Breakingviews - Saudi can afford to scrap Aramco IPO plan

A view shows Saudi Aramco's Wasit Gas Plant, Saudi Arabia December 8, 2014. Picture taken December 8, 2014. Saudi Aramco/Handout via REUTERS

LONDON (Reuters Breakingviews) - Saudi Aramco’s initial public offering is an idea that deserves to be put back in the ground. The sale of a 5 percent stake in Saudi Arabia’s state-owned oil giant may be pushed back into 2019, according to Bloomberg. Achieving the desired $2 trillion valuation always looked a stretch. If Riyadh really wants the money it has better options.

Buying a bit more time to prepare what could be the world’s largest IPO makes sense. First, the timing of the sale – a pet project of Crown Prince Mohammed bin Salman – is awkward. Saudi is embroiled in a bitter diplomatic feud with neighboring Qatar, which has undermined Arab unity and investor confidence in the region. Closer to home the House of Saud has also been shaken by internal strife. The prince replaced his older cousin as heir to the throne in June, in what looked more like a coup than a royal reshuffle. Since political risk will be a big input into Aramco’s valuation, it would be logical to wait for calmer times.

Then there is the valuation. The prince thinks the sale could raise $100 billion, but he is in a minority. According to a Breakingviews calculation, oil prices would have to trade at around $80 per barrel over the next decade – a 45 percent premium on Brent’s current value – to achieve this windfall. Tinkering with royalties and taxes is one way of juicing up the valuation. Even then, the pricing could be sensitive. Too cheap, and it will look like the kingdom has given away a piece of its crown jewel too easily. Too expensive, and the shares could fall, embarrassing the Saudi elite.

One alternative would be to shelve Aramco’s sale, and instead open up more of the kingdom’s oil reserves – the Middle East’s largest – directly to international oil companies. Over time the fees they pay to produce crude and the economic boost from their investment could raise more cash. Saudi tried this before with gas and failed – but then, bin Salman has cultivated the impression that he is moderniser and willing to experiment when that’s what’s best for Saudi. This is a chance for him to prove it.


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