Saudi Aramco privatisation intentions astound oil sector

The Guardian

If flotation goes ahead, Sauid oil producer will be world’s most valuable quoted company, dwarfing Apple, Exxon and Google

Saudi Aramco, the world’s biggest oil producer, is studying plans to privatise some of its subsidiaries as well as offering shares in the main business.

The news follows comments made by Deputy Crown Prince Mohammed bin Salman on Thursday that he supported the trillion-dollar company being prepared for an initial public offering (IPO). If the float goes ahead it will be the world’s most valuable quoted company, dwarfing Apple, Exxon and Google.

The moves have astonished the oil sector and led to speculation about whether a share float would change the Saudi strategy of driving down oil prices by refusing to cut back on production.

Analysts believe the world’s most valuable business will attract a lot of interest from potential investors, but warn that the Saudis could underestimate western concerns about Aramco’s traditional secrecy and the impact of falling oil prices.

A statement from the oil group said: “Saudi Aramco confirms that it has been studying various options to allow broad public participation in its equity through the listing in the capital markets of an appropriate percentage of the company’s shares and/or the listing of a bundle its downstream subsidiaries.

“This proposal is consistent with the broad and progressive direction pursued by the Kingdom for reforms, including privatization in various sectors of the Saudi economy and deregulation of markets.’’

Prince Mohammed expected a review of the business, which has reserves of 260bn barrels and 60,000 staff, to be completed within months. Any float could take place after that.

The Saudis have recently introduced a raft of changes to the economy, not least has been a decision to cut subsidies on domestic energy bills and a plan to introduce VAT taxes. Both are considered risky in a conservative country with such fragile democratic credentials.

Jason Tuvey, a Middle East specialist at Capital Economics, said it was difficult to value Saudi Aramco and he had come across speculative figures ranging from $1tn to $10tn.

Even the lower figure means Aramco is worth three times as much as Exxon Mobil, and a 5% stake of that would easily dwarf the $25bn raised by China’s Alibaba group, whose $25bn float is the largest so far.

Fadel Gheit, a veteran oil analyst at Oppenheimer & Co brokerage in New York, questioned how easy it would be for the Saudis to pull off a significant flotation given Aramco was used to a very low level of transparency.

And he pointed out that Prince Mohammed had raised another issue at Aramco that could concern any potential buyers: corruption.

“If western investors are to be interested in Aramco they are going to want all sorts of details and reassurances about the way the company will be run, its growth prospects and dividend policies. Will the Saudi government be willing to provide these and relinquish control?

“The company may have huge oil reserves but look at what happened when Petrobras (the Brazilian state oil group) was privatised. There was a total lack of understanding of free markets and the stock dived in value.”