ARAMCO: THE IPO THAT SUCCEEDED AND FAILED

StickyIntroduction

BY GEORGE HAY

Saudi Arabia’s sale of its crown jewel always risked becoming a Greek tragedy. Ever since the Gulf Kingdom decided in 2016 on a public stock offering to sell 5% of Aramco, the world’s biggest oil producer and its main source of revenue, the interests of the seller and the anticipated horde of international investors have been on a collision course. A crash duly ensued.

Aramco’s ill-starred listing has been through four distinct stages. The genesis of the current strife came in 2017 when Mohammed bin Salman, the Saudi crown prince, insisted on a $2 trillion price tag for Aramco and set investment banks and exchanges around the world competing to make that happen.

That led to stasis, as the difficulties of achieving such a valuation and accommodating Aramco’s myriad environmental, social and governance headaches on a global bourse became clear. In mid-2018, things went quiet. A few months later, the murder of journalist Jamal Khashoggi by the kingdom’s agents made investing in Saudi assets verboten.

MbS should have waited. Instead, he displayed hubris. Saudi overhauled Aramco’s leadership in September and then revived its IPO, despite a drone and missile strike reported by Reuters to have been planned by Iran that knocked out half its oil output. The predictable result was a sort of nemesis. Aramco slashed its price to $1.7 trillion and, after foreign investors largely held back, cut the size of its offering from 3% to 1.5%.

Breakingviews has been covering all the twists and turns of Aramco’s tortuous journey. That’s encompassed our own stab at a discounted cash flow valuation, ongoing probes into where the company could conceivably list, and the masochistic experiences of foreign bankers, sentenced to months of Saturday flights to Aramco headquarters in Dhahran for a demanding client with little hope of fat fees. 

Aramco got its deal away, with at least some non-Saudi interest and a book that in the end attracted 4.7 times the amount on offer. But the sale has come at the cost of leveraging its own citizens, companies and neighbours. That could end badly. Either way, MbS’s Vision 2030 programme to diversify the kingdom away from oil has had an imperfect beginning.

First published Dec. 9, 2019

(Image: REUTERS/Maxim Shemetov)

Table of contents

GENESIS

Aramco IPO has limited destination choices

Saudi Aramco IPO is exercise in reverse valuation

Aramco exemption bends London IPO rules to limit

Saudi Aramco’s backup IPO plan runs through China

STASIS

Cox: Aramco and Amazon encourage bad behavior

Saudi’s Aramco plan B is too clever by half

Cox: Global finance has a Saudi Arabia problem

Saudi’s $69 bln asset rejig starts banker payback

Aramco flashes its cash but also its independence

Saudi Aramco is big, just not big enough

Overpriced Aramco debt still has a Saudi discount

HUBRIS

Aramco gives bankers new scope for Saudo-masochism

New Aramco chair bears small plus and bigger minus

Some Aramco IPO banks look more equal than others

Drones detonate Saudi Aramco’s renewed IPO hopes

Aramco IPO can choose either price or credibility

Aramco’s intrepid investors are hedged in two ways

NEMESIS

Cox: Aramco is an ESG investor’s worst nightmare

Aramco has first-class seat on oil-tanker Titanic

Aramco’s $1.7 trln price tag pleases almost no one

Aramco IPO has dug Saudi an even deeper hole

ARAMCO IPO HAS LIMITED DESTINATION CHOICES

Genesis

BY UNA GALANI AND NICOLLE LIU

Aramco is too big to experiment. Every global stock exchange would love to handle the debut of the world’s biggest oil producer. A Reuters Breakingviews analysis weighing six market-related, political and other factors suggests New York is the most attractive locale and Tokyo a top wild-card. 

Kingdom authorities reckon the fossil-fuel colossus may be worth some $2 trillion. If only 5 percent of the company is listed next year, as expected, that would translate into $100 billion of shares on offer. Aramco Chief Executive Amin Nasser said this week that Riyadh’s Tadawul and one or two other venues internationally would host.

If a warm embrace of foreign enterprises is the top priority, Aramco might choose Singapore. Almost 40 percent of its listed companies come from beyond its borders. That’s a higher proportion than on the half-dozen other bourses reviewed by Breakingviews. Aramco’s market value would dwarf the city-state’s exchange by almost threefold, however, and is one reason Singapore rates near the bottom.

Tokyo would be a good option for shoring up ties with a customer. Japan bought more than a third of its total crude imports from the Saudis last year. The Tokyo Stock Exchange – though it has accommodated no oil and gas IPO of significance since 2010 and is the least welcoming to foreign companies – also could provide ample liquidity. That helped it place second overall in the Breakingviews rankings.

Strip out oil ties and London jumps to the second spot, followed jointly by Hong Kong and Toronto. Tokyo then would fall, and sit ahead of only Singapore and Australia. Aramco also may have a soft spot for the British capital given its board includes oil grandees Mark Moody-Stuart, former chairman of Royal Dutch Shell and Anglo American, and Andrew Gould, BG Group’s former chairman.

There’s no obvious winning point for Hong Kong. Swiss commodities trader Glencore, which is also listed in London and Johannesburg, received a tepid reception in the special administrative region of China from investors in its 2011 flotation. The city is now mainly a site for IPOs from the People’s Republic.

The best destination, by far, is the New York Stock Exchange, assuming only one of the city’s exchanges gets the nod. It has the largest market capitalization, the most trading and has led the way by a large margin on recent oil and gas listings. Even if the national climate is becoming more hostile to foreigners, the Big Apple bourse itself is notably welcoming, too. Despite many attractions elsewhere, finance fundamentals will have to come first for Aramco.

First published March 8, 2017

(Image: REUTERS/Ahmed Jadallah)

SAUDI ARAMCO IPO IS EXERCISE IN REVERSE VALUATION

Genesis

BY JOHN FOLEY          

As it readies for an initial public offering, the second most important question about Saudi Aramco is whether it is worth $2 trillion, as the Saudi Arabian royal family claims. The most important question is what the world’s biggest oil-producing company and its bankers have to do in order to make it so.

Breakingviews has analysed Aramco using a discounted cash flow model. The big inputs are the price of oil and how much the Gulf-state giant can produce. These together decide its revenue. Assume the oil costs $9 per barrel to extract, as many analysts have estimated, and add $2 per barrel of operating costs. Deduct tax and royalties, and the result is an estimate of the company’s earnings, assuming it carries no debt.

The verdict: if the oil price stays where it is now, at around $50 a barrel, Aramco would be worth less than $1.1 trillion – even if it were pumping oil at its full capacity of around 12.5 million barrels per day, rather than the current output of 10 million barrels per day. Indeed, it would require an average oil price of just above $80 per barrel over the next decade to nudge the market capitalisation close to $2 trillion. All this presupposes that Aramco doesn’t pay for the energy subsidies Saudi Arabia gives its population.

The kingdom hasn’t had much luck in pushing the price of oil up recently. But there are other levers it can crank to make Aramco more valuable. Slashing the tax rate is one. It’s currently 50 percent, but halving that might justify a valuation above $2 trillion, provided the oil price averages $60 over the next decade. If that fails, Aramco’s financial advisers will require other kinds of engineering. One option is to include assets like the downstream business. Cutting royalty payments is another.

Saudi royals have another $200 billion of assets to privatise after Aramco’s IPO, according to vice economy minister Mohammed al-Tuwaijri. If the kingdom is determined that the starting price for Aramco is going to be $2 trillion, it has a few ways to make that a reality – and investment banks have plenty of reasons to make the numbers add up.

