Strong Undercurrents of Growth

Watered Down Saudi IPO Merely a Distraction

By Amy McLellan

It was touted as the world’s biggest IPO. A global initial public offering of shares in the world’s most profitable company that would usher in a new era of transparency and raise funds to help transition the Saudi economy from an overreliance on oil. A target price set by a powerful monarch, Crown Prince Mohammad bin Salman, often known as MBS, valued Saudi Aramco at an eye-watering US$2 trillion.

Yet, as so often in life, things haven’t quite gone to plan. Already much delayed, Saudi Aramco’s much-anticipated IPO was scaled back to a more regional affair in December 2019. The offer of 1.5 percent of the shares in the company was confined to the Tadawul (the Saudi stock exchange) and investor roadshows in the U.S., Europe and Asia were canceled as international money managers shied away from the reduced price target of US$1.6 trillion to US$1.7 trillion; many believed US$1.2 trillion was a more realistic valuation for Aramco, the cornerstone of the Kingdom’s vast wealth.

But while the IPO failed to reach MBS’s US$2 trillion dream, Saudi Arabia’s giant state-owned oil monopoly still managed to pull off the biggest IPO in history, valuing Aramco at roughly US$1.7 trillion, exceeding Alibaba’s record-breaking 2014 market debut in New York.

The company is, without doubt, admired around the world. Aramco, which traces its roots back to 1933, sits atop 52 years of proven reserves, extracts oil more cheaply than any western energy major, with some fields delivering up their riches at less than US$10 per barrel, and its production capabilities are world-class. Aramco pumps 10.3 million barrels per day of oil, has some of the lowest energy-intensive production in the world and brought assets damaged in recent drone attacks back online astonishingly quickly.

For the first half of 2019, it posted a net profit of US$46.9 billion, almost all of which was paid out in dividends to the Saudi state. The profit dwarfs the US$21.6 billion net profit generated by Apple, the world’s largest company by value, and the US$5.5 billion posted by ExxonMobil, the world’s largest listed oil company. On a pure profit-and-loss basis, investing in Aramco stock looks a solid bet for investors.

Investment Downsides

But there are significant risks attached. First, the price is high given these are times of high oil supply and uncertain demand. The brazen drone attacks on Aramco’s Abqaiq and Khurais facilities showed the kingdom is vulnerable to terrorist attacks, while a surge in anti-fossil fuel sentiment could deliver policies that render some of its oil wealth null and void. There are also concerns about the kingdom’s record on human rights, with the murder of the Saudi journalist Jamal Khashoggi scaring off some potential backers – although the success of the company’s first international bond sale in April 2019 suggests some have overcome their qualms at doing business with the kingdom.

Possibly more troubling for potential international investors is the fact that the company will still be majority-owned by the state and shareholder rights could well be overridden by political considerations.

Last year, for example, Aramco was forced to acquire a 70 percent stake in petrochemicals giant Saudi Basic Industries Corp., or SABIC, from the Public Investment Fund, or PIF, of Saudi Arabia for US$69 billion, a move largely seen as a way to help PIF, which is under the control of the crown prince, to replenish its coffers.

Ellen Wald of Transversal Consulting and author of Saudi, Inc., points out that in Saudi Arabia the state is an “absolute monarchy, where there are no rights other than by consent of the monarch and new laws to nominally protect shareholder rights remain untested.”

IPO Key to Prosperity

It may have been a bumpy road, but the flotation still raised a significant sum. The cash will be used to further the Vision 2030 strategy, which aims to plow huge sums of oil wealth into new industries to transform the Saudi economy.

“The kingdom needs US$88.60 per barrel Brent to balance its fiscal budget, a level that is not expected to return on a sustainable basis,” said Dan Klein, head of scenario planning at S&P Global Platts. “As a result, a successful IPO is essential to funding diversification of Saudi Arabia’s economy and weaning itself off oil revenues.”

With oil prices stubbornly trading in the US$60-US$63 per barrel range, a cash injection from the IPO will be key to balancing the books and managing this transition to a more diversified economy.

“The IPO of Aramco is the cornerstone of the Vision 2030 strategy,” said Dmitry Marinchenko, an analyst with Fitch Ratings. “Apart from being a fundraising exercise for the state, the IPO preparations have already made Aramco a much more financially transparent company. This should ensure better governance. Finally, the IPO should familiarize investors all over the world with the kingdom, and could promote investments into other sectors and companies.”

This diversification push has been underway for some time. In addition to increased investment in downstream petrochemicals and renewable energy projects, the PIF has also been making big bets on tech stocks, such as Uber and augmented reality start-up Magic Leap, and investing billions in funds run by Blackstone and SoftBank, including the Vision Fund, which was recently hit by the failed public offering of office-rental company WeWork.

