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Executive Summary
The present policy paper describes the two policy options for Saudi Aramco’s IPO plans. One is to abandon the idea of privatizing a part of the company focusing on preserving the status quo and nationalized governance. The other is to list Saudi Aramco’s shares on international stock exchanges. The evaluation of economic and political criteria that included upstream and downstream operations, as well as political risks, resulted in recommending the first policy option. Not letting in the foreign capital would safeguard the company from stock price fluctuations while preserving unchallenged national leadership and slower but steady growth.
Policy Problem
The policy issue discussed in the present paper is the listing of Saudi Aramco on domestic and international stock exchanges. This complex and multifaceted problem touches Saudi Arabia on the whole, as it is listing its core provider of national GDP. In such matters, there are no universally appropriate decisions, which substantiate the fact of the necessity of the present policy paper. The ambiguity of Saudi Aramco’s IPO is in the risks that threaten to undermine the stability of the company and the country that essentially owns it.
The sources of risks are multiple and lie in the sphere of politics, economics, and national security. The insecurity of the present fluid position of Saudi Arabia about this decision undermines the credit rating of the country and harms the company’s financial affairs. On the other hand, rash decisions may also create obstacles to long-term prosperity. In the political sphere, indecisiveness on the IPO may lead to missed opportunities and strategic alliances.
For instance, the United States as a key partner of UAE having assumed that the opinion of Saudi leaders on the IPO is still under consideration might continue to hold talks and develop strategies that are less productive to the former. Yet, the key concern is the cost of lost business opportunities. The continuous process of evaluation and re-evaluation of options without making a decision undermines the capacity of a corporation to develop in either direction. Thus, if IPO is held, then the company can obtain the chance to grow and elaborate on a strategic plan for further actions concerning the allocation of public funds, new share dissemination, or other issues.
If IPO is not held, then the company could focus on creating value within the realms of corporate governance and develop ways to operate more effectively with no shareholders involved. Thus, the indecision leads only to the waste of resources and does not contribute to the development of Saudi Aramco and UAE, which is why it is essential to present, assess, and evaluate policy options for the company, which will be done in this paper.
Context
The context of the initial public offering in terms of key actors was set around political leaders of the UAE and other nation heads. As such Crown Prince Mohammed bin Salman who, in an aspiration for an innovative corporate governance strategy and urge for reform in the economic sector, decided to announce an IPO in 2016. He stated that 5% of the company would be sold at the New York Stock Exchange (NYSE) and London Stock Exchange (LSE).
He estimated that the company value would then rise to $2 trillion (Hubbard). Such a statement aroused a lively interest in the company’s affairs among international media, financial institutions, and country leaders. However, as the decision was continuously postponed, a range of stakeholders became skeptical and the speculation in the media continued. It also led to media scandals on corruption that allegedly involved the Saudi Government and key financial and business actors (Hubbard).
Currently, corporations and national leaders announce that the IPO can occur, yet only under favorable circumstances and at the right moment. Thus, the possibility of IPO has not been dismissed completely yet. On the other hand, it is not present on in current national and corporate agenda either, as financial advisers and experts are no longer consulting the key decision-makers, at least publicly (DiChristopher).
The nature of IPO decision making in itself is typical for state-owned corporations. The existence of multiple risks and influencing factors require through and prolonged assessment. As for the confident analysis result, the scholars report that usually, state-owned firms tend to be undervalued during IPOs (Deventer and Malatesta 1659; Wang and Zhang 475). This identifies that optimistic estimations voiced by Mohammed bin Salman are untypical of IPOs.
In general, academics agree that listing national corporations on stock exchanges has its benefits and drawbacks which complicates the decision-making process (Tupper et al. 555). Tupper et al. also note, that foreign IPOs constitute almost 25% of all first-time listings which makes the issue a popular topic in international business (555). Therefore, the problem of Saudi Aramco’s decision to open itself for global capital is not unique.
Policy Options
The first option is to let Saudi Aramco remain a public company and cease all activities for preparing it for IPO. A considerable number of sources review the experience of private companies who decide to list their shares on the stock market, yet the IPOs state-owned corporations seem to be occasionally out of focus (Wang and Zhang 478; Tupper et al. 557). Decision making in IPOs is a complex process that requires consult from several financial agencies such as national and international banks.
Since such consultations have been provided to the government of Saudi Arabia as well as the corporate leaders, one of the options might be to completely renounce the idea of IPO. Such a course of action is dictated by the logic of the known events as well as calculations provided by Bloomberg agency and official information provided by trusted media sources.