First published June 22, 2017

ARAMCO EXEMPTION BENDS LONDON IPO RULES TO LIMIT

Genesis

BY PETER THAL LARSEN

Where does an 800 pound gorilla sit? Anywhere it wants to. The old joke also applies to giant companies such as Saudi Aramco. The UK regulator has proposed changes that would make it easier for the state-controlled oil group to offer its shares in London. But making policy for a single company – especially one this large – is a mistake.

Under the current rules, it would be almost impossible for Aramco to obtain a “premium” listing in London. For example, almost every transaction between the company and its controlling shareholder – in this case, the Saudi government – would have to be approved by independent investors. Hard to imagine a group that is effectively an arm of the state countenancing this. Aramco could choose a second-class “standard” London listing with fewer restrictions but that is hardly suitable for what may become the world’s most valuable company.

So the UK Financial Conduct Authority has come up with a compromise: a new “premium” listing category especially for state-owned groups. These would be subject to all the usual rules, with three big exceptions. First, transactions with government owners would not need investor approval. Second, controlling shareholders would face fewer legal restrictions, such as the requirement that independent directors be vetted by external investors. Third, the category would be open for companies that have a primary listing elsewhere.

The workaround at least ensures Aramco would not be part of the FTSE 100 Index – one of the main objections to the proposed listing. Indeed, one interpretation is that the FCA is creating a category for Aramco that offers few of the benefits of a full London listing but sounds better than the other options.

Yet UK investors who decided to buy Aramco shares would face greater risks, and enjoy fewer protections, than with other large companies. It’s striking that a regulator that has spent years holding investors’ hands should conclude that, in this case, they are able to look after themselves.

Attracting Aramco would be a big endorsement of UK capital markets as Britain prepares to leave the European Union. That’s something the FCA, which is required to keep markets clean while also ensuring that London remains competitive, cannot ignore. Nevertheless, a willingness to opportunistically stretch the rules does not bode well for post-Brexit regulation. 

First published July 13, 2017

(Image: REUTERS/Toby Melville)

SAUDI ARAMCO’S BACKUP IPO PLAN RUNS THROUGH CHINA

Genesis

BY ROB COX AND PETE SWEENEY

Saudi Arabia’s Mohammed bin Salman is a crown prince in a hurry. Besides detaining members of his family in a corruption sweep and painting a high-tech vision of the kingdom’s future, the young ruler-in-waiting is also planning to sell a chunk of the national oil company, Saudi Aramco, to international investors. For that to proceed in 2018, he’ll need to choose a venue besides Riyadh for the listing early in the year. China looks like the best option.

Setting aside questions about Aramco’s value, which the crown prince himself has pegged at an ambitious $2 trillion, there are hurdles to bringing what’s likely to be the world’s largest corporation to more traditional marketplaces.

Start with London. Britain is bending over backwards to bring Aramco to the London Stock Exchange. Prime Minister Theresa May and then-LSE chief Xavier Rolet traveled to Riyadh and lobbied Aramco’s chairman for the business in April. Over the summer, the Financial Conduct Authority proposed to twist its rules to create a new listing category for companies controlled by sovereign states. Amid some resistance, the rules have yet to be finalized. 

There’s also an additional wrinkle. The LSE’s biggest shareholder is the Qatar Investment Authority, the sovereign wealth fund of that country’s al-Thani monarchy. Yet Saudi Arabia launched a trade and economic boycott of Qatar in early 2017, alongside other Gulf nations. The crown prince, in an interview with Reuters Breakingviews in October, called Qatar’s investment a “very, very, very small issue.” But that still signals it’s an issue.

New York has a different problem. President Donald Trump took to Twitter in November to extol the benefits of a U.S. listing. But Saudi Arabia could fall foul of the U.S. Justice Against Sponsors of Terrorism Act, or JASTA. The law passed by Congress in 2016 would allow Americans to sue the Saudi government for damages, on the alleged grounds it helped to plan the 2001 attacks on the World Trade Center and the Pentagon. Aramco’s New York presence would make it the biggest target for the plaintiffs’ bar in American legal history.

Chinese backup

All of which raises the possibility of Hong Kong’s role in Aramco’s future. The Chinese city is morphing from a mere back-up plan to a potential front-runner among the deal’s backers.

One reason is flexibility. Though the Hong Kong exchange would need to bend some rules to allow Aramco to list, Chief Executive Charles Li is loudly signaling his eagerness. He’s pushing a new program called “Primary Connect,” which would allow mainland Chinese investors to buy into initial public offerings in the special administrative region’s exchange. Li says that’s “key” to closing the Saudi float.

Even without the Connect – which would require Beijing’s approval, too – the exchange has other advantages. Hong Kong Exchanges and Clearing is a for-profit company trading publicly in Hong Kong, which regulates listings on the very board on which its own stock trades. It is in its business interest to grant the oil giant an exception to its requirement that companies list a minimum of 25 percent of their stock – something that would instantly render Aramco the largest member of the Hang Seng Index by a margin of around $200 billion.

A 5 percent free float would be easier to swallow. At $100 billion, it would leave the company adjacent to insurer AIA, politely leaving mainland tech champion Tencent in first place. Exchange executives would have to deem the Tadawul exchange in Riyadh to offer standards of shareholder protection “equivalent to those provided in Hong Kong,” but that is unlikely to take long.

The other thing the city can offer is a roster of Chinese state-owned financial gorillas, potentially ready to invest on terms that will give the crown prince the valuation he wants – and not too fussed about transparency. Reuters reported in April that a consortium of government oil giants like PetroChina and Sinopec, major banks and the $800 billion sovereign wealth fund could be rallied to serve as cornerstone investors.

If Aramco does choose Hong Kong, it could signal a political shift. China’s interest in the relationship with Saudi Arabia is strategic, focused on offsetting American influence in the Middle East, and on achieving greater leverage over energy prices. It is therefore likely to ask for a quid pro quo, such as oil-price concessions, supply guarantees, or even denominating oil contracts in yuan instead of dollars. The latter could set off unpredictable changes in global energy and currency prices, and alienate the United States, Saudi Arabia’s primary security guarantor.

The biggest risk might be embarrassment. Non-Chinese companies haven’t done too well out of secondary listings in Hong Kong of late: Swiss miner Glencore and U.S. luxury brand Coach – now known as Tapestry – took down their tickers in late 2017, blaming tepid turnover. There have also been numerous scandals surrounding IPOs by mainland firms. If nobody trades the stock, share prices could struggle to stay in natural sync with the Tadawul, which is unlikely to see much volume.

No matter the reception in secondary markets, an Aramco listing in Hong Kong would be rich in irony: a marriage of convenience between an atheist communist bureaucracy and a monarch from the theological heart of Sunni Islam – united by a preference for opacity.   

First published Dec. 19, 2017

(Image: REUTERS/Thomas Peter)

COX: ARAMCO AND AMAZON ENCOURAGE BAD BEHAVIOR

Stasis

BY ROB COX

Amazon and Aramco would seem to have little in common apart from their shared first letter. The Saudi giant sucks oil from Arabian sands and sells it to energy-thirsty nations, sending the proceeds back to its controlling monarchy. Amazon sells stuff online, ships it to customers rapidly and reinvests the profits to destroy the economics of every industry it enters.

