Saudi Aramco IPO Seems Unlikely

The proposed Saudi Aramco IPO seems increasingly unlikely to actually take place, in my opinion.

The Aramco IPO of 5% of the "family jewels" was originally heavily promoted to be listed on the New York, London or Hong Kong stock markets.  But those locations fell through with a resounding thud.  Despite media chatter, those key financial hubs seem clearly not suitable for the Aramco IPO.  Due to lack of transparency by Aramco, and also the very real threat of litigation against Aramco, especially in New York.

So last year, Aramco tried bypassing these 3 international markets, and tried floating the idea of selling the 5% stake directly to state players China and then to Russia.  Clearly, neither China nor Russia were seriously interested in directly purchasing a 5% stake in Aramco.  My guess would be lack of transparency by Aramco regarding their actual proven reserves and actual, proven decline rates.

With China going great guns in recent years to acquire secure energy sources from countries and National Oil Companies around the world, it speaks volumes to me that China turned down the offer to acquire an exclusive 5% stake in Aramco, which is by far the biggest oil company in the world.

China has invested heavily over the years in Venezuela's National Oil Company PDVSA.  And PDVSA is currently a complete basket case, a corroding disaster, circling the drain.

So China has thrown money left, right and center to PDVSA, but won't touch an offer from Aramco for 5% of Saudi Arabia's "family jewels" - Aramco.

Think about that for a minute.  Seriously.

Russia also politely snubbed Aramco's offer of an exclusive 5%.  And Putin is no dummy.

So ... then KSA had the bright idea to list the world's largest IPO on their own, tiny, Saudi Arabia stock market. Bad idea.  The local Saudi exchange is clearly not transparent enough for international investors to dump USD $2 trillion (supposedly) for the Aramco IPO. 

And that idea clearly didn't work, as it has come full circle again.  Media are once again chattering about the idea of an Aramco IPO being listed on the New York, London, or Hong Kong exchanges.  That idea fell through the first time around ... what's Einstein's definition of insanity again ... ?

Oh, and that USD $2 trillion valuation?  Without transparency about the actual, proven reserves and actual, proven decline rates of Aramco's massive oil assets, then that number is reminiscent of the Emperor's New Clothes - try not to gawk in disbelief.

With water cut at 40% or 60% in some cases on Aramco's aging oil wells, with Enhanced Oil Recovery activities going on for years now, with China and Russia unwilling to purchase an exclusive 5% stake in Aramco, and with Al-Naimi, the former longtime head of Aramco leading the charge for renewable energy in the Kingdom, it seems increasingly unlikely that a Saudi Aramco 5% IPO with a valuation of USD $2 trillion will ever see the light day.

Maybe if the significantly over-valued $2 trillion valuation gets chopped in half, and Aramco fully opens their books to investor scrutiny, then - and only then - does a Saudi Aramco IPO have a chance to succeed. 

Since the Aramco books remain firmly closed as an official State Secret, and since the brash, young Crown Prince MbS won't back down about a $2 trillion valuation, I'm not holding my breath.

Just my opinion; as always, you are free to disagree.

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On 4/28/2018 at 4:28 AM, Tom Kirkman said:

So last year, Aramco tried bypassing these 3 international markets, and tried floating the idea of selling the 5% stake directly to state players China and then to Russia.  Clearly, neither China nor Russia were seriously interested in directly purchasing a 5% stake in Aramco.  My guess would be lack of transparency by Aramco regarding their actual proven reserves and actual, proven decline rates.

 

Did China and Russia officially give up on a bite of Aramco? I was under the impression they were still considering (although I'm guessing they're holding out for more favorable terms).

I agree that the likelihood of an Aramco IPO outside of Tadawul is increasing waning as the oil price rises. Rumors kept surfacing that the IPO wouldn't generate enough income at $35 oil. Then it was $50 or whatever, now $70---still insufficient to push it through. What about $100 oil? $120? Maybe. If Saudi Arabia has its way with OPEC, and if US shale industry is suddenly sucked through a black hole of space, and if Saudi Arabia can at least feign transparency with Aramco's books, then we may very well see an Aramco IPO.

