Imagine for a moment, the following: In an industry with global
demand there is one organization that has the following advantages. It
has the lowest cost of production for its product, exported and used by
every country on the planet, and is part of a publicly recognized and
accepted price fixing cartel that can counteract swings in supply and
price.
In 2018 this organization generated profits of over $111 billion on revenues of almost $356 billion, outstripping profits of market
titans such as Apple and Walmart. Best of all, and for the first time in
decades, the management of this organization is looking to participate
in an IPO and allow new investors to participate in this profit bonanza.
Sound too good to be true? The answer is both yes and no. The
organization described in the above paragraph is real; the Saudi Arabian
Oil Company, commonly referred to as Saudi Aramco. Controlled by Saudi Arabia,
leading member of the OPEC cartel which still does exercise influence
over global oil supply and prices despite increased non-OPEC production,
Aramco holds a unique position in the petrochemical industry. Record
profits, the support of a nation-state, and a product that every country
in the world consumers – what could possibly go wrong?
Unfortunately, the story is not all bumper profits and limitless
returns for investors as the proposed IPO (initially announced in 2016)
is just now reaching fruition. Under the scrutiny that inevitably
accompanies an IPO process the valuation of Aramco has dropped from $2 trillion to a range between $1.3 and $1.7 trillion, the amount of company stock to be issued to the public has dropped from an initial estimate from 5% to just 1.5%, and the scope of the IPO has been scaled back. Initial plans of issuances in the US,
London, and Hong Kong have been cancelled and replaced with an exclusive
listing in Riyadh.
With this local-only issuance of shares the tactic being employed
involves strongly encouraging Saudi residents, including the very same wealthy individuals held captive at the Ritz Carlton last year, to invest in the share
issuance. In other words, the very same wealthy citizens that were, in
essence, shaken down for billions of dollars prior to being released are once again being strong-armed to help prop up a lackluster IPO.
Not quite the grand reorientation of the Saudi economy that was initially promised, dubbed Saudi Vision 2030.
What Happened?
During the last several years as the IPO process has slogged forward
there has been much speculation about just what exactly went wrong.
Recently it has become fashionable to blame 1) a downturn in oil prices,
and 2) the attack on major Aramco facilities in September that led to over 50% of total production being
offline, albeit only for a short time. Taking a closer look, however,
reveals several factors that contradict the facade put forward by the
management of Aramco seeking to raise capital. There are three reasons
why this otherwise promising IPO has stalled, shrinking both in scope
and market impact.
First and foremost it is important to note, and despite the fact that
many extremely competent professionals work for Aramco, the only
management decision makers that really matter are the royal family.
Not a board of directors elected by shareholders, not globally
recognized experts in the petro-chemical markets, and not shareholders.
These positions may very well exist, but the true influence lies
elsewhere. In fact, Aramco operates under a lease concession model that results in profits and dividends being allocated directly to
state coffers to be spent on whatever project currently has the
attention of the family. This arrangement follows the seizure of assets
previously operated by international oil players during the 1970s.
This closely held and unusual ownership structure also resulted in an opaque and mysterious operating structure and a lack of verifiable financial
information for market participants to assess. Prior to the release of
partial financial information as part of the lead up to the proposed
IPO, hard numbers had been difficult to come by. Even with these
releases, however, much remains uncertain as to just how Aramco operates from a financial and operational
perspective. Accounting reports and disclosures required by markets such
as the U.S. would have dramatically increased the scrutiny the
organization would have operated under.
Last but not least, the key management decision maker in Aramco is
the Saudi royal family, led by a man who has been accused by many as
playing a key role in organizing the murder and dismemberment of a
journalist and other human rights violations. There are also mounting suspicions, attended by facts, that the government of Saudi Arabia had a role in the September 11th attacks in New York and Washington D.C.
Taking into account that only 1.5% of the company is set to be
issued, and that the lease concession operating structure does not seem
set to substantially change this means that any global investor would be
getting into a partnership with a direct extension of the government.
No government or individual is perfect, but the laundry list of human
rights abuses may have given some institutional investors cold feet
given the contentious global political landscape.
So What’s Next
It seems like the Aramco IPO will go forward, in no small part
because the Saudi government needs to salvage something from this saga
as well as raise some much needed capital, currently estimated to be
approximately $25 billion. This would rank the IPO as one of, if not the largest, IPOs of all time.
The Aramco story may have unfolded in Saudi Arabia, but it should
serve as a dire warning for pundits across the globe. Even an
organization with every possible advantage in its favor is unable to
overcome a government seen as overly involved in operations of the
organization, and operating as the only management voice that matters.
Aramco may seem like an extreme example, but the truth is that this
story has been repeated innumerable times with innumerable governments.
A successful business is a like a good recipe: too much of any single ingredient can ruin the whole batch. That includes too much governmental meddling.
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