The Saudi Aramco IPO is a race against time
Over the weekend, Saudi Arabia took a very big step closer to the long-anticipated initial public offering for its massive state-owned oil company. The exact details under which investors around the world will be able to buy shares in Saudi Aramco remain uncertain. On Sunday, though, the company kicked off its roadshow — the traditional process of wooing investors before an IPO actually goes down.
Trading is expected to begin next month. Saudi Crown Prince Mohammed bin Salman is hoping the IPO could bring in $100 billion, and a market valuation of $2 trillion, which would make the company the biggest in the world. Its initial stock sales could very well dwarf Alibaba's record-breaking $25 billion IPO haul in 2014. But in many ways, the crown prince is now racing the clock: There's no telling when (or if) a whole host of looming complications could suddenly materialize and squash the share price, and his plans to remake his country along with it.
Those challenges begin, not surprisingly, with oil. Saudi Aramco cranks out over 10 million barrels of crude oil daily — approximately 10 percent of global oil consumption. Its 2018 net income was $111 billion, which is well beyond the other five global oil giants combined. Its proven oil reserves are five times larger than theirs. Yet for all that massive economic clout to translate into a blockbuster IPO, investors must be convinced that the value of that oil will be reliable for years to come. In the era of climate change, that's no longer a sure bet.
Thus far, global action to move national economies off fossil fuels remains halting and limited. But politics is unpredictable, and there's no telling when governments could get serious. If that happens, current and future demand for oil would fall precipitously — and with it, the price of oil, and Saudi Aramco's value to investors. To give an example of the damage a fall in oil prices could do: when they fell to 13-year lows in 2016, the company's net income for that year was a mere $13 billion. In fact, the company's net income as of September this year was $68.2 billion, compared to $83.1 billion by this same point in 2018. Saudi Aramco "did not give a reason for the fall, but it likely reflects lower oil prices," Reuters reported.
Temasek, the Singaporean sovereign wealth fund, is already hinting it wants to reduce fossil fuels in its portfolio. In which case, it may well skip investing in Saudi Aramco's IPO. Other major institutional investors could well follow suit. And all this clearly has the company spooked: It's pumping $600 million a year into projects to diversify itself and deal with those challenges, like more efficient car engines and carbon capture. Meanwhile, Saudi Aramco's chief technology officer is trying to run interference: "The pessimism around oil is misplaced," Ahmad Al Khowaiter asserted in a recent interview. "The growth is in materials; it is in chemicals."
Another wild card is the drone attack that struck Saudi Aramco's oil infrastructure in September. Responsibility for the attack, which temporarily cut the company's production in half, was officially claimed by Houthi rebels in Yemen. But the U.S. government suspects the involvement of Iran, Saudi Arabia's bitter geopolitical rival. The damage from the attack was repaired relatively quickly, but given the brutal and destabilizing proxy war Saudi Arabia and Iran are still waging in Yemen, investors remain nervous. When Fitch Ratings cut Saudi Arabia's credit rating a notch, from A+ to A, it noted that, "There is a risk of further attacks on Saudi Arabia, which could result in economic damage."
There's also the October 2018 murder of journalist Jamal Khashoggi, a long-time critic of the Saudi regime. Bin Salman denies ordering the killing, though he takes responsibility in the vague sense that he's the ruler of Saudi Arabia, and the murder was apparently committed by people working for officials within the country's government. Khashoggi's murder sent shockwaves through the international community at the time, though it hasn't been enough to quite put people off of Bin Salman's grand plans for his country. Of course, there's no telling what new details might emerge, or when, and what effect those revelations might have on the Crown Prince's reputation.
On top of it all, Saudi Aramco's new chairman, Yasir al-Rumayyan, is also in charge of the country's sovereign wealth fund — a dual role that has some prospective stock buyers concerned about company governance, as the wealth fund is the ultimate destination for the IPO sales.
Add it all up, and no one's yet sure where Saudi Aramco's IPO will land. Estimations of the eventual market valuation range wildly. Bank of America Merrill Lynch estimated anything from $1.2 trillion to $2.3 trillion; Goldman Sachs suggested $1.6 trillion to that same $2.3 trillion upper limit; HSBC put the range at $1.59 trillion to $2.1 trillion. You get the idea. According to Reuters, uncertainty regarding the future value of oil is playing a particularly big role in the vast spread of projections.
Finally, even if the IPO does go off with flying colors, Bin Salman isn't out of the woods yet. Saudi Arabia needs the U.S. dollars from the IPO to wean its economy off dependence on oil as its major domestic industry and export. Saudi Arabia is horribly energy inefficient, it relies almost entirely on fossil fuels for power generation, and those power needs are likely to go through the roof in future decades: The country is a desert, after all, and climate change will only make its environment even more inhospitable, driving demand for major power drains like desalination and air conditioning. Again, if the rest of the world gets serious about tackling climate change, the days when Saudi Arabia could sell its oil in exchange for dollars could be limited.
The clock is ticking in that regard, as well.
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