From almost the very moment in 2016 when Saudi Arabia first announced that it was to float its state-owned oil and gas behemoth, Saudi Aramco, in a dual domestic and international listing, the pool of possibilities for the foreign side of the initial public offering (IPO) has steadily reduced. This has been a result of a simple equation: the more that would-be investors know about Saudi Arabia and Aramco the less appealing the prospect of having anything to do with them becomes. However, because Crown Prince Mohammed bin Salman (Mbs) has staked his personal reputation – and his political future – on the Aramco IPO going ahead in some form, he and his bankers are currently rooting around for at least one international bourse upon which to execute the foreign listing part of the omni-toxic Aramco.
The New York Stock Exchange (NYSE) was one of the original top-two favored candidates, alongside the London Stock Exchange (LSE), as these two bourses are rightly seen as the most liquid, most traded, and most prestigious stock exchanges in the world. Early on, though, a number of major problems began to bubble up for a listing of any Saudi company and particularly Aramco in the U.S. Aside from the usual farrago of lies from Saudi about oil reserves, spare capacity, tax rates, concessions, non-hydrocarbons activities and so on with which investors have now become familiar, a key early sticking point was Saudi Arabia’s perceived links with the ‘9/11’ terrorist attacks.
Of the 19 terrorists who hijacked planes on ‘9/11’, no less than 15 were Saudi nationals. Following the overriding by the U.S. Congress of former President Barack Obama’s veto of the ‘Justice Against Sponsors of Terrorism Act’, making it possible for victims’ families to sue the government of Saudi Arabia, at least seven major lawsuits alleging Saudi government support and funding for the ‘9/11’ terrorist attack have so far landed in federal courts. As one New York-based chief executive officer of a major commodities hedge fund told OilPrice.com: “If I invested in anything Saudi, my investors would hang me from the nearest streetlight.”
This was the pervasive view even before Saudi continued the indiscriminate bombing of Yemen, led the way in the international ostracising of Qatar, kidnapped Lebanon’s then-President Saad Hariri and forced his resignation (allegedly), and murdered the journalist Jamal Khashoggi (allegedly, although the evidential pointers appear incontrovertible), which would never have been done without MbS’s personal go-ahead.
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Making matters even worse was Saudi’s decision to threaten the U.S. shale industry if Washington passed into law the ‘No Oil Producing and Exporting Cartels Act’ (NOPEC). This bill was founded upon the supposition – which still hangs in the air like a Damoclean Sword above the Saudis’ heads – that OPEC is a cartel and that, as such, Aramco – as the principal vehicle of the leading member of OPEC, Saudi Arabia – violates the U.S. (and U.K.’s) stringent anti-trust laws. Given that OPEC’s members account for around 40% of the world’s crude oil output, about 60% of the total petroleum traded internationally, and over 80% of the world’s proven oil reserves – and controls geographical sales policies and pricing – this would appear to be an entirely sensible conclusion.
That Saudi actually threatened to destroy the U.S.’s shale oil industry – yet again – was greeted with actual laughter by a number of senior oil figures spoken to by OilPrice.com at the time. “OPEC and Saudi tried to do exactly the same thing [destroy the US shale oil industry] in 2014 and 2015 in exactly the same way [push oil prices down by producing all-out] and that did not end well for OPEC’s oil producers in general and Saudi Arabia in particular,” Norbert Ruecker, head of economics and next generation research for Bank Julius Baer, in Zurich, told OilPrice.com. More specifically, in the two years before the Saudis in 2016 completely reversed its ‘U.S. shale oil destruction strategy’, OPEC member states lost a collective US$450 billion in oil revenues from the lower price environment, according to the IEA. Saudi Arabia itself moved from a budget surplus to a then-record high deficit in 2015 of US$98 billion, being forced to spend over the period around US$250 billion of its foreign exchange reserves that even senior Saudis have said are lost forever.
