Saudi Aramco’s stalled IPO will dent investor confidence

IN THE Dhahran headquarters of Saudi Aramco, the world’s largest oil company, it is all change. The bankers working on what was supposed to be the world’s largest initial public offer (IPO) have not only gone home for the summer; they may never come back. In their place people are preparing for a possible takeover of Sabic, Saudi Arabia’s biggest petrochemicals firm.

After a Reuters report on August 22nd that listing plans had been called off, the kingdom issued a statement saying the “speculation” was untrue, and that it remained committed to the IPO “at a time of its own choosing when conditions are optimum”. But in reality the process is on hold for the foreseeable future.

Since Muhammad bin Salman (pictured), now the crown prince, revealed his intention to part-privatise the kingdom’s crown jewel to this newspaper in early 2016, it has always been touch-and-go whether he would succeed. He blundered by putting a $2trn price tag on Aramco before anyone had a chance to test investor appetite for it. The palace could not decide whether it preferred a listing in New York, London or elsewhere, having failed beforehand to consider the ramifications of its choice. Nor did it do a good job of persuading Saudis that the sale was in their interests, says Jim Krane, an energy expert at Rice University. Saudi royals feared the transparency required by an IPO would expose the monarchy’s inner workings.

Its logic, however, was sound. An IPO has been the cornerstone of Prince Muhammad’s “Vision 2030”, aimed at raising enough cash for the kingdom to invest in industries that could diversify the economy beyond oil. Much preparatory work has been done, such as making Aramco a joint-stock company and certifying reserves. Suspending the IPO, at least until Aramco has succeeded in taking over and absorbing Sabic, will make potential investors more cautious about the kingdom’s transformation. Their confidence has already been dented by the detention of rich Saudis in a hotel in Riyadh last year and a high-profile crackdown on dissent.

The tie-up with Sabic, worth $100bn, would be a second-best option. The aim is for Aramco to deposit up to $70bn, probably raised in global debt markets, into the Public Investment Fund (PIF), the kingdom’s official piggy bank, in exchange for the PIF’s 70% stake in the petrochemical firm. The PIF would get less than the $100bn that the Aramco IPO was meant to bring in, but a tidy sum nonetheless.

The risk is that it will fritter the money away on vanity projects that do little good to the kingdom’s economy. That risk also exists with the proceeds of an Aramco IPO, but at least then, after the kingdom sold the first batch of shares, it could always raise more money by selling others.

Yet for Aramco, buying Sabic may turn out to be a good thing. Mr Krane says that for years the oil company was forced to provide Sabic with subsidised feedstock, essentially supporting a rival to its own downstream operations. The acquisition will create a more diversified energy giant, along the lines of an ExxonMobil or a Royal Dutch Shell. And with 30% of Sabic’s shares possibly remaining listed on the Saudi stock exchange, could there be a back door, one day, to an Aramco listing?