative ease of extracting oil as also shipping it to different parts of the world through the Strait of Hormuz, made it the lowest cost supplier, leaving the scale and size of the margins it had to the imagination of everyone. Yet being shrouded in such secrecy, no one really knew what was the quantum of profits they actually made or what would be the real valuation of the company, or that Saudis would ever consider privatising it even partially!
Change after 2014 slide
All this changed after the great oil slide happened post November 2014 OPEC meeting in Vienna that ended without any conclusion on production cut and OPEC themselves losing the relevance thereafter having come to about 30% of the world supply, due to record increases in production all over the rest of the world, led by the tight oil or shale gas revolution in the US. This along with the change of guard in Saudi royalty, with the young prince Mohammad Bin Salman Al Saud, practically at the helm, a new plan for Saudi’s future that is not entirely dependent on oil fortunes was drafted and partial divestment of Aramco came up on table for the first time in 2016.
That finally Saudis decided to monetise their most valued asset to start looking for new investments was hitherto unprecedented and the whole debate was, will then Aramco be “freed” from the shackles of the Kingdom in terms of its governance and would it be able to comply with the tight norms of regulations and disclosure policies that most international stock exchanges and international investors would demand of it.
How the US helped
Saudi Aramco’s IPO offering was actually triggered by the election of Donald Trump as the President of the United States in November 2016, and his new foreign policy that puts America first and keeping “hands off” from Middle East and elsewhere in terms of military spend, unlike how it was until then from the time of President Nixon to President Obama.
Besides, Saudis had to continue fighting their war with the Houthi rebels in Yemen and the shock bombing of Aramco that happened in September this year, despite having one of the highest defence spend among the world in its budget and practically no “action” from the US in spite of Saudis presenting evidences that point to Iran for the attack, meant that in future they will have to fend for themselves. Also the repercussions due to Khashoggi’s murder within the US Congress meant that they would not be able to set the clock back to how it was before 2016 even if there is a change in Presidency next year.
By restricting this whole exercise predominantly within Saudi Arabia, they had managed for the time being to deal with the challenge of compliance requirements elsewhere, and the sale process itself is restricted to rich Saudis and other expats living there as also clients like Chinese. The drop in their profit margins due to falling oil prices and the setback in production this year due to bombing also would have been a concern for the investors that resulted in the Saudis finally somehow getting their act together and making this happen. With some success achieved in this round, we could expect they may eventually go upto the original 5% levels through subsequent rounds of disinvestment.
IPO spurred by output slide
The IPO was also timed with the OPEC meeting held on Wednesday (December 4) that decided to deepen and extend the production cuts would mean that Saudis would be somehow defending to keep oil prices afloat above $60 per barrel. With the reports of year-on-year growth in shale production in Permian basin plateauing, it would make sense for the Saudis and OPEC not to take any drastic measures as of now but simply to wait and watch oil price slowly rising and taking advantage of that. So we could see the oil climbing up, which despite a sharp surge after the bombing of Aramco had fallen back to the previous levels, and rising above $65/bbl. Any positive news on US China trade deal would only make it brighter.
With the excess funds in hand we can expect Aramco to also get into investing into new businesses both within and outside their territory, like their stated investment plan in Reliance Industries Ltd, and in further downstream areas as well. In days to come we could even possibly see larger consolidation of oil firms, which would be Saudis’ own way to regain the control of market that they had until 2014 through OPEC, now through a different route altogether. For the time being though, they could toast to having been crowned as the most valued company on the planet and beating a US giant at that!
(Kishore V Ramasubramonian is an oil and gas professional and works for a leading offshore drilling company)
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