Saudi’s shattered dream: The failure of the Aramco IPO



For Saudi Arabia Aramco is more than just an oil company, it is a matter of national pride. The crown jewel of the Saudi kingdom is the most valuable oil company in the world. For decades Aramco has financed the kingdom's development and its exponential rise from an impoverished desert kingdom to a modern country, in its rags to riches tale.

However as oil prices crashed in 2016, the extent of the kingdom's addiction to oil became clear. To survive in a post-oil world Saudi Arabia will have to diversify away from oil into other sectors. To finance this diversification the Saudi government decided to divest a small part of Aramco whose valuation was estimated at 2trillion dollars, the Saudi government deciding to sell 5% of the company to raise 100 Billion dollars. Or so was the plan.


A series of events that culminated in the interim contributed to a systematic collapse of the IPO plans. On 11th December 2019, Aramco did make history by floating the biggest IPO in history valued at approximately 29.4 billion dollars at the local Saudi stock exchange (Tadawul), but not everything went as planned.


What is Aramco and why is it so important to Saudi Arabia.

The foundations for Aramco were laid in the year 1933 when it's the then-parent company, standard oil California (SoCAL) obtained a concession to explore for oil in the Kingdom. SoCAL gave this license to its subsidiary in Saudi which was known as California Arabian standard oil (CASOC). The following companies held a share in CASOC.




In 1938 CASOC discovered oil in a well close to modern-day Dhahran (which happens to be the headquarters of Saudi Aramco). Eventually in more oil wells were discovered in the kingdom which significantly increased output. In 1944 CASOC was officially renamed as Arabian American Oil Company or Aramco. Initially, a majority of Aramco's profits were taken abroad to its American parent however in 1950 king Ibn al Saud threatened to nationalize the kingdoms oil reserves if the profit wasn't shared on a fifty-fifty basis with the kingdom.


By 1973 following the Yom Kippur War in which the US (Saudi's largest customer) had supported Israel and the ensuing oil embargo, the kingdom increased it's holding in Aramco by an additional 25% increasing its ownership to 60% of Aramco.By 1976 Saudi Aramco hit a milestone as in that year it produced more than 3 Billion Barrels of Crude. BY 1980 the nationalization of the company was complete and by 1988 its entire operation was moved to Saudi Arabia including its headquarters and the company was officially renamed as Saudi Aramco.


Since then Saudi Aramco has grown exponentially, the company retained much of its technocratic work culture and most of its employees including a significant number of foreigners. Initially, Saudi Aramco limited itself only to extraction; however with Aramco's first Saudi President Ali Al Naemi (who was also the Saudi energy minister at the time) expanded the company's business into a refinery and commercial oil products as well. For this purpose, Aramco purchased Refineries around the world. Aramco's refineries portfolio includes numerous refineries in China, Japan, and South Korea which have for long been Aramco's focus markets and North America's largest refinery at Houston. It has also agreed to purchase 20% of Reliance industries limited which would give it access to the Indian Market as well through RIL's Jamnagar refinery.


The revenue Aramco has brought in for the Kingdom has been used to subsidize and give Saudi citizens a comfortable life. Until the austerity measures which were introduced in 202o due to COVID 19 pandemic Saudi citizens virtually paid no taxes and were entitled to subsidized housing, healthcare, education, and other services. For the Saudi Royal family, it has financed an opulent lifestyle and their indirect control over Aramco has cemented their political authority domestically and given them a voice in International affairs.


However as oil prices plummeted in 2016 to below 40 dollars a barrel, Aramco's revenue started slowing and the kingdom's vulnerability was exposed. IMF predicted that if oil prices continue at its current trend Saudi Arabia will run out of its cash reserves within a period of five years. In 2016 it became evident that Saudi Arabia had to kick it's addiction to oil and diversify its economy on an urgent basis. Table below gives you a perspective of Saudi Arabia's dependence on Oil.


The impact of the oil price crash has been evident on Saudi Arabia's budget deficit as shown in the figure down below



Since the drop in oil prices, the Kingdom has seen severe constraint on its economy and has spent tens of billions to shore it up.