So I am firmly saying there is a chance.

 

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Heh heh, the saga of the proposed IPO is an ongoing morass. 

Your points noted, Rodent.  Nothing is set in stone; the IPO has been delayed till at least the end of 2019.  Primarily due to lack of transparency - Saudi Aramco books are still a "State Secret".  Good luck to the auditors who are trying unravel the Aramco State Secrets. 

As oil prices get pushed up higher and higher toward triple digit territory, all bets are off, and KSA may just fly the IPO in a fit of haste with oil at $100, in order to grab whatever cash they can before oil prices crash again.

If oil stays closer to $70, then IPO plans will probably drag out.

A significant issue that KSA and MbS seem to not have fully grasped is that to have an IPO, the company's books have to be fully transparent and independently confirmed.  And absolute dictatorships are not exactly used to those concepts.

Near as I can tell, KSA's overtures to China and then to Russia for an exclusive stake of 5% were never "official".  But clearly, China and Russia have so far shown no overt keen interest.  Again, I'm guessing it's that lack of transparency bugbear that keeps mucking up the plans for Aramco's IPO.

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China wouldn't pass on opportunity to snatch 5% of Aramco. 2T valuation puts reserves at ~$7.5/bbl - fair deal, if you can enforce it (I guess they can). Question of 270B bbls reserves figure is an open one but there are heaps of it (Arab D permeability is likely understated - can't core good stuff). 

5% of $2T is only $100B - Putin may have it on his personal offshore accounts but an unlikely buyer (selling his oil to China); China won't think twice. Transparency? leave it for the Western world...

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8 minutes ago, DanilKa said:

China wouldn't pass on opportunity to snatch 5% of Aramco.

Oh really? Remember this from last year?

Saudi Aramco’s global listing in doubt as Riyadh explores private sale

"Saudi Aramco is considering shelving plans for an international listing in favour of a private share sale to the world’s biggest sovereign wealth funds and institutional investors.

Talks over a private sale to foreign governments including China and other investors have gathered pace in recent weeks, according to five people familiar with the initial public offering preparations, as concern for the feasibility of an international listing has grown."

Clearly Aramco's talks with state players - including with China - have failed, as the recent buzz is all about a public IPO at the end of 2019 (maybe).  No recent talk about China or Russia directly buying a 5% stake of Aramco.

Just a thought, perhaps China offered to buy the 5% stake using Yuan rather than USD, and Aramco said no ...  just speculation.

The longer the runway gets for an Aramco IPO, the more things that can derail it.

Yes, I know, Aramco and MbS need to save face.  And perhaps I'm being a pain in the butt contrarian anout this IPO.  But still, all I see in actual fact are more delays, more excuses for delays, and no actual progress toward an IPO.

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Tom,

there are a lot of games around this IPO - I wouldn't trust a thing they publish. $100B is nothing for China and only pays KSA budget deficit for a year.

My guess - KSA (or folks around IPO) are using China card to prop up valuation above $2T.

 

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1 hour ago, DanilKa said:

My guess - KSA (or folks around IPO) are using China card to prop up valuation above $2T.

 

That makes sense to me.  The $2 trillion valuation is still way too high in my opinion.

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On 5/2/2018 at 2:46 PM, DanilKa said:

Tom,

there are a lot of games around this IPO - I wouldn't trust a thing they publish. $100B is nothing for China and only pays KSA budget deficit for a year.

My guess - KSA (or folks around IPO) are using China card to prop up valuation above $2T.

Seems despite the rise in oil prices, the $2 trillion valuation has magically shrunk to $1.5 trillion.  Still seems fishy to me.