Certain academics suggest that keeping state-owned enterprises public is a sound decision that can help such companies reach sustainable market value (Wagner 282). Also, some of the national oil and gas giants remain 100% nationalized such as the National Iranian Oil Company or Kuwait Petroleum Corporation who produce 4 million and 3.15 million barrels of crude oil per day respectively (Bloomberg a, b). Thus, this policy option is not unusual in global practice and theory.
Within the last decade, the government of Saudi Arabia was continuously assessing risks and benefits of IPO widely utilizing the assistance of the largest financial organizations within the country and abroad and still did not decide to list the company’s shares on any of the stock exchanges. This fact signals that there are no apparent and significant benefits of IPO under the current market, political, and other conditions. Conversely, if the best financial service agencies having much broader access to corporate financial data did not argue too actively for the IPO, it is probably the right decision to leave the company solely in the hands of the state.
The rough calculations provided by Denning to the Bloomberg agency suggest that a decision to list the company under the terms voiced by the Prince does not appear to be very realistic (a). According to his assumptions and research, the goal of achieving the company’s value at $2 trillion can be reached only under specific and fairly optimistic conditions. As such, the price per barrel of oil should be at least $80 to have the company valued at this price after the IPO is held.
Considering the last week’s average price of $55 per Brent crude oil, Saudi Aramco’s valuation might only reach one billion (Denning a; Nasdaq). In addition to that, given such high aims of the Prince, current oil prices, and subsequent risks of not reaching the goal, Denning rationalizes that many investors would require free cash flows no less than 5-8 percent (a). This factor can become a significant burden for the company.
In comparison to Exxon Mobile whose cash flow is estimated at only 3.9 percent, the 5-8 for Saudi Aramco could become a rather tough obligation to meet. Even though about a quarter of global crude oil and derivatives are provided by the UAE’s largest natural resource company, Saudi Aramco’s decision to hold an IPO in the nearest future on these terms is not looking very realistic. Given the current trend for undervaluation of companies during IPO, and the financial benefits researchers suggest this strategy holds, the listing option that currently circulates probably does not have substantial economic benefits to support such a decision.
Thus, the decision to abandon the idea of the involvement of foreign capital through the global issue of shares is the first option that Saudi Aramco could undertake under the present economic and political conditions.
The second option is to undertake an IPO in the nearest future and make 5% of the company listed in the form of shares on international stock exchanges such as NYSE and LSE. Making the company open for international funding could substantially increase Saudi Aramco’s development and expansion options. Given the amount of natural resource capacity that UAE possesses, the decision to increase volumes, quality, and other parameters could be wise and timely.
Many national crude oil harvesters such as Exxon Mobile, Royal Dutch Shell, Canadian Natural Resources, Gazprom Neft, Rosneft (Russian state-owned oil and gas companies), and other organizations already listed their shares on international stock exchanges. Indeed, each nation’s decision was more or less warranted from the standpoint of its unique political and economic situation. The control and safety from stock market panics that are not infrequent in the history of global trade are probably among the core concerns of the state-owned oil-producing companies.
The policy to hold an IPO has been forwarded initially by Crown Prince Mohammed bin Salman in 2016 and supported by certain other government officials (DiChristopher). Recently, the Crown Prince reaffirmed this decision, though the listing date was moved towards 2021 (Denning b). International practice quoted in research also suggests that IPOs among state-owned enterprises are not rare (Deventer and Malatesta 1659; Wagner 283). Certain researchers find that organizations with substantial contributions to the national labor market and economy demonstrate an increased probability of IPO events (Johansson et al. 271).
Yet, they also note that the correlation between such occasions tends to be stronger in private firms rather than national corporations. The scholars who assessed the Chinese experience of IPOs in the public sector suggest that politics produce a significant influence on listing decisions. Successful IPO events in public companies are associated with promotions in the political careers of the decision’s advocates (Johansson et al. 272). Thus, the decision to privatize a small share of the state-owned Saudi Aramco Corporation is an actual policy proposal that is also substantiated by global experience as well as scientific literature and corporate expansion logic.
The two policy options discussed above are fully-fledged policy dilemmas. Yet, if the IPO decision partly excludes the possibility of nationalization, the latter leaves UAE and corporate officials to return to IPO plans in the future thus making this policy opportunity compatible with the other one. Deciding to list Saudi Aramco’s shares will mean that that share of its value will be determined by foreign investors and this is not easily reversible.
Theoretically, practically, and legally, a company may opt for voluntary delisting and become nationalized again. Yet the tradeoff would most likely involve undermining the political ties and large shareholder connections UAE would have possibly gained as well as all other benefits. Davidson argues that the cases of nationalization and delisting are warranted and practiced in the global economic history mainly in times of recession or the threat of major economic damage to a country (188). Therefore, the second policy is in the large part a deal that has a limited possibility to be aborted.
