A delay in Aramco IPO is in the interest of the Saudi energy industry

The kingdom's economic diversification and development plan is not invalidated by an IPO delay

A future IPO of parts of Aramco's business such as a collection of fields or its downstream assets could possibly be on the agenda, say analysts. Reuters

A delay in the initial public offering of Saudi Aramco is well-considered, given the largely discounted valuations of national oil companies in the energy industry, analysts said.

“National oil companies probably have much deeper reserves than the international oil companies, and yet they still don’t get massive premium valuations; they get discounted valuations,” said Hootan Yazhari, head of Mena and frontier markets, at Bank of America Merrill Lynch.

"It makes a huge amount of sense because if they ultimately destroyed value by going too quickly or if they weren't able to realise the prices they'd like to see, then quite frankly it makes sense for them to delay things a little bit," he said.

Last week, Saudi Arabia, the world's top oil exporter said it would consider flotation of shares in its cash cow Aramco at an optimal time. The 5 per cent listing of Aramco, which accounts for 12.9 per cent of global production, piqued interest among investors and hedge funds that have warmed up to Saudi capital markets, which relaxed rules in 2015.

The Saudi government values the company at $2 trillion (Dh7.34tn) and the listing, which was estimated to raise $100 billion, would have been the largest offering to date globally. 

Analysts maintain the kingdom's economic diversification plan known as Saudi Vision 2030, championed by Crown Prince Mohammed bin Salman, is not invalidated by the stalling of the IPO, and that it was an exaggeration to suggest they were two sides of the same coin.

"While the Aramco IPO is intertwined with the overall strategy to bolster the Public Investment Fund, and thus be utilised for intergenerational wealth accumulation intentions, the Aramco IPO and Vision 2030 should be considered as two separate strategies," said Ehsan Khoman, head of Mena research at Japan's MUFG Bank.

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Hasnain Malik, global head of equity research and strategy at Exotix Capital in Dubai, also said the delay was "pragmatic" and a reflection of the Saudi state's ability to change course in tune with fluctuating economic and energy landscapes. 

"The apparent delay to the Saudi Aramco IPO should not be seen as a retreat from Saudi Arabia's commitment to reform," he said. "Overall, we view the decision to put the IPO on hold as a pragmatic move, given the additional fiscal space that rising oil prices have afforded Saudi Arabia as well as other privatisation priorities."

A key pillar for taking Aramco public was to use the funds raised to help finance, create and develop industries in the kingdom. However, Aramco's ongoing acquisition of a stake in Sabic, which MUFG has valued at $70bn, is likely to bring in some of the proposed revenues, analysts said.

“They’ve effectively bought themselves some time by selling their Sabic stake to Aramco,” said Mr Yazhari. “So if you think they’re able to raise a $100bn in the not too distant future, and get the capitalisation, then that buys them some time ... and an Aramco IPO in the way we’ve been expecting could happen.” 

An IPO of various operating segments, perhaps Aramco's downstream operations, could possibly be on the agenda in the future, he said.

Plans by Aramco and Arabian Gulf NOCs to generate greater efficiencies through new capital structures are not necessarily jeopardised without a flotation, said Ghanem Nuseibeh, founder of strategy consultancy, Cornerstone Global Associates in London.

“Going public is not the only way of generating efficiency. It is an action that cannot be easily reversed like other efficiency measures. I would think Aramco is continuously exploring improving efficiency on all levels and across the organisation.”