In 2017 after Crown prince Mohammad Bin Salman took power ,as part of his vision 2030 a plan to diversify the Saudi economy away from oil it was decided to partially sell Aramco among other measures.


The Valuation trouble.

Following the footsteps of its neighbors the UAE and Qatar, Saudi Arabia decides to use the proceeds from Aramco to shore up its public investment fund or PIF. In January 2016 the crown prince announced the Kingdom's intention to sell 5% of Aramco for about 100 billion dollars; this would put the valuation of the company at 2 trillion dollars. It is this number that would eventually cause trouble for the IPO.


On paper, Aramco gives a very rosy picture. The table below compares Aramco's profit in comparison with its other competitors


From the chart, it is very much clear that Aramco's profits are far more than all of its competitors combined. Moreover, as per Saudi's official estimates, Saudi Arabia still possesses up to 261 Billion Barrels of Oil in reserves. These numbers would comfort any investor to take the risk and invest in the company; however, the valuation of the company has been heavily disputed.


Saudi Government's official valuation of 2 trillion dollars has not been backed by any third-party evaluator. Initially when the company planned on listing in the New York or the London stock exchanges, independent evaluators gave the company a more modest valuation. While the agreed value was 1.6 Trillion dollars, some other valued Aramco at below 1 trillion dollars with Mckinsey &Co evaluating the company at a mere 400 billion dollars. The 1.6 Trillion dollar valuation was supported by local economists in Saudi Arabia such as Essam Al Zamil who was later arrested and Jailed on terrorism charges


Zamil's arrested showcased the kingdom's sensitivity to any party scrutinizing the company's true valuation, including the NYSE or the London stock exchange. One of the reasons why Saudi Aramco backed off from listing in these stock exchanges was due to the various disclosures the company would have to give about its financials.


In reality, Aramco was never prepared to go public. Even before it went public at the Tadawul questions were raised as to whether an IPO would substantially change the role of the company. For long Aramco's revenues were made for the Saudi State, however, an IPO would force the company to change its priorities towards its shareholders. Zamil in particular criticized this aspect; according to Zamil an IPO would divert significant shares of the profit away from the Kingdom and into the hands of private investors. Moreover, a clash between corporate interest and State interest would also be inevitable as it was highly unlikely that Aramco would give its investors unfettered access to its operations.


However external events would eventually spell an end to Aramco's dream of raising 100 Billion dollars. On 2nd October, 2018 Saudi dissident Journalist Jamal Khashoggi was murdered inside the Saudi Consulate in Istanbul, even Saudi's closest ally the United States agreed that the crown prince ordered the Murder. Further, the Kingdoms campaign in Yemen which had been on-going since 2015 further damaged Saudi Arabia's international image and credibility as it was accused of committing war crimes. Aramco itself would be affected by this when its oil facilities were attacked by Houthis (Saudi's main opposition in Yemen) when its oil facilities were attacked in Abqaiq and Khurais, the attack cut the kingdoms daily output by half. These events eventually overshadowed the hype around the IPO and Saudi quietly shelved away from the plan till 2019.


Listing at Tadawul

On 11th December 2019, Saudi Armco went public when it traded 1.5% of the company at the Saudi stock exchange. Aramco ultimately raised 29.4 Billion dollars from the IPO, the biggest ever surpassing Alibaba's 2014 IPO which raised 25 Billion. However, as one analyst put it "it was the biggest by an eyelash and not the expected Landslide".


The final valuation that Aramco settled on was 1.7 trillion dollars and the per-share price was set at 32 riyals (8.53 dollars). It had been reported that many wealthy Saudi's had been coerced into investing in the company and so were ordinary citizens. Ultimately Grand IPO which was supposed to take the world by storm went ahead with its IPO relatively unnoticed at the Local stock exchange.


Conclusion.

The failure of the Aramco IPO indicated that as far as vision 2030 is concerned, the Kingdom will have to make more concerted efforts. The lack of transparency and clarity in the company is ultimately what contributed to the fizzling of what could have been a momentous event in the history of Stock markets. However ultimately Aramco still exists and it would indeed be interesting to watch whether the Oil titan can learn from its mistakes and make it big, or repeat them and fumble again.

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