On the other hand, opting for the first policy now would leave an opportunity for an IPO at any suitable time in the future. Arguably, announcing a decision not to list Saudi Aramco’s shares would not produce any major economic effect besides certain fluctuations in oil prices in the market. Leaving the situation at the status quo does not mean that the company cannot conduct an IPO at all. Yet, as noted by Wagner, the company that decides to list its shares on the stock market has to undergo certain internal corporate restructuring (282).
Therefore, theoretically, Saudi Aramco could institute a course of action and necessary changes in case it decides that the time for an IPO has come. Thus, the policy for nationalization or retaining the status quo does not contain any apparent tradeoffs except for national budget planning changes and political ties and is compatible with the other policy option.
Evaluation Criteria
The first core criterion for evaluating policy options will be the economic performance of the firm. This criterion is necessary because the economic success of the firm is the core indicator of its stability and subsequently, the strength of the UAE’s economic power and leverage (Wang and Zhang 480). In addition to that, economic activity and its effectiveness are the goals of any for-profit enterprise that guarantees its survival.
Among the key economic performance indicators through which the company may be assessed are net profits on the upstream, downstream, and midstream activities. According to current research, these activities represent core parameters that influence the strategies used to leverage oil barrel prices, purchasing power for raw materials, and offers the company flexibility in times of low oil price (Brasoveanu 10). The data necessary to conduct this analysis will require Saudi Aramco to reveal the information about all of its current activities in any sphere ranging from oil well exploration to refining and transportation of the final product.
Political criterion would also be paramount to utilize in the policy assessment as it provides a measure of the stability of UAE’s international connections. As oil prices and the stability of the market for natural resources are highly dependent on political ties and decisions, it is critical to know the political underpinnings of either policy choice (Piotroski and Tianyu 2). Thus, political risk assessment could become a critical factor in the evaluation of policy soundness.
The data required for measuring political impact and risk of a policy is a detailed overview of trade connections and volumes, official political statements, and results of international events related to oil and gas where UAE officials participate. Since economic parameters are inherently better predictable and measurable than political risks and impacts, the former will be given priority.
Evaluation and Assessment of the Options
Under the circumstances of the status quo and nationalization policy preservation, the company will operate with the revenues available to it from its operations. No additional foreign investment is considered as IPO plans are canceled. The information provided in the Saudi Aramco’s latest annual review dated 2017 lets one assess its main upstream and downstream operations. As the company continues to invest in the exploration of new sources of oil and natural gas, it should be safe to assume that this activity will be maintained further in the future at the same pace. Yet, as the report states, the demand for global energy demand will rise by 30% which will arguably require Saudi Aramco to increase the speed of the discovery and preparation for extraction (Saudi Aramco).
The increase in demand will affect not only upstream but also downstream operations. Currently, the maximum output of crude oil is estimated at 10.7 million barrels per day (BPD) (Saudi Aramco). Given the increased energy demands, this measure will have to increase to satisfy the customers. Yet, under the constraint of using only the profits from its operations as well as international loans and direct investments the company may fail to meet the demand fully.
Nonetheless, the company currently has plans to open several new extraction facilities in 2018, 2019, and 2020 (Saudi Aramco). Given the current influx of free funds to support these projects under continuing nationalized states the projects may be expected to be launched within the specified periods.
In terms of natural gas production, the company demonstrates a steady growth, which may substantiate the claim for addressing the rising demand in this regard. Saudi Aramco also announces its allegiance to new technologies that can help sustain growth, increase recovery, and exploration. The projects for the new technologies and equipment are currently in the testing phase with no launch dates specified (Saudi Aramco). It can be assumed that the financing cannot let the R&D process to unfold at full speed.
Downstream operations include plans to scale up the company’s chemical production, international product placement strategy, build new pipelines, and decrease CO2 emissions from operations (Saudi Aramco). All of these projects will require sufficient investments and straitening of international ties. The company reports a one percent increase in power efficiency, new integration projects and agreements with China, Malaysia, and Indonesia, and successes at employing technological advancements in refining oil. So far, it appears that the company demonstrates steady growth in the majority of spheres it marks as crucial. Yet, the limited nature of national reserves may hinder the growth potential of Saudi Aramco and the speed of implementing innovation.
Political risks under this policy are minimal as the company is largely independent of foreign influence on corporate decision-making. Retaining its self-sufficiency, the company can continue on its set course of development. Yet, as argued by (Piotroski and Tianyu 4), political connections to other countries may change as a result of unexpected events, which the nationalization policy does not effectively mitigate. The absence of foreign countries that have a share in Saudi Aramco to a certain extent protects the company from foreign security market perturbations as the company’s valuation is independent of the share price.
