Where and when?
Amid fluctuating oil prices, delays and a lack of firm decisions from the government, there is no guarantee that an IPO – particularly on a foreign exchange – will happen at all. The Saudi government’s current view is to launch an offering in the second half of 2018, but some believe it could be pushed back to 2019.
The latest move by the government has given the biggest hint yet that a listing will happen this year. In the first official bulletin of 2018, the Kingdom announced it has changed the status of Aramco to a joint-stock company to establish the framework needed for future investors to hold shares alongside the government.
The cabinet decree said Aramco has fully paid-up capital of 60 billion riyals ($16 billion) divided into 200 billion ordinary shares. The decree said the move will mean Aramco will meet the regulations of the international market where it is listed.
The only exchange almost certain to get a piece of Aramco is Saudi Arabia’s domestic stock exchange, the Tadawul. As far as an overseas listing goes, London and New York are seen as the two frontrunners, with competition also coming from the likes of Singapore, Hong Kong and Tokyo.
Although Aramco would sit in its own league on any exchange, the US and UK are both bellwethers in the IPO space. The New York Stock Exchange (NYSE) remains top of the league by some way, with IPOs raising nearly $38 billion in 2017, while IPOs on the London Stock Exchange (LSE) reached a three-year high at £15 billion to eclipse its European counterparts.
Big money brings in big players
It is rare for world leaders to bend over backward to attract a company, but UK Prime Minister, Theresa May, visited Riyadh in 2016 on a trip that happened to coincide with a separate visit to the country, by the then chief executive of the LSE, Xavier Rolet. US President, Donald Trump, also lobbied King Salman bin Abdulaziz Al Saud in 2016 and tweeted that Aramco’s listing in New York was ‘important to the United States’.
Last year, the UK Financial Conduct Authority (FCA) launched a consultation about creating a new premium listing category on the LSE to make the regime ‘work better for companies controlled by a shareholder that is a sovereign country’. Although not mentioned by name, the proposals are targeted directly at Aramco.
With Saudi Arabia set to retain majority control over Aramco after any listing, the FCA’s proposals would allow the Kingdom to float only 5% of Aramco in London (compared with the 25% minimum under current rules), and exempt the government from controlling shareholder and related party rules.
A final decision was supposed to be made by the FCA before the end of 2017, but the market is still waiting, with reports the plan could be dropped altogether as pressure builds from critics against the FCA’s seeming willingness to accommodate Aramco at the expense of the UK’s highly respected regulatory regime.
Powerful politics
Politics has and will continue to play a much bigger role than usual in this story. Most importantly, Saudi Arabia has confirmed it would keep control over Aramco’s output and capacity, as well as who is chairman, in the event of any listing. This would facilitate Aramco’s leading role in the 14-nation strong Organisation of Petroleum Exporting Countries (OPEC). The oil producer’s group, in partnership with non-members like Russia, has been working in recent years to manage global supply in order to support prices amid ever-rising output from the US, which overtook Saudi Arabia as the largest oil-producing nation back in 2014, when prices began to tumble from over $100 a barrel.
And with US and UK leaders openly pursuing Aramco, the strained relationships between the pair and Saudi Arabia have to be taken into account – from criticism over the West’s willingness to supply arms to Saudi Arabia, amid proxy wars with Iran, to the Kingdom’s questionable human rights record, as well as the furore sparked by Trump’s recognition of Jerusalem as Israel’s capital.
With one of the more recent diplomatic crises in the Middle East still rumbling on, after a swathe of countries led by Saudi Arabia cut ties with neighbouring Qatar in mid-2017, it is worth noting that the latter’s sovereign wealth fund (the Qatar Investment Authority) holds over 10% of the London Stock Exchange Group.
Snapshot of Saudi Arabia’s economy
- - Saudi Arabia has a population of 32 million, almost two-thirds of which is under the age of 30
- - Around 90% of total government income comes from oil revenue solely derived from Saudi Aramco
- - The economy grew 1.4% in 2016, but declined in real terms, versus long-term average annual growth of 3%
- - In 2013, Saudi Arabia had the second highest fiscal balance (8.3% of GDP) and the lowest debt-to-gross domestic product (GDP) ratio in the G20. In 2016, it had a budget deficit of around 56%
- - Cash reserves peaked in 2014 at $750 billion, before falling to $610 billion in March 2016
- - Opened its stock market to large institutional foreign investors in 2015
The outlook for Saudi Arabia: Vision 2030
- - Vision 2030 is aimed at leveraging the country’s position within oil markets, privatising government services and growing sectors like manufacturing, technology, and tourism
- - To increase non-oil revenue from 163 billion riyal to over one trillion
- - To up the contribution from the private sector from 40% of GDP to 65%
- - To lift foreign direct investment from 3.8% to an 'international level' of 5.7%
- - To move from 29th into the top ten countries for global competitiveness
- - To grow the assets of its sovereign wealth fund (Public Investment Fund) from 600 billion riyal to seven trillion, to make it the biggest fund of its type in the world
With a multitude of possibilities, what next?
With such uncertainty surrounding any offer, speculation is high. With the Kingdom currently in sole control of the business, it could transfer ownership of Saudi Aramco before any listing to the Public Investment Fund. The Kingdom could also sell additional shares on top of any IPO through a secondary placing to book extra profits.
While many doubt the Tadawul could handle the listing on its own, it is still a distinct possibility, as the Kingdom would be able to avoid the transparency required if it listed overseas, which would see Aramco’s finances, and therefore the vast majority of the government’s finances, made public. It would also require the oil reserves that Saudi Arabia has boasted for decades to come under further scrutiny.
Listing Aramco at home as well as abroad through a dual-listing is seen as the most likely outcome at present. While Aramco is likely to choose only one foreign exchange, there is potential for two or more being involved.
There is also a chance that China could scupper the plan to take Aramco public altogether, with reports that Beijing is willing to buy a 5% stake in Aramco privately, which would allow Saudi Arabia to manoeuvre around the rules and regulations of any exchange to keep everything in-house, while raising the funds it needs for its sovereign wealth fund. Operationally, Aramco is much more aligned with Asia, where two-thirds of its oil and one-third of its refined products are exported, than that of Europe, where 6% of Aramco’s oil and 12% of refined products end up, or the US, which takes about 16% of Aramco’s oil.
While the questions of where and when still linger, investors can only prepare themselves to make sure they’re ready for the biggest IPO of all time.