But both corporate titans are engaged in a similar game of extraction, quite separate from their business models. In Saudi Aramco’s case, the world’s financial capitals are prostituting themselves to accommodate an initial public offering potentially valuing the company at $2 trillion sometime over the next year. Similarly, Amazon’s request for proposals for a second headquarters in North America has U.S. municipalities bending over backwards to please the $765 billion behemoth.

Competition is a good thing. The fact that, say, Newark is trying to sell its charms to Amazon boss Jeff Bezos over Miami’s is a healthy exercise for New Jersey’s largest city. Even if Newark loses, the process should make the city better prepared to attract other businesses and nurture the ones it already has. Saudi’s exchange-shopping could produce similar re-examinations of the strengths and weaknesses of the financial centers and their bourses in London, New York, Hong Kong and beyond.

But there’s also another risk from what might be called the “Aramazon effect”: a shortsighted race to the bottom that sticks the winners with long-term curses their leaders, communities and institutions may live to regret.

Take the wooing of Aramco, which went into high gear two weeks ago in the UK. Prime Minister Theresa May rolled out the red carpet for Crown Prince Mohammed bin Salman, the heir to the throne and the architect of Riyadh’s ambitious “Vision 2030” economic-reform program, for which the listing of Aramco is a key component. Foreign Secretary Boris Johnson welcomed bin Salman, who also had lunch with Queen Elizabeth and later dined at Clarence House with Princes Charles and his son William – rare treatment for a 32-year old dauphin.

There are, of course, many reasons for Britain to suck up to the son of the reigning Saudi monarch, including defense, geopolitics and general business considerations. BAE Systems, for instance, bagged an order for 48 Typhoon jets from the Saudi air force following the visit. But landing the Aramco listing is critical to helping the May government contend that divorce from the European Union will not weaken the UK’s pre-eminence as a global financial capital. That’s especially true after $158 billion consumer-goods giant Unilever, picked Rotterdam over London as its global headquarters on Thursday.

Investors in particular have protested considerations by the London Stock Exchange and regulators to water down listing, governance or disclosure requirements to assuage the Saudis. The Investment Association, which represents fund managers overseeing nearly $10 trillion of client money, has lobbied the Financial Conduct Authority not to move forward with the creation of a so-called “premium listing” category for companies controlled by sovereigns, as Aramco would be.

The worry is that by modifying the rules around related-party transactions and controlling shareholders, London’s reputation for the highest standards of corporate governance will be diluted. Recent history offers the opposition some evidence. They point to the ignominious delisting of Eurasian Natural Resources Corporation five years ago. The Kazakh mining group incinerated shareholders after its London debut amid allegations of malfeasance and a criminal investigation by the Serious Fraud Office. So did Bumi, a miner controlled by an Indonesian family, which was eventually delisted after fierce infighting among its shareholders. Both were included in FTSE indices, which the special class listing proposed for Aramco would not be.

Beyond bending rules, which the Hong Kong exchange has done as part of its ambition to best London and New York for the Aramco deal, cozying up to Saudi Arabia raises bigger questions about morality. Reformer though he may be, bin Salman’s recent roundup and detention of hundreds of Saudis has attracted widespread concern about human rights, due process and the rule of law. The New York Times reported this week on the possible beating, and subsequent death, of one detainee. While it’s perhaps just business for the exchanges to ignore these allegations, it’s uncomfortable for leaders like May and President Donald Trump – who will welcome bin Salman and his entourage on March 20 – to engage in such public bootlicking.

Amazon doesn’t kidnap people and beat them in the Riyadh Ritz-Carlton. But the contest to host its second headquarters has unleashed a similar fox-in-the-henhouse tizzy. The danger is that the winner of the competition, whom Amazon promises will see 50,000 new jobs and some $5 billion of capital investment, winds up fiscally constrained by piling incentives, tax breaks and other concessions that, in the end, produce no greater financial benefit. It has already provoked other companies to ask municipalities to match the sorts of goodies offered to Amazon.

That’s one of the reasons Richard Florida, an urban studies expert and professor at the University of Toronto, launched a “Non-Aggression Pact for Amazon’s HQ2” last month. The petition, which has been signed by leading economists, policymakers and urban planners, argues that tax giveaways and location incentives are wasteful and counterproductive. Worse still, they sap communities of funds that could be used for education, housing and transportation.

Moreover, Florida worries that Amazon is sowing the seeds for an even bigger backlash than the one U.S. tech giants are already weathering due to their dominance. What happens if the promises of prosperity don’t come true? “There will be demonstrations and protests and accusations that ‘you bankrupted our town,’” he says. “How can mayors and the heads of chambers of commerce explain to the man on the street that they are giving billions of dollars to the richest man in the world? It just doesn’t sound right.”

The risk is one that Amazon seems prepared to tolerate in asking cities to fight it out, arguably for the benefit of its shareholders today. And, who knows, landing its new HQ might actually improve the fortunes of a downtrodden city like Richard Florida’s own hometown of Newark, offsetting any expensive incentives. But whether beckoning in a tech giant or the listing of a Saudi oil producer, local and national governments ought to better consider the risks of long-term failure before handing over the keys.

First published March 15, 2018

(Image: REUTERS/Maxim Shemetov)

SAUDI’S ARAMCO PLAN B IS TOO CLEVER BY HALF

Stasis

BY GEORGE HAY

Mohammed bin Salman’s financial engineers are earning their fees. Plans for the Saudi crown prince to spearhead a triumphant listing of domestic oil titan Aramco are on ice, but his advisers have a workaround – Aramco may now create the cash itself by borrowing money and buying a stake in chemicals group SABIC. It’s a clever idea, but no substitute for plan A.

Looked at as a piece of corporate strategy, splicing together Aramco’s huge oil reserves with SABIC doesn’t automatically create much value. It makes more sense to see the leveraged acquisition as a way to replace the $100 billion that won’t materialize if Riyadh fails to list Aramco. If the similarly state-owned Aramco buys the stake then the Public Investment Fund, earmarked as the engine for the crown prince’s Vision 2030 drive to diversify away from oil, would still have a chunk of cash for pursuits such as investing with Masayoshi Son’s Vision Fund.

Aramco can probably afford the move. It has minimal debt, Bloomberg reported on April 13, and made over $34 billion of net income in the first half of 2017. With a probable value exceeding $1 trillion, bond markets and banks would be happy to provide it with the roughly $70 billion it would need to buy the 70 percent stake in SABIC. And gearing up Aramco avoids many of the pitfalls of a listing: the state would not need to keep investors sweet with high dividends, and the crown prince can avoid the embarrassment of an IPO failing to reach the $2 trillion value he sought.

That’s all very well. But neither Aramco nor SABIC are as keen on the deal as the prince’s advisers, the Wall Street Journal reported on July 26. If Riyadh were not wrestling with a large budget deficit, it’s hard to imagine it would be using its crown-jewel oil company to raise cash. Even if the financial risks are low, the plan falls short of the ambition of the original Vision 2030 strategy. The Aramco listing promised to diversify the state’s risk from petrodollars, while opening up Saudi equity capital markets. This is a funny way to do so.

First published July 27, 2018

COX: GLOBAL FINANCE HAS A SAUDI ARABIA PROBLEM

Stasis

BY ROB COX

Is global finance complicit with Saudi Arabian tyranny? Following the alleged assassination of a journalist critical of the kingdom, that’s the question leaders of the world’s biggest banks and investment firms must ask themselves before they fuel up their jets and head to Crown Prince Mohammed bin Salman’s “Davos in the Desert” in just over a week. From a strictly moral perspective, if they believe a scintilla of what has been put forward by Turkish authorities, they should bow out as JPMorgan’s Jamie Dimon did Sunday night.

