Saudi Aramco to Take A Pause in Going Public

State-owned, Saudi Arabian Oil Company or Saudi Aramco has been a centre of focus lately. Well, the drone strikes at its one of the many plants saw policymakers from the global geopolitics playing a blame game.

In a note, dated 14 September this month, the gigantic oil producer, mentioned that the drone strike at its facility resulted in production suspension of 5.7 million barrels of crude oil per day.

This news sent an opportunistic wave to the crude oil bulls across the globe, resulting in a sharp acceleration in crude oil price in the futures market. A 5.7 million barrels a day cut in the supply outlook, witnessed crude oil futures to attain the highest intraday high on 16 September, which surpassed the previous intraday high recorded during the Gulf War in 1991.

Nevertheless, the high-flying bulls in the crude oil market were put to calm by the sizzling stance of the United States. The US had declared to use its strategic petroleum reserves in order to tackle the supply shock, and this was enough to calm the rally in the crude oil prices.

As a consequence, it is widely circulated in media that the gigantic oil producer might take a pause in listing its stock in the local stock exchange, which majorly hosts banking companies and petrochemical companies. The listing, which could be one of the largest, has been a widely reported move by the media giants.

As a state-owned enterprise, the government of Saudi Arabia is the owner of the company, and the Crown Prince intends to list about 5% of Aramco, which would see the company taking off billions of dollars from the market.

Media reports had cited that the crown prince intends to diversify the oil-dependent economy, and the stake sale is a part of Crown Prince Mohammed bin Salman’s economic reform agenda.

Being the world’s most profitable oil company, the valuation in mind of the owners is close to US$2 trillion, but that is in excess by US$500 billion according to market consensus. Moreover, the market is expecting a valuation of US$1.5 trillion.

Aramco is prepared for a dual listing of its stock with a primary listing in the local stock exchange, and the other listing would be targeted to other jurisdictions. In the light of dual listing, the stock exchanges across the globe might have been engaged to pursue Aramco’s listing in their respective exchanges.

Currently, the global financial markets offer various jurisdictions to list, which includes major financial centres, including Tokyo, London, Honk Kong, New York & Singapore. It should be noted that the Saudi Government could be critical of the offered valuation, as efforts to list the stock last year collapsed.

Media reports note that a listing in the US might trigger a series of terrorism lawsuits targeting Saudi assets, as a new law in the US allows terror victims’ families to sue foreign countries for reparations.

Besides this, the possibility of antitrust litigation rose up, as Aramco is a member of OPEC or Organisation of the Petroleum Exporting Countries, could take up a toll on bond-offering prospects.

In addition, the increasing uncertainty in the political environment of the UK & China has dented Aramco’s plan to list the stock in both the countries, and the oil producer is reportedly eyeing Tokyo as a compelling prospect.

Half Year Insights (Source: Aramco Website)

Lately, the state-owned enterprise has seen some management reshuffling, and Mr Khalid al-Falih was replaced from his position as the Chairman of Aramco. Mr Khalid was also removed as the energy minister, and Prince Abdulaziz bin Salman became the energy minister, while Saudi’s Sovereign Wealth Fund head, Yasir al-Rumayyan was appointed as a Chairman of Aramco.

Market has cited this move as a sign of firming up of intentions to list the stock of the Aramco domestically, as well as internationally. The Royal Family members have been pursuing rich families to subscribe for the Aramco’s stake sale, in order to boost the probable demand to acquire a stake in the company through a public offering.

According to media reports, following the attacks at the facility, the company’s officials and energy ministry might consider rescheduling the hefty IPO of the oil producer. The officials may want to attain the production levels back to normal.

Media has cited that the damage caused by the drone attacks might take weeks to get back to pre-attack status. However, the company would use its stored oil and other facilities to restore production in the coming days.

Incorporating the attack-related risks might tumble the hefty valuation of the company. Besides, the country’s conflict against Iran-backed Houthi rebels in Yemen has seen an increasing number of rocket & drone attacks in the country.

In addition, there have been several attacks on the strategic assets of Aramco’s facilities and supply chain assets across the nation.

Recently, the company has disclosed its half-year results for the period ended 30 June 2019. The revenue and other income related to sales for the period stood at US$163.88 billion compared to US$167.67 billion a year ago. Profit after tax for the period was US$46.89 billion against a profit of US$53.01 billion in the previous corresponding period.

At the half-year end, the balance sheet was carrying borrowings of US$10.24 billion under the current liabilities, and US$35.85 billion worth of borrowings under non-current liabilities. Besides, the company had cash & cash equivalents of US$39.52 billion at the half-year end.

Operating at a humongous scale is a compelling advantage that Aramco would leverage in its business operations. Besides, the stake sale would also help flourish a more transparent corporate governance model in the company.

Lately, the investors have been critical of high valuations and less transparent corporate governance structure, and these critical aspects have dented the higher aspirations of hefty valuations.

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