When the idea of a public float for Saudi Arabia’s state-owned oil behemoth Aramco was first suggested by the kingdom's Crown Prince Mohammed bin Salman in 2016, it was dubbed the "mother of initial public offerings (IPOs)" with fancy chatter of a $2 trillion valuation via domestic and international listings.
Over three years and several delays later, with an international listing firmly parked for the moment, the Saudi Aramco IPO is finally upon the market via a domestic listing on the Saudi stock exchange – the Tadawul.
If market commentators thought rumors of a mere 5% of the equity of the state-owned oil giant would be on offer internationally, with the percentage being well below the minimum listing requirements of several global exchanges, the latest move of offering much less than that – possibly a mere 2% - via a domestic listing is unlikely to instill confidence.
It won't be helped by Aramco's revelation on Monday (November 4) that its nine-month profit fell 18% to $68.2 billion, down from $83.1 billion posted over the same period a year ago, while its revenue dropped to $217 billion from $233 billion.
By my modelling the company does not appear to be on track to match the $111 billion annual net income it posted in 2018, making it the world's most profitable firm. That title is likely to stay with Aramco with a "public-listed" prefix as its nine-month income figure already exceeds the 2018 net income posted by Apple – hitherto the most profitable public-listed company in the world.
While Aramco offered scant details on why its profits have declined, it is obvious that oil price declines of over 10% compared to the same reporting period last year have contributed to it, with Brent currently lurking around $60 per barrel levels rather than lower $70s range seen over the corresponding period last year.
If the profit drop is unsettling, Aramco appears pretty poor on the openness front. The IPO prospectus will be released on November 10 but in the run-up the so-called mother of all IPOs all analysts have received are upbeat ambition statements.
These include talk of "long-term value creation through crude oil price cycles" and improving sustainability "by leveraging technology and innovation to lower our climate impact" with little detail. And if that wasn't enough, investors have to contend with an IPO with an above average geopolitical and economic risk profile.
Recent drone attacks on Aramco's crude processing facilities in Abqaiq and the Khurais oilfield, knocked off 58% of Saudi Arabia headline crude production. The attack was claimed by Yemen's Houthi rebels, but was pinned by the west on Iran. The developments are part of a regional tussle between Tehran and Riyadh, who have been regional rivals for decades, and Aramco's fortunes could be caught in the cross-hairs.
However, for Aramco's boss Amin Nasser, the company is still the "most reliable" oil producer globally. In a pre-IPO statement, Aramco has said it does not expect the fallout from the drone attacks "to have a material impact on its business, financial condition or results of operations."
Be that as it may, it adds another layer of concern for an IPO that doesn't appear to be short on that count. Right now all of Aramco's profits are paid back as dividends to the Saudi state. Very soon, a tiny portion of that would be dispatched to private shareholders bringing pressure of a kind the company has simply not faced.
Market sentiment is often fickle. In step with the dividend yield, regional geopolitical flare-ups as well as the oil price direction, Aramco's share price will be hit by short-sellers which would be alien territory for a monopolistic outfit with upstream assets that are hardly diversified.
What's more, after nearly four decades of independence as an operating entity, Aramco is facing increasing operational interference in the reign of King Salman, and the country's de facto power broker Crown Prince Mohammed Bin Salman. But with cons aplenty, there is one very huge pro – the company's phenomenally low production cost which cannot be easily matched by rivals.
Aramco's crude lifting costs in the last few years have averaged between $8-10 per barrel, courtesy shallow fields and cheap labor from the Indian subcontinent. With near absolute monopoly, comes the company's custody of over ~297 billion barrels in proven reserves. That's a huge chunk of 1.73 trillion of the whole planet's total proven reserves. Only Venezuela holds more as a nation, and Canada is a distant third in the pecking order.
So even if Brent trades at $50 per barrel, the company will still make plenty of money although it may not be enough to balance Riyadh's budget and social programs that need ~$80 to keep ticking along. Where from here is tricky to call but even the biggest fans of the IPO within and outside Saudi Arabia believe a $2 trillion valuation is wishful thinking.
Perhaps a valuation in the $1.2 - $1.5 trillion bracket banking on low production costs, huge reserves and, for now, the absence of an international listing, would be the big ticket. But sooner rather than later Aramco is bound to feel market forces of a different kind, and not just passive critics but short-sellers with a game plan.
Date: Nov 4, 2019