The top American, European and Japanese banks and investment firms do business with many governments and regimes their executives can’t be particularly proud of at dinner time with the family. They rationalize the work by saying if they don’t do it, someone else will; and, anyway, they’re in no position to judge the political systems of other nations. These are potentially defensible arguments that can be applied to many clients associated with China, Russia and other countries accused of human-rights abuses.

The Saudi case adds a complicated wrinkle to this calculus. First, the Saudis deny involvement in the disappearance of Jamal Khashoggi, who entered the kingdom’s consulate in Istanbul and didn’t come out, Reuters reported. Second, there is little guidance from above on how to proceed. President Donald Trump has expressed dismay over the alleged killing by Saudi agents. But Trump, who has branded the U.S. press as “enemies of the people,” also said he didn’t want the matter to affect a $110 billion sale of arms to Saudi.

The imposition of sanctions, like those applied by the United States and European Union to Russia after the annexation of Crimea, would make it an easier decision for executives like BlackRock’s Larry Fink, or the bosses of France’s two largest banks to skirt the second installment of the Future Investment Initiative next week in Riyadh. Though banks may still act for some Russian companies, their executives now mostly skip public events like the St. Petersburg International Economic Forum. They do not want to be accused of renting out the public reputation and dignity of the organizations they run to a regime that, in the Saudi case, allegedly sanctioned the high-profile murder of a subject. It has been over a week since Khashoggi’s appearance and the Saudis have failed to provide evidence to refute Turkish allegations he was captured, killed and dismembered.

Even before Khashoggi, there were reasons to consider passing on the crown prince’s sophomore showing, as my colleague George Hay argued last week. After wrapping up 2017’s event, the prince known by the initials MBS rounded up hundreds of subjects on corruption charges without due process in the same hotel where the conference took place. Saudi has also been engaged in foreign-policy actions that have stoked instability in the Middle East and beyond, like the blockade of Qatar. Arguably worst has been the ongoing prosecution of a proxy war in Yemen that has left three-quarters of Yemenis, or 22 million people, needing humanitarian assistance or protection, according to the United Nations.

Of course, accusations that China similarly commits human-rights violations hasn’t stopped banks from investing in the country. Last year’s death of a Nobel Peace Prize laureate in a hospital under heavy guard didn’t stop executives from Standard Chartered, Société Générale, Blackstone or Mizuho from attending the China Development Forum in March.

Then there’s the money. This year, Saudi Arabia generated $247 million in fees from selling securities, arranging loans and advising on deals, according to Refinitiv. And that’s without the mother of all deals taking place. The now-shelved stock offering of Saudi Aramco, the national oil company which MBS contends is worth $2 trillion, could produce $200 million alone.

The biggest recipients have been banks whose executives were scheduled to grace the stage at the crown prince’s fiesta. The agenda was scrubbed from its website last week. Dimon’s company leads the league tables, or the rankings Refinitiv compiles based on estimated fees, with $22 million this year and $81 million over the past six. Though HSBC trails JPMorgan in 2018, the London bank captained by John Flint has earned $110 million from the Saudis since 2013, more than its rivals.

Citigroup, Standard Chartered, Goldman Sachs, Mitsubishi UFJ, BNP  and Crédit Agricole fill out the peloton of top fee earners. Goldman executive Dina Powell was expected to show up. So were BNP Chairman Jean Lemierre and Frédéric Oudéa, chief executive of France’s second-largest bank, SocGen. StanChart boss Bill Winters was also expected in Riyadh.

There’s nothing wrong, in the legal sense, with any of the work these institutions have done for the Saudis. Until recently, it could have been argued there was nothing unseemly about it. At his debut last year, MBS presented a convincing image of a reformist from another generation willing to stand up to conservative clerics, let women drive and young people who make up two-thirds of the population go to movies and concerts.

While this hardly offset the beheadings in Deera Square and virtual absence of the rule of law, financiers, policymakers – even journalists like myself – saw hopeful signs of a more liberal and humanistic Saudi Arabia. The consensus was that while MBS has absolute powers, he understood the desire of his people for more freedom – and with clarity envisioned a future where the lifeblood of his nation’s economy, oil, would deplete.

If Khashoggi’s alleged killing was sanctioned by the Saudis, whether to clumsily silence a critic or brazenly transmit the crown prince’s resolve to erstwhile enemies, every bank that benefits from the rule of law at home should reconsider taking the stage next week. The presence of their senior executives may send a message that they – and their employees, directors and owners – endorse a regime potentially responsible for murdering a journalist.

Bankers may balk at sticking their necks above the parapet individually. But there’s a workaround. If all the banks and big investors due at this year’s event made a joint decision to withdraw, the scope for individual firms to be penalized by Riyadh in terms of future work would be limited. The heads of the relevant groups should be organizing some conference calls – and fast.

First published Oct. 14, 2018

(Image: REUTERS/Osman Orsal)

SAUDI’S $69 BLN ASSET REJIG STARTS BANKER PAYBACK

Stasis

BY PETER THAL LARSEN

Saudi Arabia’s $69 billion asset reshuffle marks the end of a dry spell for investment bankers who have been courting the desert kingdom. Saudi Aramco on Wednesday announced its long-awaited purchase of a 70 percent stake in Saudi Basic Industries Corporation, or SABIC, from the country’s sovereign wealth fund. Though the rejig is mostly an internal affair, financing the deal may scatter some rewards in the direction of the international financiers who have spent years cosying up to the oil giant.

The deal that ranks as one of the largest M&A transactions so far this year is something of a consolation prize for investment bankers. They have spent years wooing Saudi Aramco and the country’s ruling royal family in the hope of landing a role on the oil giant’s initial public offering. But that was shelved last year.

That IPO was supposed to raise $100 billion to help Saudi Crown Prince Mohammed bin Salman realise his ambition to diversify the economy away from oil. The SABIC deal achieves a similar outcome in a roundabout manner. Aramco will pay 123.4 riyals per share in cash – slightly below the closing price on Wednesday – for the Public Investment Fund’s controlling stake in the company. The remaining 30 percent will remain publicly traded.

The oil giant’s financial resources are opaque, but it is expected to issue bonds to help finance the deal. Saudi’s energy minister said earlier this year it could raise about $10 billion. That and related financing will give banks including Goldman Sachs, JPMorgan, Morgan Stanley, Citi and HSBC an opportunity to reap some benefits from their efforts in the kingdom – even though fees on a bond issue are generally much slimmer than the rewards for arranging a massive equity offering. Beefing up Aramco’s downstream operations also enhances its appeal. The company says it plans to as much as double its global refining capacity to 10 million barrels per day by 2030.

The bond offering will test international appetite for Saudi investments, which understandably waned in the immediate wake of the brutal murder of journalist Jamal Khashoggi by Saudi agents in early October. Bank executives faced intense international scrutiny for their decision to keep working for the regime. The SABIC deal means it’s payback time.

First published March 27, 2019

(Image: REUTERS/Faisal Al Nasser)

ARAMCO FLASHES ITS CASH BUT ALSO ITS INDEPENDENCE

Stasis

BY GEORGE HAY

Aramco is doing its best to look like a normal company. The Saudi oil giant on April 1 disclosed a 469-page prospectus for its maiden dollar bond issue, to help fund the $69 billion acquisition of a 70 percent stake in chemicals group SABIC. When investors have finished gawping at the scale of Aramco’s income statement, they may be marginally less concerned about its links to Saudi Crown Prince Mohammed bin Salman.

