If the public listing of Saudi Aramco ever happens, it will be the largest stock market listing ever. That’s if you believe the Saudi energy ministry, who claimed the company should be valued at four times the size of Apple – at an almost incredible $2 trillion. Such a bullish valuation has generated a mixed reaction from analysts.
Riyadh however is in salesman mode – with oil prices looking low for the foreseeable future and reserves, although large, sure to be run down as fresh oil starts to run low. Part of its economic modernisation programme, which is sluggish to say the least, is to begin privatising its state owned oil assets. Only a fraction – between five and seven per cent, is likely to hit the market, but with such a big prize on offer, there is already an unseemly scramble to gobble up the deal.
Aramco’s crude reserves of about 260 billion barrels are ten times those of Exxon Mobil Corp – while Bloomberg reports that its daily production of ten million barrels is “more than the domestic output of every US oil company combined”. So large is this company that Exxon, Apple, Berkshire Hathaway and Google combined would look small in comparison.
Three stock exchanges are seriously pushing to host this mega-IPO – London, Tokyo and New York. Tokyo recently played their hand. In a meeting with Deputy Crown Prince Mohammed Bin Salman Al-Saud in Tokyo, Prime Minister Shinzo Abe offered concrete assistance with Saudi’s broader modernisation plans. Meanwhile Japan’s Mihuzo, the only Japanese bank already with a branch in Riyadh and the fourth biggest lender to its private sector, is offering its banking services to Saudis in a bid to have a seat at the table when IPO day comes (no doubt at a very good price), and it is not alone amongst Japanese financiers.
A listing in Tokyo, which need not be exclusive, is an outside shot compared to New York, but the House of Saud are said to be looking on in disapproval at the rise of potential president Donald Trump,and his anti-Muslim rhetoric. To be the custodians of the grand mosque and then leap into bed with a deliberate Muslim-baiter would hardly sit well with their public or more importantly the clerical establishment. Wall Street will be fuming – always a good thing – and the third hopeful, London, is looking to cash in.
A while back I wrote about how British politician and former oilman Alan Duncan had missed out on becoming Middle East minister because of his strong views on Israel. The man who kept the job – Tobias Ellwood – also happens to be a former senior business manager at the London Stock Exchange. Old chums there will be hoping Ellwood can convince the Saudis of the benefits of a London listing – while the new Prime Minister Theresa May will surely use any listing as a boost for Britain’s temperamental post-Brexit economy.
Is this company really worth $2 trillion? Latest reports from the International Monetary Foundation have continually stressed that political stability is the single biggest risk to the global economy this year – and Saudi Aramco, and its oil reserves, are based right next to a full on war that already threatens to spill over into southern Saudi Arabia. Few analyst reports I’ve seen seem to have priced this in. At the end of last month, Yemeni rebels claimed to have fired several missiles at Aramco facilities just over the border – although Aramco deny this. State-controlled Saudi media, according to a worried report on OilPrice.com, did acknowledge one missile strike from Yemen, which caused a fire at an electricity sub-station in Narjan.
There is also the possibility of oil running out sooner than Saudi salesmen are making out. One peer reviewed academic study recently estimated “peak oil” could come by 2023. Canny stock market buyers will also be buying from a desperate customer – giving them leverage on the price. This week, Saudi Arabia is cancelling $20 billion of public projects because they are running out of cash, giving buyers of Aramco significant leverage. Some analysts seem to think Saudi Arabia’s low tax system applies to Saudi Aramco and therefore makes the investment appealing; in fact nobody knows how much Aramco is asked to hand over to the increasing costs of running Riyadh’s sprawling public sector, even if these hand-outs aren’t “taxes” per se.
In fact almost nothing is known about the workings of this secretive company – from executive pay to exact operation costs (other than extraction itself – which is low) to middle management capabilities. The oil price staying as low as it is isn’t helping – hedge fund speculation is recently depressing prices further, but the broader structural problem is that demand is going down and down as developing economies’ growth slows. That is not a problem that goes away easily.
Certainly a $2 trillion valuation makes an interesting headline, but the proof will be in the pudding. Saudi Arabia has bet the house on the Aramco listing, particularly as other privatisation plans have – as I have previously reported – become embarrassing failures, but the unseemly scramble to win the IPO has only just begun.