Why Saudi Aramco Delayed Its IPO

Authored by Cyril Widdershoven via OilPrice.com,

The long-awaited Saudi Aramco IPO, scheduled for mid-2018, could be delayed to 2019.

International news reports have stated that the Saudi government is currently putting together contingency plans for a possible delay to the biggest IPO ever. The listing of 5 percent of Saudi Arabia’s crown jewel, the world’s largest oil company Saudi Aramco, could bring in around $300-$400 billion, based on a valuation of Aramco at between $1.5-2 trillion.

The cash generated by the IPO has already been earmarked for the coffers of the Saudi Public Investment Fund (PIF), to be used as financial support for Saudi Vision 2030, the economic diversification program proposed and pushed for by Crown Prince Mohammed Bin Salman (MBS).

Doubts about the valuation have been strong, but a success story for this particular once-in-a-lifetime IPO is all but guaranteed. International interest is growing and media reports are stumbling over each other to assess, criticize or support the IPO strategy. Presently, international advisors and banks have already been appointed, but no decision (officially) has yet been made on where Aramco will be listed. New York, London, Frankfurt and Hong Kong are leading the race, but no white smoke has plumed from the chimney of the Saudi Royal Palace.

Some analysts view the possible IPO delay as a sign of the problems Aramco and the Saudi government currently face. A lack of transparency, issues with its oil and gas reserves, and the role of the Saudi government as the main stakeholder have all been suggested as the reason for this possible delay. Most of these suggestions, however, are based purely on issues surrounding the IPO itself. The true reason for this delay, however, likely hides among the intricate societal and economic problems in the Kingdom.

One obvious reason for a delay is the still-fledgling global oil price. A higher price setting—above $60 per barrel—would surely drive up the overall interest in the IPO. As long as OPEC and non-OPEC members, such as Russia, are still struggling to get a grip on the oil market, the potential for disaster looms. Needless to say, an oil price slump would have a detrimental effect on the expected revenues of the IPO.

The analysts, it seems, feel no need to look any further than this simple oil price explanation, but several other key factors should be addressed…

The impact of an influx of $1-2 trillion into the current Saudi economy is bound to have a significant impact. The implementation of Saudi Vision 2030 is broad and ambitiously planned. A full diversification of the economy is needed to guarantee work and salaries for future young Saudis, with the end of government subsidies or handouts.

A multitrillion investment scheme in a rather small local economy will likely result in total disorder, inflation and possibly ineffective investment schemes. The attractiveness of investing the total amount could lead to staggering inflation, higher costs and superfluous projects being realized. 

A delay of such an influx of cash seems to be more and more attractive, giving the Saudi government and local industries more time to adjust and put in place the right steps for a sustainable and commercially attractive economic future.

The crown prince’s future, and that of his supporters, also depends on the whole endeavor. A fully-fledged economic revival and restructuring could threaten power brokers and religious entities in the Kingdom. MBS has appeared to misunderstand the significance of these issues, but is currently stepping up to remove some of the apparent hurdles. His current policy to remove hardline fundamentalist religious leaders (partly under the name of Muslim Brotherhood allegiances) is a step he needs to take to control the opposition and solidify his own position.

At the same time, MBS’ future will also be decided soon, as rumors are growing of an upcoming abdication of the throne by King Salman. For MBS, as the new heir, stability is needed to prepare for this unprecedented move. Internal security is put in place, which could be impacted by the Aramco IPO not going according to plan. Opposition groups will take the opportunity to protest against his new status under the umbrella of an unsuccessful sale of the key company, while also dealing with Iranian tensions. A delay of the IPO could be a sign that for MBS, stability and the future of House of Salman has taken precedent over the Aramco IPO.

Taking this all into account, delaying the Aramco IPO until 2019 could be an astute move. The enormous task that the Saudi government has established under the umbrella of Saudi Vision 2030 will be incredibly difficult to achieve. Last week’s statements about an extension of the National Transformation Program (NT), the basis of Vision 2030, was the first sign of this.

Change is always difficult, but Saudi Arabia faces a daunting task. An implementation slowdown is needed in order to reduce the risk to the Saudi government. Aramco’s attractiveness is undebatable, and will be there, whatever happens. The future of the Kingdom of Oil however, is at risk if this transition is not carefully controlled.

Without MBS as captain of the Vision 2030, there will be no Vision 2030.