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Floating the world’s most profitable company

Rarely does a troubled stock market float tell us so much about the world. When the company is Saudi Aramco, revelations gush like a blowout well, writes Rod Oram

Saudi Arabia’s Prince Mohammed bin Salman promised much three years ago by offering a small stake in the company to global investors. They would profit from the world’s largest, lowest cost oil company; the float would value the company at US$2 trillion; the Kingdom would gain capital for its economic diversification plans; and the attraction of foreign investors would create “more transparency” in the country.

Since then, he has ferociously consolidated his power, becoming Crown Prince and heir apparent. Along the way he incarcerated 400 wealthy Saudis in Riyadh’s Ritz-Carlton luxury hotel until they paid the government US$106 billion; he was implicated in the murder of Saudi journalist Jamal Khashoggi by government officials; he has escalated his country’s war in Yemen; investors are facing greater ethical and political risks from being involved with the Kingdom; and his diversification plans are faltering.

Meanwhile, the global oil market has had plenty of turmoil of its own. The US has consolidated its position as the world’s largest producer, thanks to unfettered fracking; oil prices have remained moderate most of the time; Iran, Russia and Venezuela have greatly complicated the geo-politics of oil; escalating terrorist attacks are threatening oil supplies; clean energy is getting ever more cost competitive against oil; and the weighting of oil and gas stocks in the S&P 500 index fell below 5 percent in June, less than a third of its level in 2008.

To compound the Kingdom’s problems, a number of high profile IPOs such as Uber and Lyft, two ride companies, have deeply disappointed investors. Worse, the float of WeWork, the office space-sharing company, was abandoned because of governance issues involving spending and investment decisions by Adam Neumann, its discredited founder.

Saudi Arabia was directly connected with those debacles. Its Public Investment Fund, its sovereign wealth fund, invested US$45 billion in the SoftBank Vision Fund in 2016. The Japanese fund in turn backed WeWork and Neumann. But the company’s valuation plunged from US$47b in its last round of private fundraising to about US$8b after the aborted IPO, according to the terms of a rescue package hammered out last month by SoftBank. In the rescue, SoftBank extended to it a further the US$9.5b.

The head of PIF is Yasir al-Rumayyan, who has overseen other big bets in international high tech companies. He is a director of SoftBank and Uber. Highly trusted by Prince Mohammed, he was put in charge of the Saudi Aramco IPO by the crown prince in September, displacing the Minister of Energy as the company’s chairman.

So, last Saturday a delegation representing the six Wall Street firms leading the IPO - JPMorgan, Goldman Sachs, Credit Suisse, Citi, HSBC, and Bank of America Merrill Lynch - gathered in a Riyadh palace to deliver a very unwelcome message. Their hosts, led by al-Rumayyan and cabinet ministers, kept them waiting for five hours, according to media reports. Then the meeting lasted just 10 minutes.

... local investors were responding to Saudi government pressure to invest patriotically. The wealthy families who had succumbed to the hotel shake-down were particularly targeted.

The bankers told them feedback from investors around the world prompted two options for the float: an international one that would value Saudi Aramco at a maximum of US$1.5 trillion; or an offer to local investors in Saudi Arabia and neighbouring Gulf states that might value it at US$1.7 trillion. 

The difference spoke volumes. International investors were taking a more objective view of the economic and geo-political complexities of Saudi Aramco. They were unpersuaded by Saudi Aramco’s efforts to burnish its valuation, which included changing royalty payments and cutting long-term capex and tax rates. Even plans to borrow to ensure a minimum dividend of US$75b a year for shareholders would have left Saudi Aramco’s divided yield lower than the likes of Royal Dutch Shell and Exxon Mobil.

Compared with many other oil majors, government-owned Saudi Aramco is also highly problematic for investors who screen companies’ performance on Environmental, Social and Governance measures. Saudi Arabia has long sought to discredit the science of climate change. For example, it regularly joins other major oil producing nations such as Russia, Kuwait and the US in delaying and weakening UN climate reports, as they did in September https://www.climatechangenews.com/2019/06/27/un-report-1-5c-blocked-climate-talks-saudi-arabia-disputes-science/ on a UN report about keeping the rise in global temperatures to 1.5c.

