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Big Questions Hang Over A Big IPO

Saudi Aramco pipelines.
Saudi Aramco pipelines. Photo by Suresh Babunair.

Saudi Arabian Oil Co., one of the largest companies in the world by revenue, has been flirting with the idea of going public, at least in part. But the long and bumpy road to a Saudi Aramco IPO illustrates why investors should be wary.

Saudi Crown Prince Mohammed bin Salman made a public offering of a slice of Aramco a key element of his plan to modernize the country. In 2016, the crown prince suggested listing roughly 5% of the company on international markets at a valuation of $2 trillion. The initial target date was late 2018.

Yet the process has faced significant delays. Reported indecision over key issues, such as where to list Aramco’s shares, slowed the process internally. Independent assessments also came in below the crown prince’s desired $2 trillion. Some equity analysts have suggested Aramco is worth something closer to $1.5 trillion; others have suggested $1.2 trillion is more accurate. More recently, the attack on Saudi oil facilities led to still more delays. Aramco originally said it would publish a prospectus on Oct. 25, but unnamed sources told Agence France-Presse that the IPO will likely be pushed back to December or January. Riyadh has not announced any official reason for the latest delay, though sources told The Wall Street Journal that the company wants third-quarter financial figures in hand to better market the IPO to investors.

Aramco has reportedly envisioned a two-stage listing. This will allow the company to split its shares, with about 2% of capital trading on Saudi Arabia’s Tadawul exchange, and 3% trading on a yet-to-be-announced foreign exchange. How close together these two offerings will arrive has been an open question. While there is still a lot we don’t know, the evidence suggests that the IPO will eventually take place, whether in December, January or later.

If it does go public, Aramco will be hard for investors to ignore. For one thing, the offering would be massive. If the company manages to secure its desired $2 trillion valuation, it could raise as much as $100 billion in an initial public offering. This would make Aramco the largest IPO ever by a wide margin. For comparison, Chinese retail giant Alibaba raised $25 billion when it went public in 2014. In addition, oil prices have fallen by 30% over the past year. An IPO when oil prices are low would give Aramco shareholders an opportunity for future growth.

Yet despite its size and strength, Aramco gives investors plenty of reasons to be wary. Some observers have suggested that Saudi officials have delayed the IPO because they’re concerned that the listing would invite intense legal scrutiny of the company’s finances and inner workings. At a pre-IPO investor meeting in late September, Aramco’s finance chief failed to provide information that fund managers consider standard, attendees told The Wall Street Journal. In particular, details about the company’s valuation assumptions were sparse. A company so averse to transparency would be enough to give wise investors pause.

Saudi Arabia and Aramco are also tied up in one another, since the Saudi government owns the oil producer. As the de facto leader of OPEC, Saudi Arabia attempts to shape global oil prices by dictating Aramco’s production level. This means that Saudi Arabia’s problems may become Aramco’s problems. There is the problem of the Saudis’ human rights record, where women remain second-class citizens in the country, even in light of reforms such as permitting them to drive. Freedom of expression does not exist within the country, and violating that norm can be fatal, as the death of journalist Jamal Khashoggi illustrated to the world last year. And the Saudi government has no problem forcing its wealthiest citizens to transfer that wealth to the crown.

In addition to its domestic problems, Saudi Arabia faces acute geopolitical risks. The recent attack on Aramco’s largest processing plant serves as a reminder of how conflict in the region could pose a risk to investors. And Saudi Arabia remains enmeshed in conflict in Yemen, despite a partial cease-fire enacted in late September.

If Aramco does make a public offering, how should American investors respond? It seems likely that the first offering will be on Saudi Arabia’s Tadawul exchange. While this market has instituted investor-friendly reforms and opened to international investors in recent years – largely in anticipation of an Aramco IPO – some foreign investors remain concerned about transparency and poor disclosure requirements. Critics also point to the risk of Riyadh interfering in Saudi shares.

Without seeing Aramco’s disclosures, I cannot categorically state whether investors should invest in Aramco at all. The company is a major piece of the global economy, and it is likely to turn up in many mutual funds. But I think it’s safe to say that if you’re going to hold Aramco shares, be sure to underweight it within your portfolio. Holding it at market weight, or worse, overweighting it, will only magnify the inherent risks.

An Aramco IPO would be a political win, especially for Saudi Arabia’s crown prince, but the country has no need to rush it. Riyadh can afford to wait until the time is right. Investors should be just as deliberate and careful in deciding if and when to add Aramco to their investment mix.

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