Sugarcoated and shrouded in mystery: Saudi Aramco's IPO

Yasir Al-Rumayyan, Chairman of Aramco's Board of Directors and Governor of the Public Investment Fund characterised the new IPO as "a significant milestone in the history of the Company and important progress towards delivering Saudi Vision 2030, the Kingdom's blueprint for sustained economic diversification and growth."

He also underscored potential "long-term, exclusive access" to his country's unique hydrocarbon resources. 

From outside Saudi Arabia, the deal looks like a potential financial asset, but is in fact entangled in a web of political liability and uncertainty pivoting around Crown Prince Mohammed bin Salman personally and politically.

As a result, the much-anticipated IPO is off to a shaky start in Riyadh. It has received mixed reactions since Aramco flagged it in 2016, and has faced multiple delays. Now, there is a renewed Saudi effort to attract foreign investors while there are also several challenges:

International investors keep asking questions with no-clear cut answers, so far, from Riyadh

First, Riyadh's excessively secretive approach may not encourage enough investors to buy the stock later in November and beyond. It remains unclear whether Aramco would allocate 5 percent or less of its shares, and how to list them in domestic and/or global markets. 

Speculation pivots around the idea of dual listing: possibly 1 or 2 percent of the shares in the domestic stock exchange (Tadawul); and a small fraction in a wide array of dispersed markets such as New York, London, and Hong Kong.

Aramco officers have not yet revealed their plan, and the lack of a linear IPO process, which would have helped to build confidence, has resulted in many wary observers.

Second, investors may be scratching their heads in front of a 'too good to be true' situation. The Saudis have accepted the Aramco valuation at 500 to 800 billion dollars less than what Crown Prince Mohamed Bin Salman had touted for the jewel in his 2030 Vision, back in the summer of 2018.

Instead of the highly-celebrated prediction of a $2 trillion valuation, the true figure tends toward $1.2 trillion to 1.5 trillion, in the best case scenario.

The investment advisory firm based in London, Palissy Advisors, puts Aramco's value at just $1 trillion. In addition, it's highly likely that Riyadh will twist the arms of wealthy Saudi families to invest heavily in the 1 to 2 percent of the domestically-listed shares. 

This idea of diversifying across multiple nests for the Aramco IPO to lay maximum gold eggs implies the company is facing real case of flagging momentum.

To help sugarcoat the new offer, the company's officials are considering boosting next year's dividend by a further $5 billion to win over investors, while vowing to secure a yield of 4.4 percent between now and 2024. Still, foreign investors find themselves in catch-22 situation; they can neither gauge Aramco's real valuation, nor the realistic yield of its future dividends. 

Third, there are the hidden rules of the game: perception and trust. The Aramco IPO is now akin to a giant golden frame hanging on the wall, still waiting for its portrait. Investors do not appreciate gazing at empty casing for too long.

Unlike MbS' new advocacy for modernity and openness, the Aramco IPO seems to be shrouded in mystery. Aramco officials have kept their hand close to their chest with extra layers of security around the offer. International investors keep asking questions with no-clear cut answers, so far, from Riyadh. The Financial Times notices Aramco has kept investors "in the dark on IPO details", about key details including the number of shares on offer, the price range, or even an indicative date for the listing. 

Fourth, the Houthi drone attacks on the company's installations halved Saudi Arabia's oil production in September. Now, MbS needs more than a political recovery, by reinforcing the image of his Kingdom's security image, as well as affirming he is the main mover and shaker of a new Saudi Arabia.

The correlation between Aramco and Vision 2030 remains vital. The company pumped roughly one in every eight barrels of oil produced daily in the world between 2016 and 2018. But MbS has been desperately trying to reconstruct his public image after the killing of journalist Jamal Khashoggi inside the Saudi Consulate in Istanbul just over a year ago.

Foreign investors find themselves in catch-22 situation

His motto remains money buys political leverage, and the financial reward of Aramco IPO will be part of his political resurrection.  

Fifth, Aramco has embodied Saudi glory in the world energy sector for decades, but the honeymoon between oil exports and high Saudi oil revenues, and influence with OPEC, may not last forever.

Back in 1973, Saudi Arabia maximised their pressure on the West by cutting oil exports. Now, world oil demand is expected to decline significantly by 2040.

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The US provides some useful indicators of the emerging shifts in the variety of energy sources over the last fifteen years, with North Americans now relying more on alternatives to fossil fuels. NASA foresees nuclear power as an effective substitute to challenge fossil fuels in the future, as well as solar, hydroelectric and wind power. 

But Saudi leaders may resist accepting such a reality.

Earlier this year, Aramco Chief Executive Officer Amin Nasser rejected any concern about the rise of those alternatives to oil as "not based on logic and facts", and said they arose "mostly in response to pressure and hype".

During an oil industry conference in Houston Texas in 2018, Saudi petroleum minister Khalid Al-Falih confidently said he was "not losing any sleep over 'peak oil demand'."

The Aramco IPO does not seem to be positioned well to generate high bids, or meet MbS' hopes on world stock exchanges. Saudi Arabia faces a double-edged loss of momentum, in either delaying the new IPO, or in being too fond, too faithful to its historic love of oil.