Aramco’s numbers are, as expected, immense. Earnings of $111 billion in 2018 make it the world’s biggest generator of corporate earnings. Despite $27 billion of borrowings, it still has net cash of $22 billion. The lack of public information meant investors could previously only guess at Aramco’s riches.

The question is whether big numbers alone can persuade foreign debt investors to take up the more than $10 billion in bonds currently anticipated, or whether overseas equity investors would support a mooted IPO – if the latter is ever taken out of deep freeze. The reasons not to remain obvious – Aramco remains wholly owned by a Saudi state whose agents spooked markets in October by murdering journalist Jamal Khashoggi. The debatable logic of the SABIC deal highlights the risk of government meddling.

Yet the prospectus suggests Aramco can at least drive a hard bargain. After a lengthy negotiation, the oil giant has agreed to only hand over half the cost of the SABIC acquisition upfront to the Public Investment Fund, which MbS directly controls. The balance will be paid in 2020 and 2021. While Aramco has to pay the PIF $1 billion for the privilege, the deal still suggests some degree of independence, given Aramco could quite easily have afforded the whole lot.

Other prospectus details point the same way. Aramco now gets compensation for selling oil to Riyadh at fixed prices, and pays 32 percent of its revenue to the government in royalties and taxes, against 59 percent in 2016. The company also has a guarantee for money it is owed by public-sector customers.

That doesn’t mean investors would pile into any future IPO. If Aramco was really independent it might not have acquired SABIC at all – the main benefit of which was to keep the PIF in funds given the delayed IPO. Still, Aramco bulls now have something to cling to.

First published April 1, 2019

SAUDI ARAMCO IS BIG, JUST NOT BIG ENOUGH

Stasis

BY JOHN FOLEY

Saudi Aramco is enormous – staggeringly so. Yet by one measure that matters a lot – the $2 trillion valuation envisaged by Crown Prince Mohammed bin Salman – it’s still not enormous enough.

The world’s largest oil producer disclosed the state of its finances for the first time on Monday as part of a bond issue to fund the $69 billion purchase of a stake in Saudi Basic Industries Corp (SABIC). Titillating details include Aramco’s towering $224 billion of EBITDA, and much new information about the way the company works with its sole shareholder, the government of Saudi Arabia.

It helps shed light on the question of what Aramco’s main crude-oil business is worth, adding flesh to the bones of a valuation Breakingviews laid out back in 2017 in an interactive calculator. At that time, the company was flirting with an initial public offering, which MbS said could value Aramco at $2 trillion. By Breakingviews’ estimates, using a discounted cash-flow valuation, that target was about twice what Aramco was actually worth.

Many of Aramco’s secrets are now in plain sight. Take its remarkable efficiency. The company finds and extracts crude oil for just $7.50 a barrel, where Breakingviews had assumed $9. The earlier analysis further assumed $2 a barrel of overheads, but the reality looks lower – perhaps $1.50. Breakingviews also assumed Aramco could jack up production to 12.5 million barrels a day, where it has instead stuck at around 10.3 million. Plug the new numbers into the 2017 model, and Aramco is still worth just $1.1 trillion.

But there’s another important variable: the oil price. Then it was around $50 a barrel, now it’s $70. If that level sticks, Aramco could be worth $1.7 trillion, the calculator shows. That’s closer to the prince’s target, and perhaps why he is now more relaxed about raising the curtain around the producer’s finances.

Even then, it’s a generous estimate. Around one-third of Aramco’s crude oil is sold not to third parties at prevailing prices but to Aramco’s “downstream” business, which must supply Saudis with energy at state-controlled prices, reducing its potential profit. The kingdom is moving towards paying the market price for its efforts, but for now, that’s a plan rather than a fact. And so, therefore, is the idea of Aramco attaining that prized $2 trillion valuation.

First published April 2, 2019

(Image: REUTERS/Ahmed Jadallah)

OVERPRICED ARAMCO DEBT STILL HAS A SAUDI DISCOUNT

Stasis

BY GEORGE HAY

Aramco’s debt is both cheap and overpriced. That’s the takeaway from the Saudi oil giant’s maiden $12 billion bond sale to international investors. While a success, it’s also contradictory.

The $100 billion-plus of orders that Aramco’s intended $10 billion sale amassed partly reflects fund managers inflating their demands in an attempt to secure a decent allocation. But it’s also clearly indicative of strong appetite. That’s reflected in Aramco’s decision to bump up the proceeds by $2 billion, and the tight pricing. Entities linked to Gulf states can borrow at rates close to their sovereigns: Mubadala’s bond maturing in 2024 has yielded around 20 basis points more than Abu Dhabi government debt. But Aramco’s borrowing costs are actually lower than Saudi government debt of the same maturity.

The oil group’s $111 billion of earnings in 2018 certainly warrants special treatment. That’s more than five times Exxon Mobil’s $21 billion. Yet the U.S. oil giant’s bonds maturing in 2026 cost it 39 basis points a year over U.S. Treasuries, according to CreditSights research, compared with 75 basis points for Aramco’s five-year debt.

The obvious difference is Saudi, and its crown prince, Mohammed bin Salman. As its prospectus makes clear, Aramco’s sole shareholder can choose to tweak royalty or tax rates should it face a budget shortfall. With 63 percent of the government’s revenues coming from the oil sector in 2017, the state’s embrace of Aramco was a potential problem even before Riyadh sparked international condemnation after it admitted that Saudi agents had killed Washington Post columnist Jamal Khashoggi.

All of which implies a more rational price for Aramco debt would be at a premium of 5-10 basis points above sovereign bonds, according to one credit analyst. There are long-term risks to oil prices from peak demand, and the company’s earnings – which slumped as low as $13 billion in 2016 – are volatile. Right now, investors are implying that an entity in many ways superior to Exxon should pay higher borrowing costs to reflect the risk of state meddling, while simultaneously underplaying that risk. That’s a weird combination.

First published April 10, 2019

ARAMCO GIVES BANKERS NEW SCOPE FOR SAUDO-MASOCHISM

Hubris

BY GEORGE HAY

Investment bankers are bracing for another extended round of what’s best called “Saudo-masochism”. Saudi Aramco’s stalled $100 billion stock-market debut is showing signs of life, eliciting the sort of frenzy that accompanied initial pitching of the deal in 2017. Yet with the first team of advisers set to change, the question is whether being jettisoned is a good thing.

Of the original leading counselors to Aramco, Wall Street boutique Evercore and mega-bank HSBC may have their roles reduced, Reuters reports. Whether this is the result of bankers briefing against rivals to a thin-skinned client, or mere Aramco caprice, is unclear. If true, it would still leave JPMorgan, Morgan Stanley, Moelis and Michael Klein on board. But they might look more like gluttons for punishment than masters of the universe.

Assuming a late 2020 listing at the earliest, banks would have to maintain teams in the kingdom. That’s a big cost commitment, especially given the probability that underwriting fees will amount to a fraction of the top rate, some 7%, normally paid in U.S. deals. Efforts to secure listings in New York or London, alongside Riyadh, led to investor pushback and political complications. That’s before vectoring in the outlandish $2 trillion valuation Crown Prince Mohammed bin Salman envisages for the absolute monarchy’s primary cash generator.

Adding to complexity this time around is whether the murder of journalist Jamal Khashoggi by Saudi agents last October has sapped institutional appetite for a piece of an entity closely entwined with the crown. The ease with which Aramco in April sold a $12 billion bond, and a prospectus that showed it earned $111 billion in 2018, may not guarantee support for overpriced stock in an ESG-focused investment climate.

