Complex Made Simple

Aramco IPO: A done deal, or a pipe dream?

Two days ago, Reuters published an exclusive report stating that the long-awaited IPO by Saudi oil giant Aramco had been “called off,” following information from four trustworthy senior industry officials.

Soon after, Aramco chairman Khalid Al-Falih countered with a statement of his own, claiming that “The Government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum.”

These conflicting accounts have brought into question Aramco’s true motives behind their latest decisions, especially given their recent interest in petrochemical company SABIC.

So, with the IPO’s fate in the balance, what are Aramco and Saudi trying to achieve?

Is there still hope for the IPO? 

When the IPO was announced in 2016, industry members expected it to take place in the following year. 2017, however, did not see the oil giant go public. This raised concerns and questions both locally and internationally.

“IPOing Aramco and transferring its shares to PIF (the Public Investment Fund) will technically make investments the source of Saudi government revenue, not oil,” Crown Prince Mohammed Bin Salman said in 2016.

In July of 2018, things started to make sense. Aramco confirmed a report by Reuters that it was planning to buy a “strategic stake” in SABIC, a Saudi petrochemical corporation and the largest listed company in the Middle East. The PIF, Saudi’s sovereign wealth fund, owns 70% of the company. SABIC has market capital worth $98.4 billion, according to Tadawul figures.

This is where things get confusing. What this means is that Aramco, which is fully owned by the Saudi government, is planning to buy a stake in PIF-owned SABIC, which is also owned by the Saudi government. What’s essentially happening here is the government buying from itself in a sense. While a merger between Aramco and SABIC will surely bolster the former’s standing and finances, it will also lead to what is perhaps the ultimate goal of this whole affair: the generation of liquid capital that will enable the Saudi government and the PIF by extension to continue its rigorous investments in non-oil sectors, whether locally or abroad. Is this not the goal of the Vision 2030 plan, and the Crown Prince’s aspiration of a diversified Saudi economy? When looked at from this perspective, it begins to make sense.

Furthermore, Saudi intends for the PIF to manage $2 trillion by 2030.

READ: Saudi Aramco raising billions to buy Sabic: Smart but will it work?

So where does this leave the Aramco IPO?

Reuters’ report of the offering not happening had seemed to conflict with what had been transpiring earlier. With Chairman Khalid Al-Falih confirming that an IPO is indeed still in the pipeline, the mystery dissipates.

The IPO had not been on indefinite hold, but was, in fact, halted temporarily until “conditions optimum.” The reason?

The SABIC acquisition deal.

Aramco found another source of short-term income that eliminated its need for an immediate IPO.

READ: Even if it wanted to, can the Saudi PIF buy a large stake in Tesla?

Bloomberg said: “ Aramco-Sabic deal could give Saudi Crown Prince Mohammed bin Salman a shrewd way to avoid an IPO that has proven far more difficult than envisaged, while still raising cash for the sovereign wealth fund.”

“The main difference would be the origin of the cash: rather than equity investors, it would come from bank loans and bond investors.”

“A Sabic deal would allow the government to buy time for the Aramco IPO,” industry and international banking sources told Reuters.

This liquid capital would be used to fund many of the PIF’s current and prospective projects, such as the $500 billion megacity NEOM, and perhaps a larger share in electric giant Tesla. It is vital to keep in mind that almost any development or business affair Saudi and its PIF take on is all for the sake of fulfilling Vision 2030, which has often been touted as the Crown Prince’s brainchild.

So when can we realistically see the IPO occur? Some analysts are predicting a date between 2019-2020. Aramco is expected to sell about 5% of its shares in what would likely be the world’s biggest IPO. According to Reuters, the listing will be worth around $100 billion.

READ: Why would Saudi Aramco want to buy a stake in Sabic?