Why Aramco’s IPO in the middle of a war?

In la Tribune 16/09/2019

The attack by drones this weekend on oil installations in Saudi Arabia caused Brent prices to soar by almost 20% on Monday before falling back. The damage caused by this attack, claimed by the Houthi rebellion in Yemen, disrupted half of production, equivalent to some 6% of world supply. This operation comes at a time when Saudi Arabia is preparing to launch Aramco on the London and Hong Kong stock exchanges, a vital issue for the country.

Almost four years ago, in early January 2016, Saudi Arabia announced the future privatization of its national oil company, Aramco. At that time, a diagnosis was made. Since 1981, oil rents have averaged 81% of the country’s income, but since 2010 they have been drifting steadily towards 90%, and with the energy transition oil prices will fall. At the same time, expenditures had been increasing at an average annual rate of 18% since the 1970s. The old path traced in the desert of the past was lost, budget balance was no longer possible, incomes being too volatile. They collapsed year on year, in 2008-2009 by 54%, more recently between 2014 and 2016, the decline in oil prices was such that Home accounts fell from a surplus of 43 billion euros to a deficit of 88 billion euros. Riyadh instantly reduced its spending by 26%, but at the same time came another traumatic event, the country had to incur a sustainable debt. From 76 billion euros, it was projected in 2020 to 177 billion euros – a figure higher than the 2017 budget – and then in 2023 to 75% of the State budget.

IPO is necessary

Declining incomes, collapsing public spending, a spiral of debt whose management would be weakened by the unpredictability of oil revenues, without reform the country was entering a long recession. It was in this context that the 2030 vision was born: to achieve a balance between expenditure and revenue by 2023 by increasing non-oil revenues, revisiting the strategy of public expenditure and therefore of all-out economies – in particular subsidies on water and energy – and by boosting the private sector through IPOs, including that of Aramco.

The plan is simple, but it has its limitations. Since 2016, reforms have been implemented, but in 2019, oil revenues, a true barometer of change, have only returned to the historical average. However, it is true that the partial IPO of Aramco, whose envisaged revenue would correspond to about 33 % of the country’s 2023 budget, has not yet taken place. It is all the more necessary.

Investors are in favour

Despite investment banks eager to charge consulting fees, the 33% figure justifies Riyadh taking its time. As an essential part of the reforms, no internal obstacles should hinder the partial IPO of Aramco or affect its value.

Indeed, since somes reportedly expressed reservations about the relevance of the deal, it seems that the recent reorganisations of the Ministry of Energy and Aramco’s C-level reorganisation serve to keep in control only managers who are fully convinced of the operation. As it will be carried out between 2020 and 2021, the change is favourable to future investors.

Remains the company’s attractiveness. It depends on several elements.

The first is naturally the price of oil, the higher it is, the higher the expected dividends will be, and the more comfortable the IPO price will be; but although OPEC and OPEC+ are reducing their oil production, the International Energy Agency predicts a production surplus in 2020 rather than a deficit… The weak link is not who you think it is.

World’s leading company

The second favourable element is the attractiveness of the company. The world’s leading company, Aramco is valued at $2 trillion (twice Apple, or Apple and Amazon together), known reserves would be equal to more than 50 years of production, equivalent to about 8 years of global demand and about 9 to 10 times larger than those of Exxon. Aramco produces almost as much as Russia alone, its cost of production is minuscule compared to that of US shale oil, its net income is about 1 billion dollars every three days, 4,000 euros per second, and its debt is low.

However, prior IPO, its value still had to improve in two ways. The first is to create additional wealth by building a verticalized group, which is the reason for the acquisition this year of 70% of the Saudi petrochemical company SABIC; the second is horizontal and includes the acquisition of refining assets, such as this summer the 20% stake in the Indian refiner Reliance Industries, or the 50% stake in the SASREF refining JV held with Shell. Other operations will follow, but each time it is the context of falling oil prices that will require Aramco to better secure the distribution of its oil production in its captive marketing network and to strengthen downstream intergroup industrial synergies, with the aim of solidifying future dividends less hostage to upstream oil prices.

The problem of the link between the company and the State

The third element of the operation: what links will Aramco have with the Saudi State and what amount will be transferred?

Investors are against the link that will persist between the company and the Saudi State; it would call for a discount of the conglomerate to 1,500 billion dollars. However, in Asia, Europe, Africa and the Americas, strategic energy, mining or technology companies have close relationships with their own governments or deep states. They protect the company, and it advances the state’s pawns. According to the latter’s image, the market may consider the relationship favourable, or the opposite, and last weekend’s attack on Aramco’s assets by drones is included in this relationship. Economic reforms and IPO have become regional geopolitical issues. Despite a rise in oil prices, who would buy a company that is being attacked? But who wouldn’t buy the shares of a company weakened by a conflict that will end one day? Needless to epilogue, if we dare to look at it to change it, the danger can vanish….

As for the volume sold, it was announced at 5% of the capital, i.e. $100 billion. This is equivalent to about one-third of Exxon, almost half of Shell or Chevron or a small Total. But 5% are probably not enough to guarantee a certain representativeness of future minority shareholders; 15% would have been more appropriate, but it would be $300 billion to invest.


A $100 billion or $300 billion market call for oil stocks is not neutral in a world that has become socially responsible, which tends to escape the smell of hydrocarbons. Although Aramco can be listed on several exchanges (Riyadh, Tokyo, Shanghai, Hong Kong, Paris…) the volume called would encourage a rapid drying of the capital base allocated to oil stocks. The investor may be tempted to buy Aramco in exchange for the sale of Exxon, Chevron, Total, BP, Gazprom or Shell shares. If the latter lose value substantially, is speculation for a consolidation movement in the sector to be expected? Who would participate? Aramco undoubtedly, and the most clever and well-prepared.

For almost four years, the privatization of Aramco has been announced. But given the geostrategy of the Gulf and the scale of economic reforms, the operation is becoming increasingly complex. What is waiting another year or two to start this necessary IPO? These Saudi decision-makers will be the first generation to see an all-oil world finish, and start another with much less oil. Let them take their time, they can’t afford to make mistakes.