Given this, Saudi for a time looked at the U.K.’s LSE as an option, following a trip to Saudi Arabia some time ago by LSE chief executive officer, Xavier Rolet, and then-UK Prime Minister, Theresa May, and indeed, according to various sources spoken to by OilPrice last week, this remains an option for MbS. The problem with this from the U.K.’s side - which was conveyed to the Aramco IPO banking team – centres on the creation of a new category of listings for large international companies, in order to accommodate Aramco and its lack of information transparency. More specifically, historically, companies looking to list on the LSE could opt for either a ‘premium’ (formerly ‘primary’) or ‘standard’ (formerly ‘secondary’) listing.
According to the rules, a premium listing that would be included in the benchmark FTSE 100 index would mean that Aramco would need to allow potential investors full access to the company’s books, let minority investors vote on an independent board of directors, and also allow them to approve transactions between the company and its controlling shareholder, the Saudi government, none of which are likely to occur. However, a standard listing would mean Aramco would not be in included in the FTSE100, being relegated instead to the second-tier of companies, alongside mid-cap UK firms groups and family-controlled foreign firms.
The compromise solution - which followed the Rolet-May trip was to create this new category of listings for large international companies that may fail to meet the premium listing standards but is theoretically more prestigious and more appealing to investors than the ‘standard’ category. Clearly, as Jeremy Stretch, senior markets analyst for CIBC, in London told OilPrice.com, simply changing the name of a listing type does not alter the fact that it does not in reality meet the standards expected from FTSE-listed companies in terms of rigorous reporting, operational opacity, and accountability to shareholders, even minority ones. Indeed, a number of major pension and insurance funds have commented to OilPrice.com that there are still ‘very big governance issues’ around how much independently verified data pertaining to the company’s oil reserves would be given, its board structure and the small portion of the company being listed. Related: Inventory Build Sends Oil Prices Lower
At that point, MbS toyed with the idea of doing a private placement of the whole amount – as then, 5 percent to be floated – with China. This would have been extremely advantageous to him for two key reasons. Firstly, it would have required absolutely no divulging of any information whatsoever on Aramco’s - or Saudi’s – dealings, except to the Chinese who, as one senior oil trader put it to OilPrice: “Don’t care, all it wants is to get control over a favourite toy in the U.S.’s Middle East toy box.” The second reason why MbS was very keen on the idea is that the price for the 5 percent private placement would never had been made public to anyone, even many senior Saudis, so he could not be accused of having not attained the US$100 billion for the 5 per cent that meant an overall valuation for Aramco of US$2 trillion (which he had already – equally unwisely – committed to). This option also remains on the table but – principally because the bankers working on the IPO would lose too much money if the IPO did not go ahead, MbS is not being encouraged to pursue this line.
All of which rather narrows the options available right now for MbS. Canada’s Toronto Stock Exchange (TSE) made a spirited pitch a while back. MbS, though, was dissuaded from this because of its small size relative to the bigger exchanges and the fact that its value is already dominated by oil companies. This latter point meant that the effect of a drop in the oil price on Aramco’s TSE valuation would be much more pronounced than if it were a reflection of the company’s other assets’ worth, at least as far as the Saudi’s see it. Hong Kong, meanwhile, was for a time a front-runner, given its close links to Chinese money and Chinese oil and gas buyers, but the burgeoning protest movement against Chinese rule by Hong Kong has subsequently marginalized its appeal.
So, as it stands, MbS has trimmed everything back to try to limit the negative personal and political fallout for himself. According to trading and fund manager sources in London, Abu Dhabi, and Tokyo, the sovereign wealth funds of Saudi’s allies in the region have been ‘vigorously encouraged to bid high for big lots’, augmenting the sort of hearty bids from wealthy Saudis that might be expected from people who remember what being locked up in 2017 – albeit at the Riyadh Ritz-Carlton – was like. Tokyo has been pitching aggressively in the last few weeks as the Asia alternative to Hong Kong, and has sought to leverage the involvement of many of its financial institutions in various of MbS’s ‘Vision 2030’ projects to bolster its pitch. Underlying all of these bids will be the bookrunners, of course, who will take up any slack from the huge amounts of money that they stand to make not just from the IPO but also from all related work for Saudi. These include future IPOs, bond offerings, syndicated loans (known for their unerring ability to provide summer houses and matching yachts in the Hamptons for U.S. senior bankers), and other long-term rolling financing facilities.
By Simon Watkins for Oilprice.com
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