Both Evercore and HSBC featured in the top five for 2018 Saudi investment banking fees, according to Dealogic, while HSBC leads this year. Either way, the point of enduring current thin gruel from Aramco is the hope of riches later, when Saudi opens the gates to foreign direct investment to achieve the crown prince’s 2030 economic vision. Yet Reuters reported in June that only one big foreign firm, theme-park operator Six Flags Entertainment, had so far committed to supporting such projects. If the bonanza proves to be a trickle, bankers’ toils will look thoroughly masochistic.

First published July 19, 2019

(Image: REUTERS/Maxim Shemetov)

NEW ARAMCO CHAIR BEARS SMALL PLUS AND BIGGER MINUS

Hubris

BY GEORGE HAY

The Saudi Arabian equivalents of Kremlinologists have something new to get their teeth into. Saudi Aramco is replacing its chairman, Energy Minister Khalid al-Falih, with the man who runs the country’s $300 billion sovereign wealth fund, Yasir al-Rumayyan. For Western investors pondering whether to buy into the oil giant’s stalled initial public offering, that brings a plus and a potentially bigger minus.

The good-ish news is that Aramco is flipping the script. Reflecting its role as a department of the kingdom, the group’s chair and the energy minister have always been the same person. Replacing Falih in one sense therefore creates welcome daylight between company and ministry. Having been a banker and at the core of the Public Investment Fund’s various investments in Uber and the SoftBank Vision Fund, Rumayyan may also be a fitting figure to lead a foreign listing.

Yet the move could exacerbate a bigger problem for foreign investors: the fact that Aramco’s strategy, along with nearly everything else in Saudi Arabia, is ultimately set by Mohammed bin Salman, the crown prince, who has been a controversial figure since the murder last year of journalist Jamal Khashoggi by Saudi agents – if not before. The PIF is central to the crown prince’s Vision 2030 agenda to diversify his country away from fossil fuels, and Rumayyan is a key ally. Hence if anything the links between the company and the centre of power are now tighter.

Non-Kremlinologists might say the changing of guard is irrelevant given MbS, as he’s known, calls the shots anyway. Aramco was, for example, recently obliged to spend $70 billion of its own money acquiring the PIF’s 70% stake in chemicals group SABIC, which was more about creating cash for Rumayyan’s fund to spend than any merger rationale. Still, Aramco’s decision to pay in installments implied some sort of independence, given it could have afforded the whole lot in one chunk. The scope for even such mild resistance looks even narrower now.

First published Sept. 3, 2019

(Image: REUTERS/Hamad I Mohammed)

SOME ARAMCO IPO BANKS LOOK MORE EQUAL THAN OTHERS

Hubris

BY GEORGE HAY

All Saudi Aramco’s listing advisers are equal, at least in name. The oil giant has hired nine banks to lead its revived initial public offering and given them the grand-sounding title of global coordinator, Reuters reported on Wednesday. That means they all get bragging rights. But they will not all be doing the same thing.

Hiring a boatload of investment banks is not unheard of, and with a market capitalisation of $1 trillion to $2 trillion Aramco will almost certainly become the world’s largest listed company. But that was the case back in 2017, when JPMorgan, Morgan Stanley and HSBC were the leading players. Now Bank of America Merrill Lynch, Goldman Sachs, Credit Suisse and Citigroup have been added to the roster, along with Saudi Arabian lenders National Commercial Bank and Samba Financial.

In practice, however, the three lead banks will have done most of the work already. It will be surprising if JPMorgan, whose Saudi relationships go back decades and which has comfortably topped Dealogic’s list of investment-bank revenue generators so far this year, does not remain the de facto top dog.

That said, there could be tweaks to the IPO pecking order. First time round, HSBC’s role was weighted towards the local Saudi listing rather than wherever Aramco will be listed abroad. Its first-tier crown could be taken by Goldman, whose pitch has been burnished by representatives such as Dina Powell, who served in U.S. President Donald Trump’s administration before returning to the Wall Street bank last year. Goldman also has history with the Public Investment Fund, whose boss Yasir al-Rumayyan last week became Aramco’s chairman.

BofA, Citi and Credit Suisse are wildcards. Citi’s departure from Saudi Arabia in 2004 is still remembered there, while the other two lenders have had good relations with Qatar, a Saudi foe. Still, both BofA and Citi have lent money recently to the PIF, while the Swiss bank’s efforts are headed by Hazem Shawki, who until recently was a regional bigwig for Goldman.

All nine of Aramco’s banks remain equally burdened with what’s likely to be a tortuous listing process – starting on the Riyadh bourse and going international later – with a demanding client for minimal reward. In other respects, some will prove more equal than others.

First published Sept. 12, 2019

DRONES DETONATE SAUDI ARAMCO’S RENEWED IPO HOPES

Hubris

BY GEORGE HAY

Saudi Aramco’s best-laid IPO plans just suffered a drone strike. In the last few weeks, the world’s biggest oil producer had seemed to be getting its stalled listing back on track by identifying a new chairman and naming a squadron of investment bankers to oversee a Riyadh stock offering. Saturday’s air attacks by Iran-aligned Houthi rebels, which knocked out over half Saudi’s national oil output, upend that.

The strikes on Aramco’s Abqaiq and Khurais facilities are a major escalation of previous Houthi drone launches, which were mostly directed at Saudi energy infrastructure and airports. Abqaiq alone processed 50% of the company’s 10 million barrels per day crude oil production in 2018. Aramco’s maiden international bond prospectus in April identified the facility as critical for its financial condition.

The world’s oversupplied oil market has some scope to absorb a short-term shock. Developed economies’ oil stocks are above five-year averages, and the combination of a global economic slowdown and increased output by other countries means the Organisation of the Petroleum Exporting Countries is currently set to produce 1 million barrels per day more than is required to balance the market in 2020, Morgan Stanley analysts reckon. Even before the attacks, the cartel had faced pressure to consider deepening production cuts in place since 2016.

Yet while Saudi might welcome a coordinated reduction, it certainly won’t like Saturday’s massive and involuntary unilateral disruption, which Reuters reported on Sunday could take weeks to fix. Aramco might have to draw on the Kingdom’s 188 million barrels of reserves to maintain exports of 7 million barrels per day that mostly go to Asia.

The best case is that Aramco’s vaunted operational efficiency enables it to restore full production rapidly. In that scenario the $10 a barrel spike in oil prices that consultant Rystad expects might even help bump up the company’s stock market value, which Breakingviews calculates will fall well short of its desired $2 trillion. Yet the latest dramatic evidence of Aramco’s vulnerability, and the possibility of regional reprisals by the volatile Crown Prince Mohammed bin Salman, make it almost certain that international investors will apply a higher discount rate to its future earnings. That could make renewed impetus around the IPO look premature.

First published Sept. 16, 2019

(Image: REUTERS/Hamad I Mohammed)

ARAMCO IPO CAN CHOOSE EITHER PRICE OR CREDIBILITY

Hubris

BY GEORGE HAY

Saudi Aramco has gone further than it ever dared before. The oil giant on Sunday kicked off a long-awaited initial public offering for the world’s biggest crude producer. The relationship between valuation and credibility is more complex than it might look.

Crown Prince Mohammed bin Salman has long wanted to sell 5% of Aramco at a $2 trillion valuation. He also wants to attract top-tier global investors. A listing in London or New York is out for now. The company will initially sell a sliver of just 1%-2% on the local Tadawul exchange, including an offering for Saudi retail buyers.