When Saudi Aramco's IPO finally happens, Canadian oil investors may be in for a painful correction

The highly anticipated IPO of Saudi Aramco may be behind rising oil prices, with analysts suggesting a deliberate attempt on the part of the Saudi regime to goose the value of the offering.

No date has been set for the IPO, but when Saudi Arabia finally does pull the trigger, it will no doubt mark a historic occasion. Aramco is estimated to be worth US$1.5 trillion, and the Saudis have expressed a willingness to sell as much as five per cent of its equity, worth approximately US$75 billion.

 

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NYSE and London are an absolute no-go, no matter what. Hong Kong, maybe. Tadawul just isn't big enough. Aramco would represent too big a piece of that pie. I think if Hong Kong doesn't want it, the IPO will be reliant on China, but my guess is that Saudi Arabia and China will be unable to agree on a price, which to be fair will fluctuate with oil prices. If China feels that oil prices will fall later this year or next, they will not be itchy to negotiate now that oil is near $80.

My unsubstantiated thought is that if KSA does pull the trigger, it will be firing blanks.

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Rodent, we seem to be thinking along similar lines.

Aramco can't list on New York or London, as Aramco simply cannot meet the transparency requirements - as well as the threat of being sued.

So far, the IPO just keeps getting delayed.

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Reuters / WSJ update:

Preparations for listing Aramco stalled: WSJ

(Reuters) - Public listing preparations of state-run Saudi Aramco have stalled, the Wall Street Journal reported on Thursday.

Aramco, the world's biggest oil producer, has been expanding its global footprint by signing downstream deals and boosting the capacity of its plants ahead of the eagerly awaited initial public offering.

The company's public listing is a part of Saudi Arabia's plan to open its economy but a senior Aramco executive told here the WSJ that "everyone is almost certain it (IPO) is not going to happen".

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It could be an unsubstantiated rumour. It could... Come to think of it, if all these refinery deals fall through because of the Aramco IPO things could get interesting in petrochems.

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They don't have a choice--they need it to happen.

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On 7/11/2018 at 2:23 AM, HermitMunster said:

They don't have a choice--they need it to happen.

But when?  2 years from now?  5 years from now?  By the deadline of Vision 2030?

Lack of transparency and unknown quantities of money being funnelled directly to the royals are not exactly items that shareholders want to see.

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Agree, it's a dead dog. The world is increasingly seeing through the previously impenetrable veneer of the Saudi oil market, and especially appraising their recent failure to single-highhandedly drive the OPEC cartel towards a sustained higher price plateau. The whispers of Russia being invited to join the cartel only underscore the weakness of the once dominant Saudis and there's a very real military geopolitical angle to this and that is that the Saudis have been messing about inconclusively in Yemen and have been totally ineffective in the broader Middle East. That Trump is content to cut them loose (without saying as much) plays further to their impotence and the recent mass round-up of money men incarcerated in the gilded hotel doesn't come across as a masterstroke by MBS, more as an act of desperation, somewhat substantiated by the fact that some players could usurp any notion of supposed right and wrong by buying their freedom, albeit at a high price (by Western standards).

There's the unspoken subtext of the Saudis previously being protected from their acts in relation to 9/11, rather than KSA being held to account, retribution was diverted to Iraq and Afghanistan (to remove a dominant figure and secure poppy fields), therefore there's not many tears being shed (or political capital being expended) on the Salafists and their narrow agenda as their oil dominance begins to wane.

Give it a decade or two and KSA will be another Venezuela, important yes, strategically necessary, no. Uncle Sam isn't backing it and nor should it, thankfully Permian power and unconventional prowess allows their sins to no longer be forgiven. Sinking their IPO, despite increasingly desperate overtures from the UK and other market makers, is almost a political subtext. I can hear the shareholders of the majors singing in the streets ;)

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They don't really need the IPO to happen, and as I believe I mentioned elsewhere, the whole process so far has shown them that they need to restructure Aramco anyway, so they will continue to do that regardless. I have some sources in Riyadh who tell me that the talks even for a local IPO have been set aside for now. 

