The Take

Saudi Arabia, OPEC and Aramco05/10/16

Publications director Nate covers the recent OPEC production cut decision, and the possibility of a Saudi Aramco IPO in this week’s edition of The Take.

Just last week the Organization of the Petroleum Exporting Countries (OPEC) agreed to begin reducing oil production, with the announcement causing a brief spike in oil trade prices to just over $50. After a few years of turbulence, it seems now action is being taken to stabilise the oil prices by OPEC, which is responsible for around 60% of the global oil market. This brings us around to the possibility of the Saudi-owned Aramco going public. One might wonder how these two topics are linked, however with the value of Aramco closely linked to the price of oil, Saudi Arabia has a vested interest in ensuring the price of oil goes as high as possible prior to undertaking a public offering with Aramco.

Saudi Aramco, an oil company based in Saudi Arabia, is widely touted as one of the largest privately owned companies in the world, with an estimated value of more than $2 trillion US dollars. Now, under the guidance of Deputy Crown Prince Mohammed bin Salman, pictured above, Saudi Arabia has potential plans to offer as much as 5% of Aramco shares on the public market. This ties in with the ‘2030’ vision for Saudi Arabia, with the aim of investing in alternative energy sources to diversify the Saudi economy beyond petroleum. The listing could raise over $100 billion for the Saudi government.

In an earlier edition of The Take I spoke about the collapsed oil prices and, while crude prices continue to hover around the $50 mark, it is difficult to confirm whether Saudi Arabia will continue to pursue their goals of moving away from oil revenue if the prices are to rebound to higher levels. Historically speaking, Saudi Arabia has frequently pursued methods for moving away from oil dependence when the crude prices have dropped, but tends to cease such investigations once the price rises again. Since Saudi Arabia has a powerful position in OPEC and the global oil industry, it is expected that they will make every effort to stabilise oil prices prior to the offering to ensure the firm goes public at a high price.

Currently, oil prices are at a 3-month high, however analysts at UBS have suggested that the oil price will not experience any significant increase in price towards the end of the year, despite OPEC agreeing to an overall production cut for oil. Their reasoning includes the current return to growth in US shale operations and the production of non-OPEC countries being less predictable than the agreed upon actions of OPEC members.

It could be that the deal is under consideration now due to the prolonged slump in oil prices, and this may be an attempt by the Saudi government to stabilise their economy and reduce their budget deficit. This would explain the recent actions from OPEC to pursue a cut in oil production, as well as calls from Iran for non-OPEC oil exporters to reduce production and thus raise the price of crude on the markets. These actions have lead to bullish movements in the oil markets and suggest that further production cuts may be on the table for November.

Although the possibility of Aramco going public is mostly conjecture at this stage, working on this deal could be worth millions of dollars for advisers and investment banks around the world. Over the last few months, bankers from countries such as Japan, China and the US have been attempting to solidify ties with Aramco and Mohammed in the hopes of securing involvement in the potential public offering.

While information regarding the actual financials of the company, and the seriousness of their pursuit of going public has been kept fairly quiet, if these plans go forward it is likely to be the largest public offering in history. It is anticipated that the deal will go forward in early 2018. There is potential that it will only list on the Arabian exchange, but most likely it will dual list on foreign markets such as the London, Hong Kong and New York stock exchanges. Until then, we may be able to expect further production cuts by Saudi Arabia and OPEC going forward.