Is The Aramco IPO Inevitable?

The Saudi government said it would halt their plans for an IPO of their State-owned Saudi Aramco oil company, in charge of virtually all Saudi energy assets.

This changes everything.

It was my belief that the entirety of Saudi strategy for the last several years revolved around the monetization of the Saudi oil assets, or at least a valuation of them in a small percentage IPO offering.

Indeed, proceeding with the outlines of the vast Saudi Vision 2030 plan required a cash flow for investment in education, infrastructure and trade that only a financial diversification from the singular oil assets in Saudi Arabia could provide. Once the inevitability of the Aramco IPO is brought into doubt, that whole plan becomes suspicious as well.

And that changes the way that we likely should perceive young prince Mohammed bin Salman. The two schools of thought of the young prince were either that he was a modern progressive voice, gaining firm control of the Saudi government in order to drive religious and social progress on the old Wahhabi culture that has dominated the Kingdom for generations - a drive to 21st century modernism. The other casts MbS as a young tyrant, taking advantage of the outlines of Saudi Vision 2030 merely to consolidate power. Indeed, crackdowns against opposing factions to the prince in Saudi Arabia are growing more widespread and the Saudis have also recently picked an unusual fight with Canada over human rights statements that normally would have been ignored. Along with the abandonment of the Aramco IPO, these latest moves by the Prince now look far more sinister.

Saudi oil minister Al-Falih was quick to deny that the IPO won't happen at some point, just not in the immediate future. There are reasons, besides believing the power grab is alone motivating this denial, to believe this is true: With the strong disclosure requirements of big exchanges in New York and London, the IPO was finding it difficult to find that "big stage" that it required. It was also clear that a valuation for Aramco under $1 trillion was going to be unacceptable to the kingdom, a lofty number that would likely not only require $100 oil, but also the general analyst belief that oil prices would remain there for several years to come. And that certainly is not the current outlook, even if I believe that's exactly what we'll see.

So -- what to make of all this? Fundamentals in the oil markets are hardly changed and the prospects, at least fundamentally, for $100 oil remain incredibly strong for 2019. On the other side for risks to this projection is the continuing long-term threat of a global recession, where other economic indicators are beginning to show signs of stress, and in the short-term, with the Trump-inspired trade war, where a new U.S. deal with Mexico seems possible, but where China and Canada have firmly refused to restart trade negotiations, at least right now.

In the worst-case scenario in which the IPO is not just "on hold" and the young prince MbS is merely concerned with consolidating power alone, then his equivalent concern for much higher oil prices disintegrates as well. With that could come the end of the production guidelines that have kept both OPEC members and Russia in cooperation and then allow an expansion of production that would put the oil price recovery in jeopardy and equally "on hold" as the IPO.

It is difficult for me to believe that the hard work of the Saudis and MbS has been solely a subterfuge for a new monarch to consolidate power -- both with the construct of Saudi Vision 2030 and with the historic discipline in the producer consortium they've created in the last two years. So, for this moment, we will continue to invest with the belief that the IPO is only being held off for better conditions, and not scrapped entirely.

But this is the key story we must continue to monitor. Everything depends upon it, for the oil markets and our investments.