By Anthony DiPaola/Middle East Energy Team/Bloomberg
Saudi Arabia first struck black gold in March of 1938, at the Dammam Number 7 well in the desert near the state oil company’s present-day headquarters on the Arabian Gulf.
Now the Kingdom is looking for a new gusher eight decades after that first discovery — this time by wooing foreign investors to buy into state-owned Saudi Arabian Oil Co. The king’s influential son, Crown Prince Mohammed bin Salman, is championing a share sale by the end of next year, which he told Saudi state television in May, could account for “not far from 5%” of the company’s stock. Known as Saudi Aramco, the state producer could be valued at more than $2tn, he said last year.
Saudi Arabia is courting investors as the world’s biggest oil exporter seeks to diversify the economy by building new industries to create jobs. Selling part of Aramco will underpin the overhaul. To tap those funds, the Kingdom needs to show it can do more than just sell crude. King Salman’s promotion of Prince Mohammed to heir to the Saudi throne in June from his previous role of deputy crown prince is set to spur the economic transformation plan the younger royal is leading.
“Saudi Arabia is all about oil — it’s still the lifeblood of the country,’’ said Olivier Jakob, managing director of Zug,
Switzerland-based energy consultant Petromatrix GmbH. “The Aramco sale has to be a success’’ if the Kingdom is going to raise the cash needed to diversify the economy, Jakob said. “It’s about the credibility of the country.’’
The biggest questions surrounding the region’s most anticipated initial public offering are how much Aramco is worth and how much oil it has. The country is currently conducting its first independent audit of oil reserves, which it quantifies at about 260bn barrels. Aramco is still sorting out where and when to list its shares, and details like these will determine whether investors flock or flee when the company hits the market.
If Aramco were to achieve the crown prince’s target for the IPO, it would be the world’s biggest company by far — about three times the size of Apple Inc and six times larger than Exxon Mobil Corp. But some analysts reckon that Aramco won’t raise a fifth of what the prince wants. A 5% sale of a $2tn company would bring in about $100bn, dwarfing the $25bn snared by Chinese Internet retailer Alibaba in the world’s largest initial public offering in 2014.
The need to reform the economy gained urgency when Brent plunged from $100 a barrel on average from 2010 through 2014 to less than half that amount. Saudi Arabia isn’t alone among Middle Eastern oil producers in cutting government spending by reducing subsidies and delaying projects. It’s running deficits and drawing down financial reserves even as it leads the Organisation of Petroleum Exporting Countries (Opec) in cutting crude output to curb a global glut and shore up prices.
The government targets a balanced budget by 2020, and it forecasts a deficit for this year of 7.7% of gross domestic product, down from 11.5% in 2016. The International Monetary Fund lowered its Saudi growth forecast to 0.4% from 2% in January. In the meantime, the Kingdom has burned through about $241bn in financial reserves since August 2014, when oil income swelled its cash pile to a record $746bn.
In a turbulent market, Aramco needs to be transparent to ensure investors of earning long-term returns. That means sharing three key pieces of information, said Neil Beveridge, a Hong Kong-based analyst covering oil and natural gas companies at Sanford C Bernstein & Co Aramco will need to report its financial performance, disclose the size of its oil and gas reserves and provide a picture of how much investors can expect for their money.
The company has said it will release its 2017 financial results, including the audited reserve data, before the IPO. The independent review of Saudi oil reserves “is very reassuring,” Energy Minister Khalid al-Falih said in February. The share sale could come in the second half of next year, Aramco chief executive officer Amin Nasser said in January.
Stock exchanges worldwide are vying for the honour of hosting the Aramco IPO. Bourses in Hong Kong, Singapore and Tokyo have all courted the Saudis, and King Salman bin Abdulaziz visited Asia in February and March. China offered to buy a stake in Aramco through its sovereign investment fund and largest energy company, people familiar with the situation said in March. Singapore made a similar offer, people familiar with those talks said in February. Both groups of people asked not to be identified because the talks are private, and companies involved declined to comment.
While an Asian listing is an option, Aramco could also sell shares in New York or London along with the main listing in Riyadh, where the Saudi Tadawul exchange is located, Aramco’s Nasser told Bloomberg in January.
Without more clarity, investors will have scant information on which to base their valuations of the company. Analysts at Sanford C Bernstein & Co estimated in March that the IPO could set a market value of $1tn to $1.5tn for Aramco, while Rystad Energy AS put it at $1.4tn, assuming a long-term oil price of $75 a barrel.
“Our most likely scenario is that the IPO will happen, but proceeds will come below the government’s expectations,’’ Raphaële Auberty, an analyst at Fitch Group’s BMI Research, said on March 14. “The level of transparency over reserves and management will be crucial to generate sufficient investor interest, and therefore boost the valuation of the company.’’
Taxation and government involvement in corporate decision-making are among reasons why state oil companies usually trade at a discount to their privately owned peers, Beveridge said. Aramco pays a 20% royalty on its revenue and had been paying an 85% tax on income. Under plans set out in March, the government slashed the company’s income tax rate to 50% retroactive from January 1 this year.
The reduction meets one of the requirements set out by analysts for the IPO. “The Saudi government needs to reduce the rate to bring it more in line with other listed oil and gas companies,” said Mohamad al-Hajj, equity strategist at EFG-Hermes Holding, in early March. “A range of 40 to 50% would be more in line with the typical tax rates applied on global oil and gas producers.”
While Aramco will derive most of its value from oil, Energy Minister al-Falih says the company he led before joining government is ploughing cash into becoming one of the largest refiners and chemical makers and also exploring for natural gas to power the country’s industrial growth.
“The benefit of having oil and gas has long been considered a birth right to many Saudis,” said Peter Salisbury, a senior research fellow at the Royal Institute of International Affairs, also known as Chatham House. “The Saudi leadership has signalled they’re willing to make radical changes. Prince Mohammed has made a series of strategic bets, and each of them has to come through to make his plan work.”
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