Moreover, the Saudi government has a terrible human rights record. Out of 10, it scores only 1.1 on freedom of opinion and expression, and the right to participate in government; 1.3 on assembly and association; 1.5 on freedom from arbitrary arrest; and 1.9 on freedom from torture. That analysis https://data.humanrightsmeasurement.org/en/country/SAU?as=hi&scale=r is from the global database compiled by the Human Rights Measurement Initiative, based in Wellington.

In contrast, local investors were responding to Saudi government pressure to invest patriotically. The wealthy families who had succumbed to the hotel shake-down were particularly targeted.

On Sunday, the government announced its decision. It cancelled the international roadshow for the float and focused instead on only Gulf investors. The book build is under way, with retail subscriptions closing on November 28 and on December 4 for institutions. The float price for the shares will be announced on December 5.

Instead of Prince Mohammed’s ambition to sell 5 percent of the company for US$100b, a maximum of 1.5 percent will be sold - 1 percent to Saudi investors, and 0.5 percent to those in neighbouring states. It is now touch and go whether the float will beat the previous global record of US$25b raised in 2014 by Alibaba, the Chinese internet company.

Even this scaling back of the float still presents challenges to the Tadawul, the Saudi stock exchange. The stock market capitalisation of Saudi Aramco will equal some 75 percent of the total value of the market, even though only 1.5 percent of the company will be tradable. The exchange will have to operate transparently to set a price for the company that global investors trust. That would be an essential precursor for any renewed offer to international investors or overseas listing.

Yet oil doesn’t create many jobs. The IMF estimates the country, given its young demographic, needs to create up to 1 million in the next five years.

The listing comes at a crucial time for the exchange. In August, it joined the MSCI Emerging Markets Index, thereby attracting some US$18b in foreign portfolio equity inflows, with a further US$5b expected by year end. Some 1500 foreign investors have qualified to trade on the exchange. Others can be nominated by Saudi Aramco and its advisers in the float process.

Delays to the float had already caused financial problems for the sovereign fund run by Saudi Aramco’s new chairman. Last year international banks lent US$11b to the PIF to help tide it over. Many banks contributed in the hope of subsequently being picked for the IPO team.

Other attempts at privatisations such as of Riyadh airport have stalled too. Other assets for sale include the Kingdom’s grain silos and water desalination system. The government’s goal is to raise more than US$10b in the next year through selling such government-owned assets.

Oil still accounts for 70 percent of government revenue and 80 percent of exports. In addition, non-oil activity often needs government funding, which is itself dependent on oil. Yet oil doesn’t create many jobs. The IMF estimates the country, given its young demographic, needs to create up to 1 million in the next five years.

Such diversification imperatives are driving Prince Mohammad’s Vision 2030. He aims to transform the economy through strategic investment in the likes of manufacturing and special economic zones, such as a planned robotic city called Neom near the Red Sea.

With or without foreign investors, Saudi Aramco is crucial to his ambitions. It has 260 billion barrels of proved reserves, equal to 52 years of production at current production rates. That is more than triple the proved reserves of the next five state and multinational oil companies. Last year Aramco pumped one in eight of the world’s barrels of crude oil.

Thanks to those huge and easy to exploit reserves its extraction costs are US$2.80 a barrel, one-third the international average. When oil demand finally peaks, it expects oil prices to fall as producers try to squeeze revenues out of their still abundant reserves. Its mission is to be the last profitable oil producer standing, although it is hedging its bets with expensive acquisitions in gas and petrochemicals.

Moreover, Aramco is a well-run company despite its political control. Its margins are more than twice that of Rosneft, Russia’s state oil company. Its after-tax breakeven costs for new projects are around US$30 a barrel, slightly higher than Kuwait, Iraq and Iran’s but less than half Russia’s and two-thirds the US’s.

With net profits last year of more than US$100b, it is the world’s most profitable company by far. Apple, the runner up, earned half that and Exxon Mobil, the largest stock market listed producer, earned only US$21b.

So, a beauty of a company for those who like oil. But a geo-political beast for international investors.

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