Saudi Aramco financial report hints at early IPO
A rare release by Saudi Aramco of its latest financial performance and news of a major foreign downstream investment are lending credence to reports that the Saudi government was moving up its timetable for the much-anticipated initial public offering of the Saudi state oil and gas giant.
There is scepticism in the energy and financial communities that Riyadh can conduct Saudi Aramco’s limited sale in 2020, given the decision-making required and questions, including the Saudi government’s valuation of the state crown jewel and the extent of Saudi Aramco’s dividend payments to the government.
Buoyed by an oversubscribed international bond sale in April that raised $12 billion for Saudi Aramco, Riyadh was reportedly gearing up to list shares as early as next year rather than wait until 2021. Saudi Crown Prince Mohammed bin Salman bin Abdulaziz recently insisted that the Saudi Aramco initial public offering (IPO) would take place in 2020 or early 2021.
Saudi Aramco’s release of its 2019 first-half earnings on August 12 was intended to assure potential investors of the firm’s profitability and move the goalpost up for the limited share sale. As required in the prospectus for its recent bond sale, Saudi Aramco had already released significant financial and oil production data that revealed it was the world’s most profitable company in 2018, with net income of $111.1 billion on revenues of $355.9 billion.
The state energy giant said it recorded net income of $46.9 billion for the first six months of 2019, a 12% drop from net earnings for the first half of 2018, largely the result of lower oil prices. The firm noted that it earned an average of $66 a barrel for its crude for the half-year, 4% lower than the same period in 2018.
Saudi Aramco CEO Amin Nasser said the energy conglomerate is following through on its “downstream growth strategy” that has involved strategic domestic and foreign acquisitions. “These acquisitions are expected to enhance dedicated crude placement, increase refining and chemicals capacity, capture value from integration and diversify our operations,” he said.
Large-scale acquisitions, such as Saudi Aramco’s decision in March to purchase 70% of state petrochemical firm Saudi Basic Industries Corporation (SABIC), demonstrate the oil firm’s desire to bolster its downstream sector as part of evolving into a more integrated and competitive energy company and raise its corporate value ahead of the share offering. Government and company officials had attributed the $69.1 billion acquisition of the majority stake in SABIC for pushing the Saudi Aramco IPO into next year or 2021.
The SABIC purchase is not expected to be completed until early 2020 and it may be unclear if the IPO occurs next year how well the two companies’ petrochemical businesses have been merged together and how profitable the combined operations will be.
News that coincided with its first-half earnings release that Saudi Aramco had agreed to acquire a 20% stake in Reliance Industries, one of India’s largest private refiners, is another indication that the Saudi state firm is intent on enhancing its corporate value with an eye to the IPO.
The $15 billion investment will provide Saudi Aramco with a stake in Reliance’s Jamnagar refinery, which with a processing capacity of 1.24 million barrels per day (bpd) is the world’s largest refinery. As part of the arrangement, Reliance agreed to buy 500,000 bpd of Saudi crude.
There are several outstanding issues impeding progress on the limited sale of Saudi Aramco shares. The Saudi government is reportedly refusing to budge on its valuation of $2 trillion for the oil company, which, with a 5% floating, could generate $100 billion for state coffers and represent the largest IPO to date. Industry estimates suggest a valuation of $1.5 trillion-$1.75 trillion is more realistic. The health of the global economy and oil price levels will influence the government’s timing for the IPO.
Crown Prince Mohammed recently downplayed that a decision on the choice of one or more foreign bourses to participate in the share flotation had yet to be made. Saudi Aramco officials are reportedly arguing against listing on the New York Stock Exchange, where the company could face anti-trust litigation from Saudi Arabia’s role in OPEC and legal risks from US legislation that allows families of 9/11 victims to sue Riyadh.
One issue of concern for IPO investors is that Saudi Aramco does not have a stated, clear policy on dividends it pays to the Saudi government. In its August 12 earnings release, the company reported that it paid Riyadh dividends of $46.4 billion in the first half of 2019, consisting of an “ordinary” payment of $26 billion and a “special” dividend of $20 billion that “reflected the exceptionally strong performance of 2018.”
That total payment almost mirrors the $46.9 billion that Saudi Aramco reported as net income for the first half of the year. For potential shareholders, the lack of clarity on dividend payments to Riyadh may underscore how financially beholden Saudi Aramco is to the needs of the government.