The constant postponement of Saudi Aramco’s initial public offering (IPO) is exposing the risks in the international oil market, thereby casting a shadow on the future of Brent, the benchmark of Nigeria’s crude oil.
Nigeria generates most of its revenue from crude oil, but the commodity has within the last few years faced some geopolitical risks in the Middle East, a development which impacted negatively on the prices of crude oil in the international market and triggered Nigerian government towards seeking alternative revenue sources.
Drone attacks on Aramco’s oil processing facilities at Abqaiq and Khurais in September 2019, which wiped out more than half of the oil giant’s production output, were one of the recent of big hits on the commodity.
The country is by far the largest oil producer, contributing almost one- third of total Organization of the Petroleum Exporting Countries ( OPEC) oil production, giving it a great influence on the world’s supply.
The attacks, which the United States alleged were launched by Iran, knocked down approximately 5.7 million barrels per day ( bpd) of total Saudi oil output. That is over five percent of global crude supply, creating a deficit in the country’s crude production volume.
Shortly after the incident, oil prices recorded their biggest percentage gain in record as oil jumped almost 15 percent to hit more than $ 69 per barrel while traders went scrambling to buy oil contracts, especially with Donald Trump warning that America is ready for war.
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In spite of this, reports say the incident would not deter the world’s most profitable company from going ahead with its much-anticipated IPO through which it plans to list a portion of its shares.
An IPO refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors.
Potentially, the biggest equity sale in history, the IPO planned for 2018 is supposed to be the deal of all deals, as it was proposed to seed a $ 2 trillion sovereign wealth fund to carry the Middle East’s biggest economy through the end of the oil age and also funnel hundreds of millions of dollars in fees to Wall Street’s elite banks such as Jpmorgan Chase & Co. and Morgan Stanley.
Aramco’s IPO process dates back more than three years ago when Muhammad bin Salman, Saudi Arabia’s crown prince suggested floating up to 5 percent of Saudi Aramco at a valuation of $ 2 trillion. The company’s share sale could not materialise since then as a result of a combination of hubris on the valuation, an overambitious timetable, among others.
A lot of preparations were made towards actualising the IPO since its 2016 announcement. However, issues such as governance and disclosure, the acquisition of a 70 percent stake in petrochemicals maker Saudi Basic Industries Corporation ( Sabic), disagreements among Saudi officials and advisers over the choice of an international listing venue, all combined to weigh on the offering in 2018.
The 70 percent acquisition in Sabic to boost its downstream business was approved in September, while the dispute among the country’s officials led to the exit of some key members from the project.
For instance, Abdullah bin Ibrahim al-saadan, a 30- year veteran who as chief financial officer was the most senior executive working on the IPO’S day-to-day preparations, left in June to become the chairman of the Royal Commission for Jubail; another key official Motassim al-maashouq, who is vice president of IPO development, has been asked to take on new responsibilities.
Buying part of Sabic, a giant in its own right, could make Saudi Aramco a more valuable company while the petrochemical industry is growing around the world. That, in turn, could help the oil company draw even more interest in a public offering.
But skeptics of a Sabic transaction worry that Saudi Aramco would be taking on a financial burden by paying tens of billions of dollars for a stake in the chemical company and adding on a big petrochemical business might reduce the overall profitability of Aramco, which is believed to enjoy among the world’s lowest costs for extracting the oil it produces.
While the valuation saga persists, investors were concerned in determining who is responsible for the company since it is wholly owned by the Saudi Arabian government. There were also concerns about how the decision-making processes within the company would become much more transparent after its IPO.
Ademola Henry, team leader at FOSTER, said the problem of poor predetermined valuation armed with lack of political will and lack of clarity on how the process should be done have made the Saudi Aramco IPO a fiction which will never happen.
“When they arrived at a valuation of $ 2 trillion, the market was shocked asking how they arrived at that,” Henry told Businessday.
Meanwhile, while the concerns around the Saudi oil attacks seem to be fading already, the Iranian government last Friday claimed two missiles hit one of its oil tankers 60 miles off the coast of Saudi Arabia as it headed to Syria on the Red Sea, a development that could further instability of Brent.
Consequently, Brent crude, the global benchmark, was up 1.7 percent at $ 60.10 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures rose 1.9 percent to $ 54.58 a barrel.
Aramco’s IPO plan on Saudi Arabia’s Tadawul exchange is part of Prince Mohammed’s economic reform plan to fund economic diversification away from oil and to shore up national finances.
Should Saudi Aramco’s 5 percent become successful, it would mark a major shift in economic policy from the ruling House of Saud otherwise the government must consider lowering the $ 2 trillion valuation to something closer to what analysts currently estimate.
Analysts say the international oil industry is currently not in a suitable condition for the original valuation to be realised due to a weak outlook for oil prices, rather it should review its valuation to around $ 1.5 trillion.
Ahead of its IPO, Aramco recently released its earnings figures for the first time in recent memory, showing a net profit of $ 111 billion and revenue of about $ 356 billion for 2018.
