It’s bad times for Saudi Aramco as investors desert its IPO in droves.
What was meant to be a decisive victory for Saudi Aramco (SA) has quickly turned into a rout, with an extremely optimistic valuation of $2 trillion ripped to shreds by a host of climate and geopolitical risks – not to mention the dangers of doing business with what is technically a rogue state.
“In the space of three years, the IPO of the world’s largest oil company has gone from unmissable to unmarketable across most of the world,” said Carroll Muffett of the Center for International Environmental Law.
“That plummet reflects the growing recognition that sinking resources into climate chaos, widespread human rights violations, and authoritarian regimes [create] risks that should be as unacceptable to investors as it is to the planet.”
SA will now offer 1.5 per cent of its outstanding shares at around 30 riyals (US$8.00) and raise somewhere in the vicinity of $25 billion, probably failing to dislodge Alibaba’s historic IPO from the top spot.
It’s a lot of money – but it’s also a lot less than the Saudis wanted.
Maybe that’s because SA has some baggage, for want of a better term.
Few companies are really prepared to do business with a state-owned oil giant that attracts drone strikes like a mangy dog attracts fleas. Then there’s the fact that the Kingdom of Saudi Arabia engages in the wanton murder of civilians and that Saudi royalty can do whatever they want with the company – including interfering with the oil supply to shore up the country’s strategic position.
And that’s all without going into the actual oil part, which is looking increasingly iffy.
Many businesses are aiming to divest from fossil fuels in the near future. For their part, SA predicts peak oil conditions anywhere from the late 2020s to the mid-2030s, but also predicts that their market share will increase at a CAGR of 0.9 per cent until 2050. That might not be enough for companies that are increasingly leery of being associated with the driving force behind climate change.
“We have shown that Aramco’s valuation was highly dependent on oil prices, prices that won’t materialise as demand drops with climate action,” said Hannah McKinnon, director of energy transitions and futures for Oil Change International.
“This is writing on the wall that obviously others are seeing as they flee the scene on the most carbon-intensive offering in history. Chase, Citi and others would do well to re-evaluate their substantial backing of fossil fuels in light of the market's clear scepticism that oil demand will continue to grow.”
The brunt of the IPO will now be borne by local investors who will probably buy into the IPO to save face. The Saudi Arabian Monetary Authority will relax its lending limits to make sure that everybody will be able to get a piece of the pie.
Sheik Rashid bin Saeed Al Maktoum, 2nd Prime Minister of the United Arab Emirates and Ruler of Dubai from 1958 until 1990, once said:
“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.”
Sheik Rashid was concerned that Dubai’s oil would eventually run out and leave the country impoverished. He worked to diversify the economy away from oil by investing in major infrastructural projects.
Saudi Arabian Crown Prince Mohammed bin Salman has sought to do the same; the SA IPO was meant to be one of the major driving forces behind his Vision 2030 plan, which would see Saudi Arabia become a major tourism and entertainment hub rather than an totalitarian petrostate propped up almost entirely by its relations with the US.
But the IPO might be too little, too late.