Saudi Aramco’s historic IPO: Fact versus fiction

Saudi Aramco has set two world records, the first as the biggest ever Initial Public Offering (IPO), giving it the second record: the world’s most valuable listed company, beating Apple.

This is a monumental development for the Kingdom of Saudi Arabia. It supports Crown Prince Mohammed bin Salman’s (MBS) Vision 2030 to modernize the country and its economy, a process that in turn is underpinned by a social and cultural revolution of pivotal consequence to the global battle against extremist interpretations of Islam.

Yet from the beginning of the IPO process, myths about the IPO have abounded. And in the media frenzy around topics such as Aramco’s valuation and potential listing venues, the strategic context of the IPO has been missed.

Here are the most common myths about the IPO:

1) The IPO is about liquidity for the government, and the valuation target has been missed.

The IPO has very little to do with liquidity. Despite reams of commentary about the largest IPO in history and speculation on valuation, little has been written about its strategic value to Saudi Arabia. (MBS mentioned a $2 trillion valuation early on because bankers who were eager to work on the IPO came up with a high figure to get the business—sadly, a common practice.) The final valuation, which will be attributed after a 1.5 percent slice of the company is listed, will be a secondary issue.

What is important is that the listing establishes a mechanism to allow follow-on offerings and/or secondary listings of the company in the future. Listing also advances a culture of transparency throughout the Kingdom (one of the Crown Prince’s original goals), gives depth to the Saudi Arabian stock market, and attracts global equity interest. Money is not needed now; Saudi Arabia has hundreds of billions in FX reserves, and the government would have benefited from similar liquidity from royalties and dividends even without an IPO.

2) The IPO and Saudi Aramco are negative from an ESG (Environmental, Social, and Governance) and sustainability perspective.

Perhaps the most inaccurate of the myths surrounding the IPO relates to sustainability. Some commentators have suggested that climate change poses an existential threat to Aramco’s business. In fact, Saudi Aramco is primed to prosper in a carbon-constrained world. Why? It is already one of the world’s cleanest producers per barrel and serves the transition to a low-carbon world. In a recent Stanford University–led study, one of the most comprehensive ever on emissions, Saudi Arabia was found to have the lowest carbon intensity (CI) of any major oil-producing country. (Carbon intensity measures greenhouse gas emissions through the full process of producing crude oil.)

Published in the prestigious journal Science, the study found that globally, Saudi Arabia was second only to Denmark in carbon intensity—and Saudi Arabia produces over sixty times more oil than Denmark daily. The average carbon intensity of oil produced in the United States, for example, is about twice that of Saudi Arabian oil.

Saudi Arabia’s more sustainable carbon intensity isn’t the result of luck. It’s a function of the company’s reservoir management, which involves minimizing the use of flaring and water, thereby lowering the amount of energy used to produce each barrel.

3) The IPO has been scaled back and is domestic only.

It’s true that the first 1.5 percent of the company’s shares have only been marketed to Saudi citizens and residents and to local and regional institutions. But qualified foreign investors (QFIs) registered with Tadawul have also been allowed to invest, meaning the IPO was also open to some fifteen hundred foreign institutions. And, as mentioned, significantly more money could be raised later with international secondary listings.

Implementing an IPO swiftly is a challenging task for any company. I come from the “IPO industry” and have grappled with listing companies a thousand times smaller than Aramco. Those who see the time taken to list Aramco as problematic have no idea what is involved in taking any company public, let alone the largest company in the world.

4) Shareholder rights won’t be respected.

Saudi Arabian history shows a long (and unique among developing countries) history of respecting foreign investment. Recently, the Dutch government sold its share in a Saudi Arabian bank that had evolved from the first bank set up in Saudi Arabia in the 1920s as the Netherlands Trading Society for close to $500 million. In the century since that date, virtually every developing country, and quite a few developed ones, nationalized or expropriated foreign investors. Yet not a single dollar of foreign investment was ever touched by the Saudi government. This respect for foreign investors will certainly continue.

Additionally, as I’ve written previously, Saudi Aramco has been one of the most successful FDI (foreign direct investment) experiments in modern history. It was founded by US oil companies in the 1930s and was managed jointly and consensually with the Saudi government for decades, eventually being acquired from those partners at full market value by the Saudi Arabian government in the 1980s (in stark contrast to many other national oil companies that were seized by socialist and populist governments all over the world).

To ensure minority rights after the IPO, a clear, rules-based system governing Aramco’s relationship with the state has been put in place. This limits the government’s power to four key elements: the company’s maximum sustained capacity, production levels, royalties, and taxes. The government has also effectively prioritized IPO investors through the company’s dividend, set for a minimum of $75 billion, with only the government taking the hit should dividends fall below that threshold.

The government will never give up control of Saudi Aramco; it is the country’s crown jewel. But minority shareholders will bring a new dimension that the government wants: scrutiny of management and an outside investor’s perspective on the Saudi Arabian government’s most important asset.

5) Saudis have been pressured or coerced into investing.

By all accounts, Saudi Arabian citizens have shown considerable interest in the IPO and, in addition to recognizing it as a source of national pride, see it for what it is: an unprecedented opportunity to own a piece of the world’s most profitable company. Helped by generous concessions such as a bonus share for every ten shares purchased (the government sees the IPO in part as a wealth transfer to citizens), Saudi Arabian citizens have actively participated, and with institutional investors the IPO has ended being oversubscribed by nearly 500 percent, a very respectable showing for such an enormous financial offering.

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Ali Shihabi is a former banker and founder of the Arabia Foundation. He tweets @aliShihabi.

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Last Update: 19:12 KSA 22:12 - GMT 19:12
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