The IPO of Saudi Aramco: Salvation or mirage?

Crown jewels are considered to be priceless assets and are rarely put up for sale. In dire circumstances, however, they can be all that a kingdom has to offer. While Saudi Aramco is not a jewel in the literal sense, the reserves of 'black gold' it possesses do represent near-immeasurable wealth. Treasure aside, the highly anticipated public listing of Saudi Arabia’s national oil company provides rare insight into the challenges facing Saudi Arabia and its rulers, one of the world’s richest and most private royal families.

Turmoil in the Kingdom: Rationale for action

Saudi Arabia, long under pressure from low crude oil prices, is looking to sell shares in Aramco as early as 2018 as part of an effort to generate much-needed revenue and reform its economy. For Mohammed bin Salman, the influential deputy crown prince of Saudi Arabia, the flotation is the lynchpin of his ambitious plan to wean the Saudi economy off oil, which today makes up 90% of the country’s revenues.  As part of its Vision 2030, the kingdom’s privatisation pivot, the IPO will send a strong message to international investors. The plan aims to boost the private sector share of the economy to 60% by diversifying into other sectors such as healthcare, infrastructure, and education.

Better call Saud: Key issues

The foundation of the powerful House of Saud is built upon Aramco, which for years has been swathed in secrecy. There has long been unconfirmed speculation that Aramco’s proven reserves may be smaller than claimed, however, any listing of the company on public markets would require the curtain to be thrown back. With wildly differing valuations of Aramco, from the $2 trillion mentioned by Prince Mohammed to the $400 billion estimated by oil & gas consultancy Wood Mackenzie Ltd, an IPO would require a level of openness that would be a huge step for both the Saudi economy and its ruling family. Already, rumours suggest that a private assessment of Aramco’s value was recently conducted – potentially a step in that direction.

Prince Mohammed’s enthusiasm around the prospects of Saudi Aramco going public is centred on an "increase in transparency" and the "curbing of corruption", but it is still too early to tell if this will be enough to appeal to potential investors. Currently, there is significant uncertainty surrounding the future governance model of the company and whether the sale will include all of Aramco’s assets. Investors involved in past national oil company privatizations have been exposed to the fallout from major shareholder transparency complaints (Gazprom) and government-toppling corruption scandals (Petrobras). Looking to that history, prospective Aramco shareholders would be justified in taking the Prince’s enthusiasm with a pinch of salt. 

The unicorn to end all unicorns

Even with all this uncertainty, the prize on offer is gigantic. Saudi Aramco is the world’s biggest oil producer with stated proven reserves of 261 billion barrels of crude and an average production rate of 10.2 million barrels of oil per day. Put another way, it owns roughly 20% of the world’s proven oil reserves and produces one in every eight barrels of the world’s oil.  An IPO of just 5-10%, even at the low-end of current valuations, has the financial world salivating. Aramco has the potential to demolish the current IPO record, which was set by Chinese firm Alibaba in 2014 when it raised $25 billion.

As a relatively new investment bank, Moelis & Co pulled off a coup, beating established rivals such as Rotschild and Evercore to become the lead independent advisor on what is expected to be the world’s largest IPO. As lead advisor, Moelis will oversee underwriters and lead preparations for the IPO, including advising on key decisions such as the markets where Saudi Aramco will be listed. While the shares will be quoted on Riyadh’s Tadawul exchange, Saudi officials are assessing the prospects of multiple overseas listings: with Hong Kong, Singapore, London and New York making the shortlist.

The privatization of Saudi Aramco has the potential to shake up the world’s financial markets and wean the Saudi Arabian economy off its unhealthy addiction to oil. It remains to be seen, however, if the ruling family will accept the sacrifices needed to woo investors and make Aramco’s IPO a success, or whether it will all only amount to a mirage in the desert.

March 1, 2017 by: Bishrut Mukherjee, MBA 2018