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4 hours ago, Martin said:

The world is increasingly seeing through the previously impenetrable veneer of the Saudi oil market, 

< snip long interesting comment >

Your ideas are intriguing to me and I wish to subscribe to your newsletter.

Well said, Martin.

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Aramco’s Next Plan To Raise Billions Of Dollars

By ZeroHedge - Jul 28, 2018

The Aramco IPO may now be history, put on indefinite hold several weeks ago, but Saudi Arabia's funding needs have never been greater. As a result, 32-year-old Crown Prince Mohammed bin Salman, aka MbS, has come up with a "novel" scheme to raise tens of billions for the government. According to the WSJ, the de facto Saudi leader is forcing urging Aramco, also known as the Saudi Arabian Oil Company, to raise debt to buy a controlling stake in a petrochemical company from the country’s sovereign-wealth fund. The money would then go to the government - whose latest fund-raising strategy, we remind readers, was to round up the country's oligarchs and hold them in a "hotel" until they paid up - to be spent as MbS sees fit.

... 

Simplifying the money flow: the cash goes from international yield chasers, to a consortium of banks, to Aramco, to Sabic, to the Saudi government.

Two things here:

First, nobody besides MbS wants the deal. Aramco Chairman Khalid al-Falih "has long been opposed to a deal for Sabic" the WSJ sources said. Meanwhile, Sabic executives worry that the company "would lose its identity in any deal."

• Second, in the absence of an Aramco IPO, Saudi Arabia really has no option; Prince Mohammed’s advisers see a deal between the kingdom’s two largest companies as central to remaking the economy.

========================

So, perhaps 1 key item needs to be added to that handy little cash flow summary posited by the wags at ZeroHedge.  Perhaps I can be of assistance... my suggested addition in bold:

Simplifying the money flow: the cash goes from international yield chasers, to a consortium of banks, to Aramco, to Sabic, to the Saudi government, to MbS.

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Amusingly accurate update, from an article today on Oil Price:

The Real Reason Behind The Next Oil Squeeze

hold the view that KSA is currently fairly happy with the supply/demand balance. At one time they weren’t happy due to an approximate $100 billion budget deficit from low oil prices (we can be forgiven for seeing a delicious irony in this outcome). This was a prime factor in the notion of selling off 5 percent of Aramco in an IPO, that was formally announced in early 2016. The fabled IPO is something that no one speaks about much anymore. Here’s why.

A few things happened on the way to the listing. First, they couldn’t find anyone who would certify just how much oil they had in reserve. That is anyone who came up with a number that matched their own. Worth noting: reserves estimation is a very complicated topic, the outcome of such an estimation is often driven by what the seeker wants the reserves to be. Getting people to agree with you is another matter entirely.

Second, they don't really need the dough anymore. Here's where it gets interesting. You may remember the corruption purge in Riyadh last year? You know the one where a bunch of very well off people were held captive by MBS, in the Riyadh Ritz-Carlton for a month or two? Take a look at the Ritz-Carlton in Riyadh sometime, if you are feeling excessively sorry for any of these folks. If you are going to be held captive some place, this is the place you want it to be.

The foundation for their estimation of ARAMCO's reserves and subsequent valuation of $2-Trillion, was the $100 billion deficit. They were going to put up 5 percent of the business which using their math turned out to be right at $100 billion. Imagine that.

To tie all of this together, a hundred billion is about the amount that various sources reported MBS having collected in the Purge.

This IPO exercise served as an abrupt education for MBS as to the vicissitudes of the transparency requirements of the public markets. Something he's never had to deal with as a private company. You hear less and less about this now that MBS has refilled his coffers courtesy of his well-heeled countrymen. The rise in oil prices over the last couple of years has also lessened the Saudis enthusiasm for the sale of even a tiny fraction of their national mainstay.

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I know, RIGHT?

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12 hours ago, Rodent said:

good grief. There is not going to be an Aramco IPO!

 

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