And then there’s NEOM, MBS’s big idea and a centerpiece of the 2030 Vision. NEOM – or “new future” – will be a high-tech city on the Red Sea in northwestern Saudi Arabia, an innovation and entrepreneurship hub that that will host ports, enterprise zones, research centers, sports and entertainment venues, tourist destinations and be home to more than a million citizens from around the world. About 40 percent of the world’s population will be able to reach NEOM in less than four hours and around 10 percent of the world’s trade already flows through the Red Sea.

This kind of blue-sky vision costs money. A lot of money. Marinchenko of Fitch Ratings has been running his slide rule over the plans. “Listing on the local stock exchange should bring around US$25 billion to the state, assuming the targeted valuation and a 1.5 percent stake to be offered for sale. In addition, around US$70 billion will be raised through the SABIC acquisition, and tens of billions more could potentially be raised through an international listing,” he said. “These transactions will possibly be used to back ambitious infrastructural projects, though do not fully resolve the funding issue. The NEOM mega-project, for example, would require US$500 billion in investments, much more than the state will raise through the IPO and the SABIC deal.”

Driving Breakbulk Demand

For breakbulk carriers, the investment ambitions of Saudi Arabia and the other countries in the region present a huge opportunity. There are major oil and gas projects underway across the region. Upstream, there’s the huge Marjan, Berri and Zubair oilfield projects in Saudi Arabia and the Hail, Ghasha and Delma oilfields in Abu Dhabi. Move downstream, and Oman’s huge Duqm refinery project is underway, with volumes into Duqm port set to peak in 2020, not to mention a US$45 billion expansion of the vast Ruwais refinery complex in Abu Dhabi, and Qatar’s plans to build four additional “mega-trains” at Ras Laffan to increase nameplate capacity at the LNG complex by more than 40 percent by 2024.

While oil and gas inevitably dominate, solar and wind energy are also experiencing rapid growth, again creating opportunities for breakbulk carriers. In Abu Dhabi, for example, the Emirates Water and Electricity Co., or EWEC, is building the world’s largest solar IPP project. The 20-square-kilometer, 2-gigawatt project in the Al Dhafra region will provide power for up to 110,000 households across the UAE, and will be almost double the size of EWEC’s about 1.2 gigawatt Noor Abu Dhabi solar plant, which came online in April 2019 and is the largest operational single-project solar PV plant in the world.

When it comes to wind energy, developers are expected to add 6.2 gigawatts of new wind capacity in Saudi Arabia between 2019 and 2028, 46 percent of the region’s 13.5 gigawatts total capacity additions in this period, according to Wood Mackenzie Power & Renewables.

“Customers in the Middle East are still proposing huge volumes to breakbulk carriers overall, especially in KSA, UAE, Oman, Bahrain, and Iraq,” said Mohammad Jaber, COO of Agility Abu Dhabi and regional director
projects logistics, MEA. “We expect other markets such as Kuwait to experience a resurgence again soon.”
He pointed out that increasingly the region is offering attractive volumes for export too, which adds a new dimension to the opportunities for breakbulk carriers.

“Middle Eastern industries will remain focused on growing exports, especially on fabricated steel, modules and pressurized vessels to supply the project needs within the GCC and to other countries and projects in other areas,” he said. “The competitive cost of material for logistics and manufacturing projects in the region will continue to play a key role in driving demand for manufacturing in the Middle East.”

Possible Road-bump

There are, of course, risks, not least the usual geopolitical tensions. Jaber said these will “remain manageable and won’t lead to deferred investment for the time being.” He did, however, highlight the new IMO 2020 low-sulfur fuel regulations. “They have led to higher prices as ocean carriers have had to pay for cleaner fuel or equipment retrofits and might lead to a bit of uncertainty,” Jaber said. “If the availability of fuel becomes an issue, then the risks might increase the prices significantly and affect project schedules.”

Making the most of the opportunities in the region, whether it’s civil infrastructure or the huge oil, gas, petrochemicals and renewable projects underway, requires carriers to have good local partners.

“It’s a very vibrant region and it’s a good place to do business,” said Dan Leach, projects team manager at Hemisphere Freight Services. “You have to have good agents on the ground, but overall we always find it very straightforward to work in the region and don’t have any problems with paperwork or red tape.”

Jaber said that in addition to the hardware of warehouses, hubs, trucking, handling equipment and offshore vessels, it’s essential to invest in people, particularly given ever more stringent in-country requirements.

“You have to invest in people, which includes training, development, organizational planning and other things to retain talent and ensure that you have skilled local teams and you’re continuously improving the in-country value,” he said. “Also operators cannot ignore the latest innovations in digitalization and technology, which is adding a lot of acceleration to the logistics operation and changing the traditional ways of logistics projects. The operators that adapt the fastest will be the most successful.”  

Freelance journalist Amy McLellan has been reporting on the highs and lows of the upstream oil and gas and maritime industries for 20 years.

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