Saudi Aramco does not rule the world

The valuation of an energy company cannot be engineered like the production of oil

John Gapper

web_Saudi Aramco IPO failure
© Ingram Pinn/Financial times


Crown Prince Mohammed bin Salman tends to get his way in Saudi Arabia, so the mood in Riyadh on Saturday when a group of investment bankers rejected his wishes must have been frosty. He had wanted an initial public offering to put a value of $2tn on Saudi Aramco, the world’s biggest oil company, but they demurred.

The prince still runs the country and Yasir al-Rumayyan, chairman of Saudi Aramco and head of the kingdom’s sovereign wealth fund, responded by calling off plans for a global IPO in favour of a local offering. Saudi Aramco will probably be valued at $1.7tn, but the prince’s vision of the IPO symbolising his country’s opening up to the world has faded.

It is a telling moment, not only for Saudi Arabia and its crown prince, but for investors. After the aborted IPO of WeWork, the shared offices group, it is another example of public shareholders refusing to accept the lofty valuations of private owners. Companies have enjoyed a good run — making exchanges compete for listings and gaining high prices from investment institutions — but the mood has changed.

Saudi Aramco could hardly be more different to WeWork as a company. Drilling for oil and gas and refining fuels is about as solid and cash generative a business as any investor could want, even if the future of fossil fuels is less certain these days. Saudi Aramco has access to 52 years of proven reserves and extracts oil more cheaply than any western energy major. Even in a carbon squeeze, it would prosper.

It is also very well managed, given the potential for corruption and insider dealing in a state energy monopoly. The bankers who rejected the prince’s estimate of its value admire the engineering skills of a company founded in 1933 as a subsidiary of Standard Oil of California. When production was crippled by a drone attack in September, it restored its operations quickly.

But a connection between Saudi Aramco and WeWork runs through the crown prince’s backyard. The Saudi Public Investment Fund (PIF), its sovereign wealth fund, invested $45bn in the SoftBank Vision Fund in 2016. The Vision Fund in turn backed WeWork and Adam Neumann, its discredited founder, and SoftBank was forced to organise the $9.5bn rescue of WeWork after its IPO failed.

The kingdom’s resources have been funnelled into other high-flying technology groups. Mr al-Rumayyan, who was put in charge of the Saudi Aramco IPO by the crown prince in September, is a director of both SoftBank and Uber, the ride sharing group backed by SoftBank. The PIF has taken bigger investment risks than the Saudi Arabian Monetary Authority central bank.

The intention is to realise the prince’s Vision 2030 plan to reduce the kingdom’s reliance on a single industry — one company, in fact — and to diversify the economy. At one point, the IPO was expected to raise up to $100bn, rather than the $25bn that a domestic listing on the Tadawul exchange is likely to produce. Selling only 1.5 per cent of the company’s equity is a domestic dabble, not a global revolution.

The crown prince and Mr al-Rumayyan could both be forgiven for believing that everyone would obey them. The prince is a monarch and Mr al-Rumayyan has billions to invest, which is the nearest financial equivalent to royalty. He and Masayoshi Son, founder of SoftBank, have adopted the wave-of-money view of investing: if you lead the way with billions, others are bound to get swept along.

It did not work for Saudi Aramco. “They were fixated on one price and that’s what happens in a monarchy if the top guy wants something. But I respect them for holding the line,” says one banker. “It’s disappointing,” says another. “There is an element of them saying, ‘I’m taking my toys home’.”

Despite the cancelling of investor roadshows in the US, Europe and Asia for the flotation, an international IPO may eventually happen. That is the hope of banks that poured resources into lobbying for lucrative roles, and lent $11bn to the PIF to fill the hole left by the retreat. If the company floats successfully in Saudi Arabia, an international listing might follow.

This requires the Tadawul exchange to operate transparently and to establish a price for Saudi Aramco that is trusted by global investors. One banker compares the domestic listing, in which citizens are being allocated one-third of the shares, with the British Gas privatisation in 1986 and its “Tell Sid” marketing campaign to retail investors.

But price discovery is not like oil discovery: it cannot be engineered by governments. Members of the kingdom’s ruling families were detained in the Ritz-Carlton in Riyadh in 2017 in an alleged corruption inquiry and some were later told it was their duty to buy shares in the IPO. Saudi Arabia’s Sids are incentivised to take the prince’s word for what Saudi Aramco is worth.

The original promise of the Saudi Aramco IPO was that it would not only unleash the world’s most valuable company but would make the kingdom more liberal and transparent. “He is opening Saudi Arabia to the world,” promised the posters displayed on the prince’s international diplomatic visits. Not really, it turns out.

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