The Saudi Aramco IPO: Back to basics

Despite some intense lobbying by international stock markets like London and also New York, there now seems to be a new realism setting on when and where the planned Aramco IPO might take place.

The message from Saudi Energy Minister and Aramco Chairman Khaled al-Falih is that the Kingdom has not yet decided on a final venue for its dual Saudi-international listing, with not only London, and New York, but also Singapore and Hong Kong vying for this prestigious listing.

Once again, the delay in announcing an international listing venue has raised the possibility of a Saudi only listing. There is now feverish speculation that the long awaited mega Aramco IPO will either be delayed to 2019 and whether the international listing will take a secondary place with a primary listing on the Saudi Tadawul Stock Exchange becoming a more realistic choice.

There has also been some statements from Saudi Ministers during the visit of Crown Prince Mohammed bin Salman to the US, that the 2018 listing date is still feasible and that all options – both domestic and international are under study.

This raises an intriguing possibility – is listing the Aramco IPO exclusively on the Saudi Tadawul a viable option and what has changed over the past few months, given the fact that all Aramco statements have been positive and that the company is well advanced in its preparations?

Detractors of a local listing have always argued that there is still some way to go for the Saudi Tadawul to ensure that the necessary legal, regulatory and operational infrastructure is in place to handle the mega Aramco IPO and that an international listing in a prized foreign bourse would bring the Kingdom prestige and ensures that Aramco applies best –in- class governance models.

However, recent comments from no other than Energy Minister Khaled al-Falih has made analysts pause and take notice to a subtle but significant change of tone on where and when the Aramco IPO was heading, leading to speculation on whether an international exchange listing such as in London or New York now hangs in the balance.

Litigation concerns

The Saudi Energy Minister put it very frankly when he rightly stated that that Aramco was too big and too important for the Kingdom to risk listing in the United States because of litigation concerns arising out of the US JASTA Law and existing lawsuits against international oil companies for their role in climate change.

“The only thing we know today is that Tadawul will be the key listing location as our national exchange,” Khaled al-Falih told CNN in a wide ranging interview ahead of Crown Prince Mohammed bin Salman’s visit to the US. The Minister provided a significant reason for why a local listing now made more sense than before.

“We are waiting for the reforms to be in place and to join MSCI and Aramco listing in Tadawul will be catalytic for that capital market as we bring international capital to the kingdom.”

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As for timing on whether this will be 2018 or delayed to 2019, and if there was an internal deadline to meet for launching the IPO, the Minister was again frank by stating that as far as Aramco was concerned it was not going to be bound by an “ artificial listing deadline “ and would do so when it was ready . What he pointed to was that already the energy giant has had its legal status changed to a Saudi joint stock company effective from 1st January 2018 to start the process.

The hoped-for inclusion of the Saudi Tadawul in several prestigious international indexes is the main factor for this newfound optimism for a Saudi-only listing of the Aramco IPO.

While it was deferred for inclusion in 2017, the Saudi bourse is now very confident that it would be added to the Russell FT Emerging Market Index by March 2018, as well as the MSCI Emerging Market Index by June.

Passive capital flow

If these happen, then it will ensure that a local Tadawul Aramco IPO listing would attract significant passive capital inflow investments, with some estimating this at around $ 60 billion, as the Saudi Tadawul would be allocated a certain percentage weighting in these indexes and investors would, in effect, be “buying into” the Tadawul index and the Aramco listing.

Passive investment funds that replicate MSCI indexes would need to put 4 percent of their funds allocated to emerging market indexes into Saudi shares to match the country weighting.

Will a local listing close the door to an international offering? A Saudi only initial listing does not preclude an international listing at a later stage as this would provide more time for Aramco to carry out its internal structural and governance reforms and produce the necessary audited accounts on a regular basis, which can then ensure that any future incremental IPO listings to the initial 5 percent is well received by international investors.

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In the end, a final decision on when and where to list Aramco will be made in good time and after taking all factors and advise into consideration by Crown Prince Mohammed bin Salman, who oversees the kingdom’s economic and oil policies as he juggles the multi-faceted implications of such a listing that involves geo- political relations, as well as a hard headed risk analysis and maximizing financial rewards.

As the Energy Minister said, the company is too important to the Kingdom to expose it to any possible risk, however remote, in the future. In the meantime, everyone is still going to be guessing on the when’s and the where’s of this long awaited mega IPO.

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Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘OPEC in a Post shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.