By Sonny Atumah
The Crown Prince of Saudi Arabia, Mohammed bin Salman, MBS in January, 2016 broke the news that global oil giants, Saudi Aramco would float a US$2 trillion Initial Public Offering, IPO in 2018. Described as the most lucrative in history, three stock greats, the New York Stock Exchange, the London Stock Exchange and Hong Kong out of the 16 ‘Trillion Dollar Club’ members globally, jostled to win the listing of Aramco shares.
In an IPO the issuer obtains the assistance of an underwriter to determine the type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to the market. Saudi Aramco appointed JP Morgan, Morgan Stanley and HSBC as financial advisers for the listing.
These banks are lead underwriters and global coordinators for the IPO. The five percent equity stake would have made the listed company the most valuable company in the world. Proceeds of the traded company were to be invested in non oil industries to reduce the Saudi economy’s reliance on oil.
With the global campaign against carbon emission and fossil fuels the Saudis also hope to invest in technology to transform and diversify their economy.
The 95 percent balance in the Aramco deal was to be transferred from the government to the Saudi Public Investment Fund, PIF. These were encapsulated in the Crown Prince’s economic diversification plan, to prepare the kingdom for the post-oil age, the core of vision 2030, to reverse budget deficits occasioned by the oil price sump of 2014. Was the IPO ambitious and realizable?
Was it abandoned or suspended? Oil industry analysts; have questioned the US$2 trillion target, suggesting that a figure between US$1 trillion and US$1.5 trillion was more realistic.
Whatever the situation is today the Saudis must be commended for their foresight in the PIF established in 1971 to operate as a sovereign wealth fund and to finance projects locally and internationally. The IPO was to further diversify the kingdom’s economy using oil along vertical linkages. It may not be realizable now but the young Crown prince should be encouraged through support by the Saudis that look beyond oil.
The Saudi Energy Minister, Khalid al-Falih last week in Riyadh reaffirmed that the state oil giant’s IPO will be listed by 2021. Last August, it was reported that Saudi Arabia had scrapped its plans to publicly list five percent worth of shares of Saudi Aramco. One explanation for canceling or delaying the IPO was that the capital injection it was expected to generate is less urgent due to a partial recovery of oil prices that stood above US$70 per barrel then.
After the release of the Reuters report on the scrapping of the IPO, Saudi Energy Minister and Chairman of Aramco issued a statement that the government remained committed to the IPO of Saudi Aramco, choosing when conditions are optimum. It is an investment that is realizable. Analysts believe that Bloomberg data are that there’s plenty to cover investors. Aramco produces from some of the largest, lowest-cost fields in the world and spent just US$7.9 billion in production and manufacturing costs in the first half of 2017.
Critics say the Aramco IPO, though important symbolically, would not help create jobs that are urgently needed in a country facing 12.5 percent unemployment. There are doubts in financial circles about the degree to which the valuation matched fundamentals.
But the Senior Vice President of Downstream at Saudi Aramco, Abdulaziz M. Al-Judaimi, believed there are two transformative drivers—global economic growth averaging more than 3 percent annually, and the world population expanding to more than 9 billion people by 2040, will have the net effect of adding another India and China to today’s global energy demand. In the decades ahead, two-thirds of global energy demand will come from India and Southeast Asia, where demographic growth must be matched by the rise in basic living standards that reliable, accessible energy can provide. That’s a challenge complicated by increased urbanization and a rise in consumer purchasing power by a growing middle class.
Saudi Aramco is the world’s largest oil supplier responsible for producing one out of every eight barrels. It produces and sells over 10 million barrels of oil every day. Aramco is the world’s fourth-largest refiner on a net refining capacity basis. Saudi Aramco is committed to helping ensure that tomorrow’s energy needs are reliably met.
That includes building our refining capacity worldwide and integrating refining with chemicals production to meet a demand for the energy products that accompany higher living standards—especially in high-growth markets. These have made it the most profitable energy company with a net income of $33.8 billion in the first half of 2017 before taxes.
Aramco generates the bulk of Saudi Arabia’s revenue, the accounts also provide sovereign bond investors with a unique insight into the kingdom’s financial health. A considerable amount of the income goes to the government budget, which could change. Oil prices are very much linked to state foreign policy, which likely worries potential international investors.Read Full Story