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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Expect New Aramco IPO Details This Week

Saudi Oil

Aramco’s 5 percent IPO—the world’s largest ever—continues to make headlines. Some analysts claim that the IPO is in danger of failing. Other sources report that the company is considering a 5 percent sale to China. New answers will likely emerge this week as many of the world’s most powerful investors, business leaders and public officials gather in Riyadh for a landmark 3-day investment summit, the Future Investment Initiative (FII).

While media speculation regarding such an historic IPO is inevitable, it’s also largely pointless, because as long as Saudi Crown Prince Mohammed bin Salman holds the reins of power, the Aramco IPO will continue as planned—it’s currently slated to list in the second half of 2018—and the company will be listed on the Tawakul (Saudi Stock Exchange) and one or two other international exchanges.

The media skirmishes regarding an underhand sale of an Aramco stake to Chinese parties is reminiscent of the Arabic Tawla game, which is similar to backgammon. By showing critics in New York, Washington, London, or elsewhere that there are other options for bin Salman to get his desired result, investors must soon decide where they want to put their money.

Aramco could certainly sell a stake to possible parties in China, Russia or even India—without a need to list the company. Though it’s a potentially attractive thought, as it wouldn’t require Aramco to comply with international accountancy rules or potential legislative issues, it also means that bin Salman would give up part of his current pulling power with Western companies, investors and governments to listen to his demands and support his regional policies. Related: Norway Unfazed By Peak Oil Concerns

International analysts’ opinions about the IPO’s future vary widely. Many discussions are focused on Aramco’s reserve potential (which will likely never be known), the impact of listing it on the NYSE, LSE or other places, and institutional investors’ interest in the IPO. Prince Mohammed has made it clear to most parties that if they don’t take part in the IPO, the kingdom doors are closed. Those interested in participating in Saudi Arabia’s major investment plans will be asked to perform according to bin Salman’s standards, meaning one hand feeds the other—those who participate can reap the gains of successful projects.

As for those other plans, there are plenty. Aramco is implementing several new joint ventures, such as its partnership with Rowan Companies (NYSE:RDC), targeting the construction of at least 20 offshore drilling rigs, to be owned by Aramco. Then there’s the Ras Al Khair shipyard project, as well as a large local construction company to target in-kingdom services. The oil giant is also setting up several new downstream projects in Russia and India, locking in demand and production in these countries.

Saudi Arabia’s attractiveness has grown immensely. The government’s budget—which is still feeling the impact of lower oil prices and the OPEC production cut agreement—shows enough room for improvement to warrant optimism. The latest IMF report indicated that the government has some monetary space that will be used to undertake a more gradual fiscal consolidation that balances the budget by 2022 rather than 2019. The latter, harsher measures were presented in the Fiscal Balance Program 2020 (FBP). The IMF reported that Saudi Arabia’s bold reforms program under Vision 2030 are moving in the right direction, and the kingdom can afford to move at a slower pace than originally expected.

Saudi Arabia’s real GDP growth slowed to 1.7 percent in 2016, compared to 4 percent in 2015. For 2017, some analysts from Standard Chartered and the Institute of International Finance (IIF) expect overall negative GDP growth of -0.5 percent in 2017 based on a projection of a 3.4 percent contraction in oil GDP and 1.7 percent growth in non-oil activity. The latter could constrain part of the reform agenda, but still isn’t concerning. Currently, financing for the budget deficit has resulted in a withdrawal of the government’s reserve account at Saudi Arabian Monetary Agency (15 billion riyals) as well as external borrowing (international sukuk of 33.7 billion riyals).

This rather grey picture, however, could be removed over the next few days in Riyadh at the FII summit. Hosted by the Saudi government and its sovereign wealth fund, the Public Investment Fund (PIF), the summit targets a wide range of sectors such as infrastructure, finance, energy, defense and high tech.

Undoubtedly, all C-level FII attendees expect to be informed about the progress and plans of the Aramco IPO. The summit agenda includes plans based on future revenue from the IPO and the other long list of privatizations like airports, hospital, utilities, Saudi Airlines, etc. Related: LNG Becomes A Buyer’s Market

The willingness of several thousand CEOs, CFOs, and CTOs to come to Riyadh—representing tens of trillions of dollars to the Saudi market—should reassure bin Salman that his plans are falling on fertile ground. Considering that the value of assets being managed by merely the listed conference speakers, alone, is said to be more than $22 trillion, Saudi Arabia is sending a message that the Aramco IPO will proceed as planned, and will be successful.

While the Crown Prince is only officially expected to inaugurate the summit, some speculate that he or another high-ranking Saudi Royal will also take the stage to announce the new deadline and targets of the Aramco IPO. With the vast majority of the world’s financial and political wheelers and dealers just around the corner from his palace in Riyadh, bin Salman probably won’t miss the chance to make an impression on the world.

By Cyril Widdershoven for Oilprice.com

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