Categories: Economy Middle-East Middle-East News

ARAMCO Public Offering: The Saudi Field of Dreams

“Make no little plans; they have no magic to stir men's blood.” – Danial Burnham, American architect and urban planner

Rabat – In 2016, then Deputy Crown Prince Mohammad bin Salman (MBS) launched his Vision 2030 plan; a bold reset for Saudi Arabia that would remake the economy and build a new society that was more open to investment and more tolerant in its faith.

Like much of the crown prince’s change agenda, it was based on a bold break from the past. The Saudi economy—long dependent on income from petroleum exports—can no longer follow the same path as it has for the past 50 years. Oil will remain king for years to come but the global march toward a post-carbon green economy is well underway.

Now, at the end 2019—slightly behind schedule—the desert kingdom is unveiling the Aramco initial public offering (IPO).

While the IPO is now much smaller in scope than originally planned three years ago, the Saudis steadfastly refuse to be spectators in the new economy. “As such, we will transform Aramco from an oil producing company into a global industrial conglomerate. We will transform the Public Investment Fund [PIF] into the world’s largest sovereign wealth fund,” states a quote from the deputy crown prince in the introduction to the Vision 2030 plan.

Details of the IPO are just now being released, but the kingdom has been actively investing in tomorrow’s economy for several years. For example, the kingdom’s enormous Public Investment Fund (its sovereign wealth fund used for domestic and foreign investment projects) now owns 16% of Uber.

Read also: MBS: Khashoggi’s Murder Happened Under My Watch

Aramco is the most profitable company in the world and, according to Fitch, Aramco income accounts for roughly 70% of the kingdom’s state budget revenue. And Saudi Arabia accounts for about 16% of total global crude oil exports; the influence of Saudi Arabia on global oil prices and production is still enormous.

Based on the recently released Aramco IPO prospectus, about 0.5% of total Aramco shares will be available to trade to individual investors (the company has 200 billion total ordinary shares) and an additional 1% of Aramco shares will be available to Saudi and Gulf-based institutions and sovereign wealth investment funds.

The planned share value is about $8.00 per share, meaning the Saudis are seeking an Aramco market valuation of $1.6 to $1.7 trillion.

Despite painstaking planning for Aramco’s debut—the Saudis have partnered with the world’s leading banks and investment houses including Citigroup, HSBC, and Morgan Stanley—plans to aggressively promote the IPO in New York, Tokyo, London and other investment centers have been scaled back.

Buy local, sell local is the current priority. Aramco shares will be trading in the Saudi domestic Tadawul stock exchange next month after share orders are secured. While Aramco will welcome individual stock buyers, the real interest for Saudi leadership is institutional investors like sovereign wealth funds from foreign nations.

Listing Aramco in international stock exchanges like New York, Tokyo, Singapore, or London, for example, may or may not happen in the future.

Read also: Saudi Royal Family Reportedly Divided Between MBS, King Salman
‘Remember that the stock market is a manic-depressive’

The quote from American investment titan Warren Buffet about the stock market’s mental state captures the dilemma of an Aramco IPO in 2019.

Tensions in the Gulf region and soft oil demand (and the new-found power of American shale oil production) are meeting youth-led change movements that seek greater transparency. There is a lot to absorb. Markets are fickle, and investors are often weary of risk even when it involves the 18th largest economy in the world.

But the crown prince has pushed on with Vision 2030. Following numerous challenges and significant missteps, he is now looking to both East and West for allies and investors.

Though a $1 billion deal to build Amazon data centers in the kingdom has stalled, the crown prince has successfully deepened economic and security ties with China, Russia, and Pakistan. Last year, the Saudis formalized agreements with China-based Huawei to jointly develop the kingdom’s 5G network.

At a September roundtable with Reuters, Saudi Finance Minister Mohammed al-Jadaan said, “We will continue to support mega projects, increase spending efficiency and empower the private sector to create jobs.” That’s a significant challenge for Saudi leadership as oil prices fall below the optimal level to fund the kingdom’s ambitious plans.

Additionally, as a green era unfolds, the role of fossil fuel-based corporations in both the investment world and as a driver of national development is being scrutinized. For example, the European Investment Bank recently decided to phase out financial support for fossil fuel (coal, oil, and gas) projects by the end of 2021. In September, the Financial Times reported a “sharp rise” in the number of institutional investors shedding fossil fuel stocks.

What’s that old saying? Winds do not blow as the ships wish.

About 70% of Saudi Arabia’s population is under 30 years old. Hungry for change and desiring real economic opportunity at home, the images from inside the kingdom are truly dramatic: Movie cinemas, Western music star concerts, entrepreneurship, Saudi women with the freedom to drive and travel, accessible tourist visas.

Transforming hometown pride and optimism into sustained investor confidence is not easy but it is a prerequisite for everything that Aramco’s IPO represents.

Yet Aramco is the most profitable company on earth, with a 2018 net profit of more than $111 billion. That kind of success breeds confidence even in turbulent times.

Aramco’s sheer size and production capacity make it capable of both underwriting an economic redesign and reordering an entire society. The economy redesign is already underway whether or not the Aramco IPO has the magic to genuinely stir men’s blood.

As for the kingdom’s broader domestic reform project? The crown prince himself was unambiguous in his Vision 2030 plan: “We ponder what lies over the horizon rather than worrying about what could be lost.”