The Delay in the Aramco IPO Is Hardly Surprising

The Delay in the Aramco IPO Is Hardly Surprising

by | published October 18th, 2019

As I noted in the last edition of Oil & Energy Investor, my next stop involved meetings with large U.S. private energy investors.

Well, it is early on Friday morning and I am putting this together before a final breakfast meeting following a long session that began last evening and lasted into the small hours. This time we are assembling at the Millennium Hilton in New York City close by the United Nations General Assembly Building.

This place brings back memories from my intelligence days, before the hotel was acquired by Hilton.

Then, I used it as a base for all manner of operations related to UN activities across the street. One of its main attractions is an impressive glass lobby that makes it difficult to determine dimensions. But it is reassuring in one way: if you’re being followed, they can’t just become invisible by sitting in the lobby behind a newspaper!

Lobby, Millennium Hilton, One UN Plaza, New York
Photo: Hilton International
These days, tails are not usually something I have to worry about; if folks want to know where I am and what I am up to, they can simply read Oil & Energy Investor online.

Now, as it turns out, for the most part I was correct in my assessment in the last Oil & Energy Investor column.

The directions of conversation and prioritizing of new investment trends in U.S. energy had already been known before we assembled by the East River…

Yet Another (Un)Expected IPO Delay

The one exception to this hit yesterday when word came that Mohammed bin Salman (MbS), heir to the Saudi throne and architect of an historic minority sale of the world’s largest state-owned oil company (Saudi Aramco), had delayed the Initial Placement Offer for a second time.

It had been penciled in for formal introduction next week, followed by high visibility salesmanship during a major investment forum in Riyadh the week after, leading up to the IPO sometime in late November.

Sources early this morning were telling us that this delay may not be for long. Nonetheless, the IPO launch is now almost certainly pushed back to the end of the year or, more likely, the first quarter of 2020.

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I have previously expressed my suspicion that the IPO would again be delayed. Overlooking for a moment the political fallout for MbS from the murder of the journalist Jamal Khashoggi and the ongoing criticism of the tragic civil war in Yemen, there are problems with the IPO itself.

The Problems with an Aramco IPO

First, the valuation initially placed on Aramco of $2 trillion is both unreasonable and unsupportable.

There has been a lot of confusion over this figure; initially, several pundits had bought a $2 trillion total expected from the IPO itself. Now, that was never likely to be for more than 5% of Aramco, with the fire coming from MbS himself.

The proceeds, in turn, were to be folded into the existing Saudi Pubic Investment Fund (PIF) to provide an even greater largess for use. But even there, I have estimated in various media appearances that the IPO will garner no more than $600 billion, with the total possibly moving up to $1.2 to $1.4 trillion via leverage when the full PIF is calculated.

That’s still a nice piece of investment change. Yet here is the problem: The valuation of Aramco remains the most important component in all of this.

The ongoing problems associated with how transparent Saudi officials want to be with reserve figures (considered a matter of national security by Riyadh) remain the biggest stumbling block in a fair valuation. The dependence this has on the market price of crude oil is another.

As an aside, there have not been full publicly disclosed reserve figures for Aramco since Saudi Arabia took it over from U.S. companies in 1979. Additionally, the overall condition of reservoirs has been a continuing concern among technical analysts abroad. There has been even less information provided on this aspect of the transparency issue.

Investors are likely to overlook these matters simply because of the uniqueness presented by the IPO, with an oversubscription inevitable. Still, any lowered valuation judgment cuts into the proceeds.

And that is on the assumption the offer will still involve 5% of Aramco. Some rumors afloat suggest that the first IPO may be for as low as 2%.

Second, all this limits flexibility for another aspect MbS has been floating.

This involves a portion of the initial sale ending up being private placements to large foreign financial and sovereign entities. Chinese interests have been mentioned frequently in this regard.

The idea here is for the private and public components of the IPO to compete, thereby ratcheting up the price. Yet sources confirm that PIF officials have been frustrated in orchestrating such a competition. There also remain internal disagreements over the prospect of foreign sovereign ownership in any part of Aramco.

Third, there are hundreds of millions at stake in funds for book runners in the IPO and considerable interest among investment banks in providing services. But they still have not been named and contacts at some of the leading contenders have privately expressed frustration to me with the process.

Fourth, at this late stage for a launch before the end of the year, Riyadh still has not named a main stock exchange for the IPO.

Much of the shares sold in Aramco will end up circulating worldwide as depository receipts or certificates. Nonetheless, the exchange on which the IPO is released will determine the liquidity and structure of that paper.

This IPO Comes In the Middle of Major Persian Gulf Tensions

New York and London exchanges had been considered the targets, given capital and access strengths. A combination of the ongoing political fallout and registration requirements (another disclosure concern here) – especially when it comes to the NYSE – have presented negatives for both bourses. The ongoing angst over Brexit does not help the LSE candidacy either.

I have a meeting at the LSE to discuss its candidacy while in London primarily on other matters beginning next week. With the October 31 Brexit deadline looming, I will also be there to assess the impact.

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On the stock exchange selection, the Toronto Stock Exchange this week has made an application, indicating the selection is still up in the air.

Fifth, the stock exchange question is further compounded by an MbS insistence that a portion of the IPO float on the Tadawul, the local stock exchange in Riyadh.

This move is to increase the capitalization and liquidity of the local bourse, allow some secondary (and perhaps less visible) ownership to offset concerns over relinquishing a portion of Aramco to outside control, and facilitate Saudi diversification of its own economy through the PIF outside non-energy asset acquisitions.

Unfortunately, the Tadawul must be significantly restructured to make this possible, another roadblock to fast tracking the IPO.

Finally, the entire IPO process is subject to a lessening of the crisis that has besieged the Persian Gulf region. The intensifying conflict with Iran provides another element in discounting the security and valuation of Aramco, thereby cutting into IPO proceeds.

After all, it has been Aramco physical assets inside Saudi Arabia that have already been targets of attack by outside parties intent on calling into question Riyadh’s ability to protect its oil infrastructure.

Hardly a reassuring environment within which to launch an IPO based on those same assets.



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  1. Robert Justiss
    October 19th, 2019 at 11:47 | #1

    Any link between the Aramco IPO and the recent series of RPO dumps to the investment banks as a prelude?

  2. October 19th, 2019 at 15:17 | #2

    What is a Saudi Public Investment Fund ?

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