The second option to hold an IPO and raise the value of the company through the influx of foreign capital offers certain possibilities for growth while also allowing the room for risks. The above-mentioned plans and statistics could be improved in speed and effectiveness with the adoption of international investments. As estimated by the Crown Prince, the company would yield about $100 billion from the IPO, which would arguably increase the developmental capacities of the company in each of the spheres mentioned above. The construction of the new oil production objects would be completed faster as the necessary funds will be allocated more swiftly.
Thus, the company would have better chances of fully meeting the growing foreign demand for energy. Yet, the economic risks lie in the fluctuations of the stock market that may scale down the value of the company. Besides, the abnormally high valuation at the start may undermine the success of IPO as the experts suggest underpricing as the best strategy (Wang and Zhang 475). Finally, the entrance of a new company whose value is twice as big as one of Apple’s can unpredictably influence the market for securities.
In the sphere of politics, however, international shareholders might be more interested in the success of the company and thereby help stabilize the market climate. Also, listing stock on NYSE was favorably met by the U.S. leader, Donald Trump, which suggests the possibility for a tighter relationship with this strategic partner for UAE (Merced). In general, opening a broader path for foreign investors will help UAE become more involved in world politics that, under wise management and diplomacy, could yield substantial reputational and economic benefits.
Table 1. Comparative Analysis.
Policy Recommendation and Rationale
Given the analysis conducted above, the option to abandon IPO plans seems more sound and stable policy. While it does not provide fast growth opportunities and political benefits that can be gained through the international listing, Saudi Aramco’s safety and stability should be valued more. The reason for such a recommendation is that the largest national and global oil and gas company needs to prosper steadily and be safe from international perturbations as it is a guarantor of UAE’s economic growth and prosperity.
Above that, by official reports, steady development is demonstrated which substantiates the claim of autonomy of Saudi Aramco. The foreign capital may gradually increase its capacity for expansion, yet under low oil prices, the security market could be increasingly unpredictable. Thus, it opting for nationalization and preservation of the status quo is a safe and sound policy that could be recommended to UAE and corporate officials as a result of the present research.
Works Cited
Bloomberg (a). “Company Overview of National Iranian Oil Company” Bloomberg.com. 2018. Web.
Bloomberg (b). “Company Overview of National Iranian Oil Company” Bloomberg.com. 2018. Web.
Brasoveanu, Sergiu. “Oil and Gas Business in Changing Times.” Proceedings of the International Conference on Business Excellence, vol. 11, 2017, pp. 10-24.
Davidson, Nestor M. Nationalization and Necessity: Takings and a Doctrine of Economic Emergency. Property Rights Conference Journal, vol. 3, 2014, pp. 187-215.
Denning, Liam (a). “The Saudi Aramco IPO Math Problem: Cash > Barrels.” Bloomberg. 2018. Web.
Denning, Liam (b). A $2 Trillion Saudi Aramco IPO Keeps Getting Less Realistic. Bloomberg. 2018. Web.
Dewenter, Kathryn L., and Paul H. Malatesta. “Public Offerings of State-Owned and Privately-Owned Enterprises: An International Comparison.” The Journal of Finance, vol. 52, no. 4, 1997, pp. 1659-79.
DiChristopher, Tom. “Saudi Arabia Calls off Aramco IPO and Disbands Advisers, Reuters Reports.” CNBC. 2018. Web.
Hubbard, Ben, et al. “Saudis Said to Use Coercion and Abuse to Seize Billions.” The New York Times. 2018. Web.
Johansson, Anders C., et al. “Government Intervention in the Capital Allocation Process: Excess Employment as an IPO Selection Rule in China.” China Economic Review, vol. 44, 2017, pp. 271-81.
Merced, Michael J. “Trump Pushes for Record-Setting Saudi Aramco I.P.O. in U.S.” The New York Times. 2017. Web.
Nasdaq. “Latest Crude Oil Brent Price & Chart.” NASDAQ.Com, 2018. Web.
Piotroski, Joseph, and Zhang Tianyu. Politicians and the IPO Decision: The Impact of Impending Political Promotions on IPO Activity in China. 2013. Web.
Saudi Aramco. “Saudi Aramco Annual Review 2017.” Saudiaramco.Com, 2017. Web.
Tupper, Christina H., et al. “Capital Market Liability of Foreignness of IPO Firms.” Journal of World Business, vol. 53, no. 4, 2018, pp. 555-67.
Wagner, Rodrigo. “Can the Market Value State-Owned Enterprises without Privatizing Them? An Application to Natural Resources Companies.” Resources Policy, vol. 59, 2018, pp. 282-90.
Wang, Yong, and Xiaotian Zhang. “Strategic IPO Underpricing: The Role of Chinese State Ownership.” Value Creation in Multinational Enterprise, vol. 7, 2006, pp. 475-95.
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