Why Saudi Aramco's IPO looks doomed to fail

Ras Tanura built by Saudi Aramco in Saudi Arabia

The expectation of high oil prices has been allowing Gulf Arab states- particularly in Saudi Arabia, the UAE, and Kuwait- to undertake large infrastructure projects and for locals to live comfortably, often with subsidized utility bills and the granting of land by the rulers for local males. For this to continue, crude oil prices have to remain over $100 a barrel- that is the hope, anyway. But oil prices are falling, and the Middle East is looking an increasingly volatile place for investors, as Saudi Arabia and Aramco's planned IPO is encountering.

Here's an article by Andy Critchlow, who is at S&P Global Platts, which provides energy and commodities information, writing in The Daily Telegraph. He was working in Dubai, for a number of years, at the same time that I was.

Saudi Aramco's blockbuster IPO looks doomed to failure

18 October 2019 • 2:09pm

Saudi Aramco's quest for a $2 trillion (£1.55 trillion) stock market flotation looks further away than ever. Tepid oil prices, the fraught politics of the Middle East and the demonisation of fossil fuel producers in response to climate change fears have all made the initial public offering (IPO) a mission impossible.

The kingdom appeared poised to list up to 2pc of its shares on its domestic market within weeks. But the long-delayed partial privatisation of the world's largest state-owned oil company now faces another indefinite postponement after the devastating attacks last month on some of its most important facilities at Abqaiq and Khurais in the Eastern Province of Saudi Arabia.

Overnight, the attacks shut down 5.7 million barrels per day of Saudi Arabia's oil production, roughly equivalent to 6pc of global supply. A catastrophic spike in oil prices was only narrowly avoided because of the kingdom's own emergency stockpiles, and its swift response in patching up the damage and restoring output in record time. But this has come at a high price to Aramco, which potential investors will want to see accounted for before paying any kind of premium for its shares in an IPO.

It is a level of detail which the normally secretive Aramco is probably uncomfortable to reveal. In August, the company for the first time gave potential investors a glimpse of its first-half earnings. Net income of almost $50bn made it comfortably the world's most profitable company. However, the cost of repairs at Abqaiq and the inconvenience caused by the attacks will be an ugly blemish on its otherwise pristine balance sheet.

Despite US President Donald Trump's decision to beef up the American military presence in Saudi to help protect its oil, the idea of investing in Aramco has become a much riskier proposition following the attacks.

The Abqaiq episode is the latest in a spate of violent incidents that have targeted oil tankers, refineries and export pipelines in the region. Blamed on either rebels from Yemen, or more worryingly Iran, the attacks have highlighted Aramco's vulnerability to the combustible Middle East and concerns that investors will be left paying the bill for any repairs in the future.

Oil prices are also making it harder for Aramco's bankers to deliver the $2 trillion valuation, the target set by the kingdom's powerful Crown Prince Mohammed bin Salman Al-Saud. The heir to the Saudi thrown wants to raise at least $100bn from the sale of up to a 5pc stake in the company to fund his Vision 2030 economic development plans, which include building a giant robotic city called NEOM on the kingdom's Red Sea coast. Few experts believe this lofty valuation is possible with crude trading at around $60 per barrel.

Three years after he first announced the idea of listing shares in Aramco and growing impatient because of repeated delays, the crown prince replaced the country's oil minister last month with his brother, Prince Abdulaziz bin Salman. However, negative events have again overtaken the IPO's prospects.

Oil markets aren't helping. Last month, the influential US Energy Information Administration (EIA) cut its outlook for oil demand growth to 890,000 barrels per day for 2019. It's the first time oil market growth will have fallen below 1 million barrels per day since 2011. The EIA has now cut its initial forecast of 1.5 million barrels per day of demand growth this year for seven months in a row as trade disputes and a slowdown in global trade weigh on sentiment.

Some international fund managers who have recently visited Aramco doubt the company would choose the current economic climate to list shares and would rather delay the offering until oil prices rebound, even if this takes years to happen.

However, this strategy would also carry risks as international investors come under increasing pressure to either divest existing holdings in fossil fuel producers like Aramco, or avoid the sector altogether. Bank of England Governor Mark Carney one of a growing number of policymakers pushing for financial institutions to make mandatory disclosures of climate change risk and carbon emissions.

More forecasters are also predicting a peak in global oil demand being reached over the next decade by 2030, which makes Aramco a less attractive proposition.

In response, Aramco may have to offer investors even bigger returns. Last month the company revealed it would pay $75bn in dividends next year and prioritise the interests of private investors should its performance fall short. However this still may not be enough to lure investors away from the sector's bellwether international oil companies such as BP, Exxon Mobil and Shell.

A highly paid army of bankers, financial advisers, consultants and public relations consultants drafted into the kingdom have once again failed to deliver the Aramco IPO on schedule. Investors are losing patience and interest.

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Tuesday, 03 August 2021