Saudi Aramco Take Two: Better Odds, Nagging Questions

Saudi Aramco is feeling its oats.

Saudi Arabia’s state oil company is revving up plans for an initial public offering and accelerating the timeline for what would be the world’s biggest listing as soon as early next year, according to The Wall Street Journal. Some things have changed since its failed prior attempt that could help a listing, and its owner has good reasons to forge ahead. But a deal can only happen if expectations are reset.

The oil giant has overcome some big hurdles since Saudi’s Crown Prince Mohammed bin Salman proclaimed Aramco could be worth some $2 trillion in an IPO. That was early 2016, when oil prices were near 12-year lows and the kingdom was burning through its foreign-cash reserves. Brent crude prices, though off from the mid-$80s per barrel price last year, have since roughly doubled. The company also has completed a $12 billion bond offering, overcoming one of its biggest hurdles: Unveiling its financial statements to the public. All that points to a higher likelihood a deal will go through on this second attempt.

But buyers still have reasons to be uneasy. First, unlike bondholders who receive a fixed coupon payment, equity holders will likely care more about how its controlling shareholder extracts value from the company and where the cash is being spent. Second, unlike oil giants like

Exxon Mobil

BP or


Aramco doesn’t make decisions on its own. When the Organization of the Petroleum Exporting Countries says that it is going to move to support oil prices by reducing production, Aramco is both driving and cushioning that blow.

Saudi Arabia has used its massive exports and spare capacity as both a carrot and a stick to get its way in the quarreling cartel, taking a disproportionate share of the pain of cutbacks or flooding the markets as punishment. What other listed oil company would give up revenue to boost prices realized by competitors?

Other dynamics could make shareholders nervous. Aramco recently agreed to buy a 70% stake in Saudi Basic Industries Corp., the kingdom’s petrochemicals firm, for $69 billion. The industrial logic may have been solid, but it was seen as a way to bolster Saudi state coffers. Future related-party transactions might leave investors wondering if Aramco got a good price.

And the kingdom still needs cash. Investments in technology, including


’s Vision Fund, may not be paying off cash as fast as Saudi Arabia might like. Its ambitious plans, including a $500 billion desert project that includes flying cars and robot dinosaurs, need funding, too. The International Monetary Fund projected in May that Saudi Arabia would have a budget deficit of 7% of gross domestic product this year and has estimated that oil prices need to be in the $80 to $85 a barrel range for its budget to break even.

A deal can get done, but at what price will MBS part with some of the family silver? Aramco’s $111 billion in 2018 profit gave bondholders enough confidence to buy. A $2 trillion price tag is another matter entirely.

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