Aramco is keen to tout its financial might. It produces 10 million barrels of oil per day, generated net income of $111 billion last year, and earned a 41% return on average capital employed. These measures put it miles ahead of the five major oil companies – Royal Dutch Shell, Exxon Mobil, Chevron, BP and Total – it regards as stock market peers.

Those listed companies trade on an average dividend yield of 5.6%, based on Refinitiv estimates of their expected payouts for next year. Aramco is promising to distribute at least $75 billion to shareholders in 2020. At the hoped-for $2 trillion valuation, its shares would yield just 3.8%.

In reality, international investors will probably demand a substantial yield premium to buy into a company which saw half its production knocked out by rocket attacks in September. With a dominant state shareholder and a small free float, Aramco looks more like Rosneft, whose shares yield a hefty 8.3%.

Aramco is not subject to the international sanctions which hang over its Russian peer. But even a more modest yield of, say, 6% would imply a market capitalisation of just $1.2 trillion.

Dividends are not the only valuation benchmark. A Breakingviews model which values Aramco on the basis of discounted cash flows, and incorporates new lower royalty payments to the Saudi government, spits out a price of close to $1.6 trillion. But with a potential demand-led oil glut next year, active institutional investors will remain wary.

Accepting a valuation well below $2 trillion might look like a defeat for MbS. But setting the price too high would force Aramco to lean on rich Saudis and retail investors to get its IPO underway. The credibility of the country’s attempts to diversify away from oil may depend on it accepting a lower price.

First published Nov. 4, 2019

ARAMCO’S INTREPID INVESTORS ARE HEDGED IN TWO WAYS

Hubris

BY GEORGE HAY

Saudi Aramco’s listing represents a tough task for its bankers. Their job is to sell a minority stake in a state-run entity with structural challenges to international investors who usually expect a proper say in the companies they own. Even so, the latest initial public offering documentation suggests buyers have two hedges.

On the face of it, foreign investors that take the plunge and invest in the 1% to 3% Aramco is selling – worth $15 billion to $45 billion assuming a $1.5 trillion valuation – are ordinary shareholders. That small say could make them vulnerable if oil prices collapse. The Saudi government, which will still own over 90% of the shares, could try to recoup lost revenue by taxing Aramco more. Yet international shareholders are subtly different from two other classes.

The first is the Saudi government itself, and its attitude to the $75 billion in minimum annual dividends Aramco is pledging though 2024. If a plunging oil price obliges it to pay out less, Riyadh will sacrifice its own share of the dividend to keep other shareholders whole. On the assumption it sells 3% of the company, Aramco’s free cash flow would have to fall below $2.3 billion for private investors’ dividend to be at risk. In 2018, free cash flow was $86 billion.

Subordinating the state and effectively turning other investors into preferred shareholders may help attract hedge funds, by making the stock easier to borrow against. Assume a fund used debt to fund half of its stake and borrowed at 3%. It could then make a juicy and predictable 7% annual return, according to Breakingviews calculations.

The other class is domestic Saudi investors. They are getting a sweeter deal in the IPO than international peers, with an extra share bonus for each 10 they hold for half a year. But that too may be good news: the bigger the presence of domestic retail investors, the stronger the incentive Riyadh will have to manage Aramco fairly. A nosediving share price might undermine the regime.

Neither of these two hedges are fail-safe. Riyadh could find ways to hurt Aramco, while helping domestic investors, say through lower taxes. And as recently as 2016, falling oil prices meant Aramco only generated $1.6 billion of free cash flow. Still, fund managers strapping themselves into the IPO roller coaster do at least have two credible airbags.

First published Nov. 4, 2019

(Image: REUTERS/Hamad I Mohammed)

COX: ARAMCO IS AN ESG INVESTOR’S WORST NIGHTMARE

Nemesis

BY ROB COX

The most important document for global investors considering whether to purchase Saudi Aramco’s stock is not actually the Saudi Arabian energy giant’s prospectus. Sure, the fundamentals of the business will determine whether the state-controlled company is worth anything like the $2 trillion that Crown Prince Mohammed bin Salman has insisted it should be.

But for a broader understanding of what it means to back the stock offering, which will kick off in coming weeks on Riyadh’s Tadawul exchange, the last country report on the kingdom from Human Rights Watch should be required reading for all fund managers.

As the independent watchdog makes clear, the murder and bone-sawing of Saudi journalist Jamal Khashoggi last year by Saudi agents in Istanbul is not an isolated violation of the basic norms accepted by the world’s liberal democracies. From arbitrary arrests of peaceful dissidents and widespread discrimination of women to hundreds of beheadings, and the prosecution of a war in neighboring Yemen that according to Human Rights Watch “included scores of unlawful airstrikes that have killed and wounded thousands of civilians,” Saudi’s record is abysmal.

And this is just the “social” bit that investors weighing the deal’s so-called “ESG” profile (the other letters in the acronym denote environmental and governance factors) must consider. For starters, Aramco’s business model is almost entirely predicated on humans continuing to spew carbon dioxide into the atmosphere. And even after the IPO, its 95%-plus government stake will make the governance that helped collapse WeWork’s IPO look benign. Fund managers with any conscience should steer clear of Aramco. And if they don’t, their customers should consider boycotting them.

True, Aramco isn’t directly responsible for the transgressions of its ultimate owner. The oil group chaired by Yasir al-Rumayyan did not lop off the heads of 139 subjects, including 54 for non-violent drug crimes, according to Interior Ministry statements cited by Human Rights Watch. Nor did Aramco direct airstrikes against Houthi rebels, even though Ibrahim Al-Assaf, who was foreign minister for part of the time that military campaign unfolded, sits on Aramco’s board.

But Aramco is undeniably the financial engine that powers the domain over which the 34-year-old MbS domineers, including its military and defence budgets and its programmes of social repression. The petroleum sector, of which Aramco is the beating heart, kidney and lungs, accounts for 87% of the government’s budget revenues, according to the Central Intelligence Agency, and 90% of its export earnings.

None of this may matter to the domestic Saudi institutions and retail investors who will be asked, if not forcibly prodded, to soak up a slice of 2%-3% of Aramco hitting the Riyadh market. It is unlikely, either, to deter potential cornerstone investors from China, such as the Silk Road Fund, Sinopec or China Investment Corporation, which have been in talks to buy as much as $10 billion worth of Aramco stock, according to Bloomberg.

But it should matter in the United States, where more than a quarter of all the $47 trillion of assets under professional management in 2018 were invested in sustainable, responsible and impact investing, according to the US SIF Foundation’s 2018 biennial report. That number was up 38% over the two-year period. The trend in Europe is similarly robust, with 2,232 ESG-related funds pulling in 37 billion euros of new money in the first half of 2019, almost equal to the 38 billion euros they received for all of 2018, according to Morningstar.

There are some caveats. The Aramco sale is part of a rational, long-term vision by MbS to reduce his nation’s reliance on fossil fuels. And Aramco argues that it wants to be part of the solution to global warming. “At Saudi Aramco, sustainability is an ethos that permeates all aspects of our company,” the company’s website reads. “It spurs us to push the limits of creativity and technology to develop and implement meaningful solutions to global energy and climate challenges – all while being a steadfast contributor to the world’s energy security.”

