Is this the end of the Aramco IPO?
By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk
The Aramco IPO has become a headache for many investors having been delayed yet again this week. Banks are now worried that it will be delayed until the end of 2019, which would have a knock-on effect in the financial world as the banks would have been counting on the earnings that the IPO was expected to bring. At the same time, there are no clear signs of the IPO being called off altogether. The very positive statements made by Russian officials, such as Kirill Dmitriev, the chief executive of the Russian Direct Investment Fund (RDIF) during the visit of Vladimir Putin to Saudi Arabia, combined with the positive sentiment in the GCC and Asian markets, would suggest the Aramco IPO will eventually become a reality.
In recent weeks, reports emerged that the IPO will be supported by several large sovereign wealth funds, such as Abu Dhabi Investment Authority (ADIA), Singapore?s GIC, Abu Dhabi?s Mubadala and others, investing in the domestic leg of the Aramco listing. Sources even indicated that these SWFs had already ordered banks to start preparing for the IPO. Chinese parties have also indicated they are on board. Russian investors, present during Putin?s state visit to the Kingdom, indicated a clear willingness to be a part of the IPO adventure. Inside Saudi Arabia, the support of local bankers, investment groups and family offices has been all but ensured by the Saudi government. The only real negative statement was made by Singapore?s investment fund Temasek which openly said it would not invest in Aramco?s IPO.
But behind the positive news, there remain some worrying issues. The most pressing of these is that the overall risk profile of the world?s largest oil company has increased substantially in recent weeks. Some risks had already been identified, such as transparency, accountability and the possible interference of the Saudi government. While these issues have been legally dealt with by Aramco, analysts remain very wary of the potential impact of taking a share in a still largely government-owned and influenced entity. Listing on a stock-exchange will not remove these fears. The opaque decision-making nature of the IPO has made a large group of investors and banks very wary of the outcome. The lack of transparency within the oil Kingdom will always be an issue for the company.
Another issue not yet dealt with fully, even if oil markets seem to be shrugging off geopolitical risks at present, is the Abqaiq issue. The fact that a proxy or third-party actor could bring the world?s largest oil company to its knees has shocked investors. Political risks can be addressed easily enough, but full-scale military threats are new to most investors. Even though Aramco has been able to restore production and exports to former levels, Aramco?s fa?ade of invincible has been severely dented.
For the IPO to be a success story Aramco would have to be valued at $1.5-2 trillion, and the issues highlighted above may well have dragged the company below that mark. With global oil markets still battling to restore stability, demand being under pressure, and regional instability causing fear, the valuation of an Aramco IPO has taken a big hit. Rumors of OPEC targeting new harsh production cuts at the next meeting aren?t helping the situation either.
All of these issues could have been assessed and taken care off well before this point. Saudi Arabia?s strategists can be blamed for having either a lack of willingness or knowledge to prevent this situation from occurring. And now, the ?ghost of Greta? has set its evil eye on the IPO too. Growing international pressure from climate change activists, coming from both NGOs and media sources, is pressuring Western and Asian financial groups to remove themselves from the Aramco IPO venture. Western environmental groups, such as Sierra Club, 350.org and Friends of the Earth, are targeting Wall Street bankers. US, British and Dutch green activists have openly asked banks such as Bank of America, Citigroup, Goldman Sachs and others, not to underwrite the IPO of Saudi Aramco. The NGOs, partly even supported by European political parties, are taking advantage of the ?Greta effect?. As shown by Singapore?s Temasek Holding, pressure from environmental groups can change strategy. Most Western banks and institutional investors are susceptible to NGO and political pressure on climate change.
All of this combined means that things are not looking good for the Aramco IPO. With each delay, all of these pressures and risks are only increasing. After years of haggling with NYSE, LSE and others over the Aramco listing, Riyadh now could be looking at a situation in which appetite is waning, options to list are disappearing, and global oil markets are weakening. That the IPO backers are getting scared is clear. The splitting up of the IPO has already seen by many as a sign of weakness. At the same time, listing Aramco on the Tadawul, Tokyo and other 2nd line exchanges is far from positive news for Aramco or the stock exchanges. If Aramco is valued at $1.5 trillion, the Saudi Tadawul will become the Aramco Exchange and nothing else. For Tokyo, Aramco?s listing would make the exchange extremely exposed to political and geopolitical developments in the Middle East. These unforeseeable and unpredictable non-financial risks are too high to be taken lightly.
These are dark days for Saudi Aramco.
By Dr. Cyril Widdershoven for Oilprice.com