Saudi Aramco's Dubious IPO

Saudi Aramco's oil refinery power station plant. Image source: jvdwolf © 123RF.com

The long-anticipated and record-breaking Initial Public Offering of the world’s biggest company has finally occurred, and the future of the Saudi Arabian Oil Company is just as problematic as its pre-listing past.

The listing of the company was hailed by many commentators, from international political analysts to Saudi Arabian nationals, as the triumphal moment for Mohammad bin Salman – the Crown Prince of Saudi Arabia – who has been the primary architect of the venture. Many have attested to the Crown Prince’s bid to transform the Saudi Arabian economy by making it more versatile and resistant to external pressures, and Saudi Aramco’s going public was seen as the essential keystone step towards achieving this goal.

Now that the initial excitement over the IPO has gradually started to subside, more profound questions regarding the future of the Saudi Arabian economy require closer attention.

More than promising kick-off on the first trading day.

The stock of the Saudi Arabian Oil Company was presented on the Saudi Arabian Stock Exchange –Tadawul – with a ticker number of 2222. The Crown Prince's goal to achieve a valuation of $2 trillion was completed within the second day of trading when the share price of the company exceeded 37.50 riyals.

At first, it seemed as though the sky was the limit for Saudi Aramco, as the goal was achieved so swiftly. Despite the fact that international investors, both at the retail and the institutional levels, expectedly did not contribute to the lion’s share of stock that was sold in those early days of trading, local activity was exceptionally high.

The company released only 1.5 per cent of its total stock for free-floating, and almost all of that was subsequently sold to local investors. Meanwhile, international investors remained distant and rejected the prospects of obtaining ownership rights over the company, citing a wide range of reasons, spanning from environmental concerns to societal issues.

Ultimately, things went for the worse afterwards as the stock price plummeted and whipped out those initial gains. It is currently trading at around 34.50 riyals.

Poor public image.

One of the prime reasons why Saudi Aramco's appeal internationally suffers from poor image stems from the Kingdom's repressive reputation. Jest a few months prior to the listing of the company's shares, the assassination of Jamal Khashoggi stirred controversy globally.

Even though the Crown Prince Mohammad bin Salman publicly condemned the assassination of this known critic of the political elite in Saudi Arabia, it is widely speculated that the order for the hit came precisely from the upper-echelon of the Kingdom’s monarchy.

International investors still perceive the Crown Prince’s “Saudi Vision 2030” as being impeded by the Kingdom’s shady policy. The transformation of the country’s socio-political landscape and economic organisation, which is the primary goal of Saudi Vision 2030, is currently jeopardised by the country’s somewhat tarnished reputation following the assassination of Khashoggi.

The future of Saudi Aramco’s publically traded shares is closely connected to the development of the country itself. If Mohammad bin Salman desires to see the share price of the company’s stock rise above the 37.50 riyals’ threshold once again – the point in which the company achieves a valuation of $2 trillion – he is going to have to change Saudi Arabia’s public image.

Why does Saudi Aramco need to appeal to international investors?

The publically traded shares of Saudi Aramco amount to 1.5 per cent of the company's entire stock, which at first glance, is an insignificant proportion. Even if the free-floating company stock fails to deliver on the previously set goals, Saudi Aramco as a whole would barely register any deterioration of performance. Nevertheless, Mohammed bin Salman’s grand vision entails the reshaping of the country’s economy, which depends on the opening of the country’s market to more international capital.

The Crown Prince wants to make the Saudi economy more competitive and attractive, and in order to do so, he needs his flagship – Saudi Aramco – to perform well internationally. It is meant to serve simultaneously as a brand, a symbol and a source of capital. Thus, the performance of the 1.5 per cent stock does indeed have more significance than meets the eye.

The main issue with Saudi Aramco’s performance so far is the apparent lack of diversification. If local investors owe all of the company's stock, then Saudi Aramco and the Saudi economy as a whole are left exposed to potential internal tribulations conversely, if the stock is instead owed by more international investors that would make the local economy more resilient to both internal and external market shocks.

What follows next?

Saudi Aramco's future is, of course, strictly dependent on the development of the global oil market. To that end, the stock's performance is going to be closely influenced by global geological occurrences, which directly impact the price of the crude oil. The new year started with one such significant event – the escalation of tensions between the US and Iran, which rattled the oil prices.

Uncertainties stemming from the prospects of a new proxy war in the Persian Gulf caused the oil prices to jump because investors feared that the global supply of crude oil would be impeded by one such conflict. As it is known, over seventy per cent of the world's oil supply goes through the Strait of Hormuz, which means that there is a real risk for the global economy in case that a major conflict erupts in the region.

It would seem that rising oil prices would be good for business for Saudi Aramco; however, the company's performance suffered from the rising uncertainties over the potential disruption of supply in the region. This shows that the Saudi Arabian Oil Company would benefit greatly from the de-escalation of the situation, which at present seems to be the case.

Overall, the company is most likely to overcome the short-term tribulations and continue to grow into the future. Once the geopolitical landscape in the region settles down and Saudi Arabia regains the trust of international investors, Saudi Aramco’s stock is sure to start growing once again.