Ultimately, though, Aramco’s 227 billion barrels of proved liquid reserves represent one of the single greatest threats to mankind’s attempts to reduce carbon emissions and avoid an ecological apocalypse. Royal Dutch Shell, Exxon Mobil, Chevron, BP and Total pose similar challenges to efforts to reduce the warming of the planet, of course. But Aramco’s reserves are five times larger than the combined proved liquid reserves of the five majors.

As if the social and environmental hazards of Aramco’s existence weren’t reason enough to eschew the stock, there’s governance. Though Aramco has been run in a professional manner in ways that many other national oil companies, such as those in Venezuela or Mexico, have not been, the Saudi monarchy’s interests will ultimately take precedence over all others. As the veteran emerging-market investor Mark Mobius put it to Reuters earlier this year: “If something happens where Saudi Arabia is in trouble for one reason or another and they need the money, (Aramco) will need to transfer assets to the government.”

Add it all up, and on nearly every measure that could possibly be considered under the umbrella of ESG, Saudi Aramco ticks all the wrong boxes. That’s before considering other risks, like the near-certainty that underwriters will bend over backwards to satisfy the crown prince’s subjective views on Aramco’s worth, or the potential for further disruption to its operations from drone strikes like the ones that hampered production in September. Foreign institutions that still invest will have zero basis to say any of this was unclear.

First published Nov. 7, 2019

(Image: REUTERS/Hamad I Mohammed)

ARAMCO HAS FIRST-CLASS SEAT ON OIL-TANKER TITANIC

Nemesis

BY GEORGE HAY

Saudi Aramco’s relative strength as the world’s biggest oil producer is an absolute distraction when it comes to establishing its worth. The Saudi oil giant’s initial public offering prospectus, published on Saturday, outlines how it is both much more profitable than sector peers like Exxon Mobil and Royal Dutch Shell, and more likely than them to remain afloat when the global oil industry hits the iceberg of peak demand. The problem is that such a collision is coming, and matters greatly to the company’s valuation.

The 658-page doorstop that Aramco presented to would-be investors lacks some short-term details like the size and price of its impending stock-market listing, but gives some eyecatching detail on the longer term. It assumes a 0.8% compound annual growth rate for global crude oil demand between 2018 and 2030, compared to the 0.5% for 2017 to 2030 cited in Aramco’s first international bond prospectus in April. But its two newly revealed post-2030 demand scenarios, using independent projections from consultant IHS Markit, are rather less bullish. One has global demand levelling off in 2035, while another sees it peak in the mid-2020s.

Aramco’s contention is that it can weather those scenarios. It says it can muster a 10% rate of return with oil prices well below $20 a barrel, compared with more than $60 today. That explains its 41% return on average capital employed in 2018, compared to 8% for its peers on average. On the basis that the most expensive oil production would be mothballed first, Aramco’s absolute production would still increase even if oil demand fell sharply by 2050, and its market share would jump to 20% from around 12% now.

The catch is oil prices. If demand really did start to tail off in the next decade, those might well fall. Politicians are not yet doing what’s needed to keep global warming below acceptable levels, but they may yet step up their efforts, faced with increasingly tangible signs of climate change. Even as the best placed of the oil producers, Aramco’s $75 billion annual dividend might then be harder to guarantee. Potential participants in its IPO should ponder not just how long they would want to stay on board, but whether they want to get on at all.

First published Nov. 11, 2019

ARAMCO’S $1.7 TRLN PRICE TAG PLEASES ALMOST NO ONE

Nemesis

BY GEORGE HAY

Saudi Aramco has gone for a suboptimal compromise. The long-awaited price range for its massive initial public offering, unveiled on Sunday, confirmed what everyone already knew: The Saudi Arabian oil giant is not worth the $2 trillion the kingdom originally sought. But even at a valuation of $1.6 trillion to $1.7 trillion it may still be too pricey for foreign investors.

Valuing Aramco shares at between 30 riyals and 32 riyals ($8-$8.5) is a step forward. The narrow range implies a high level of confidence in demand for the offering, which will give Saudi’s Public Investment Fund around $25 billion to help diversify the kingdom’s economy away from oil. Crown Prince Mohammed bin Salman’s willingness to accept a valuation below his preferred target shows an unusual capacity for compromise.

Even so, no one is getting what they want. The crown prince’s reputation for bending markets to his will suffers a dent. International institutions, meanwhile, would have preferred a valuation between $1.2 trillion and $1.3 trillion. At that level Aramco shares would yield about 6%, based on the company’s promise to pay annual dividends worth at least $75 billion for the next five years. That is in line with the average yield offered by other listed oil giants. The expectation that most foreign investors will pass helps explain why Saudi is offering only 1.5% of the shares, rather than 2% or even 3%.

Despite prioritising valuation over foreign appeal, Riyadh should still raise as much or slightly more than Alibaba’s record $25 billion offering in 2014 – a massive sum given its tiny domestic stock market. Some non-Saudi investors could still take part, and overseas funds which track emerging market indexes will be compelled to buy after Aramco starts trading. If oil prices stay elevated, retail investors who snap up 0.5% of the company, with the help of loans from local banks, will have been motivated by more than national pride.

Still, the IPO was also supposed to open Saudi capital markets, revive meagre foreign direct investment and help power diversification. A lower price tag might have enabled a bigger offering, and attracted greater interest from blue-chip global institutions to offset concerns about peak oil demand – not to mention Saudi’s woeful human rights record. Aramco’s compromise means those goals could remain unfulfilled.

First published Nov. 17, 2019

(Image: REUTERS/Hamad I Mohammed)

ARAMCO IPO HAS DUG SAUDI AN EVEN DEEPER HOLE

Nemesis

BY GEORGE HAY

Saudi Aramco finally pulled off its $25.6 billion initial public offering. Party time in Riyadh? Probably not, because the world’s biggest stock market listing has in one way accomplished the opposite of its intended goal.

The oil giant priced at the top of its range at a $1.7 trillion valuation, giving Saudi Crown Prince Mohammed bin Salman a bit extra to divert to Public Investment Fund, through which the kingdom hopes to diversify away from an economic dependence on oil. That recovers a little of the pride lost in abandoning plans to list at a $2 trillion valuation, and in selling only 1.5% on the local bourse rather than a previously mooted 5%.

A high price might have been an undiluted good had Saudi been able to sell a big chunk of Aramco to foreign investors. But only a portion of the offer ended up being sold to non-Saudis, with some of them likely to have been wealth funds from nearby Kuwait and Abu Dhabi. Although Aramco didn’t disclose the split when it announced its price on Thursday, non-Saudis made up 10% of the institutional demand a week earlier – and slightly more than that in the final analysis, according to a person familiar with the situation.

There were plenty of reasons for them to hang back, from Saudi’s poor human rights record to the fact that Aramco is unlikely to be worth more than $1.6 trillion, as Breakingviews has argued on numerous occasions.

That leaves the crown prince in a less-than-ideal position. For example, it suggests Saudi can’t count on an ecstatic reaction should it decide to part-privatize other industrial assets in future. More importantly, it turns Aramco stock into a political hot potato. It’s one thing if institutional investors get hosed by a falling Aramco share price, but another thing if retail punters who bought one-third of the stock – many funded by loans from local banks – suffer a similar fate.

With citizens’ wealth tied up in an investment whose valuation fluctuates publicly minute to minute, Saudi might find itself even more focused on ensuring maximum oil production, rather than improving the health of the general market. In that case, Aramco’s IPO won’t be a step away from fossil fuel dependency, but a step closer towards it.

First published Dec. 5, 2019