Khalid Al Falih, Aramco’s chairman, said that 'what will be offered is the economic value of Saudi Aramco, and not its oil reserves'. Fayez Nureldine / AFP
Khalid Al Falih, Aramco’s chairman, said that 'what will be offered is the economic value of Saudi Aramco, and not its oil reserves'. Fayez Nureldine / AFP

Saudi Aramco dials back IPO talk



Now that Saudi Arabia’s state oil company Aramco has taken its main asset – its oil reserves – off the table, what part of the company might it actually offer for sale to the public?

Ever since the idea of an initial public offering of shares in Aramco was floated by Mohammed bin Salman, deputy crown prince and 30-year-old son of Saudi Arabia's King Salman, in an interview with The Economist this month, Aramco officials have been busy dialling back expectations.

The latest comments came from Aramco’s chairman, Khalid Al Falih, who took the air out of all the excited talk of a “multitrillion-dollar” flotation, although still leaving it vague what assets might actually be up for sale.

“The oil reserves belong to the state,” he said in an interview with Al Arabiya, a Saudi-owned broadcaster, while attending the Davos summit. “What will be offered is the economic value of Saudi Aramco, and not its oil reserves … [that is to say] the ability of the company to produce from those reserves.”

In typically Delphic fashion, he expanded slightly on those comments this week at a conference in Riyadh, saying options being considered include a percentage of “everything we do” and some form of bundling “together a significant downstream portfolio”.

Seasoned industry observers say that at least it is clear what is off the table.

“I never thought they would put Aramco as a whole up for IPO,” said Louis Besland, the Abu Dhabi-based head of Middle East oil and gas at AlixPartners, a firm of consultants.

Even if Aramco were to consider selling a percentage of “everything we do” minus the oil reserves, it would be an extremely hard entity for investors to value.

The share price of inter­national oil companies – BP, ExxonMobil, Royal Dutch Shell, etc – are based to a large extent on the value investors put on their oil and gas reserves. For Aramco to legally remove title to its reserves and then try to sell shares on a claim to some measure of oil production seems to many like a pointless exercise.

“As things stand, private investment in Saudi Aramco [as a whole] looks very unattractive,” said Paul Stevens, an energy expert at the Royal Institute for International Affairs in London. “You won’t know what you are buying because of a total absence of transparency, and the company is not at all profitable after tax.”

Saudi Arabia would never relinquish control over its oil output, which is its principal tool for domestic and foreign policy control, leaving analysts to parse the deputy crown prince's move and Aramco officials' reaction for their true meaning.

“I think that the motivation was to do with flagging the fact that serious economic reforms and changes are under way,” said Mr Stevens. “What better than to appear to attack the sac­red cow?”

Even much-scaled-down ambitions, where Aramco might look for outside equity participation in corners of its operations, could have that desired effect.

“It has always been extremely unlikely they would IPO the exploration and production part of the business. But even when you start to think about listing the smaller parts of Aramco, it could bring a lot of transparency and I think that was [the deputy crown prince’s] key message,” said Sachin Mohindra, a portfolio manager at Invest AD, an Abu Dhabi investment fund.

There is a precedent for that kind of offering. Petro Rabigh, for example, is a petrochemical refining complex that is part-owned by Aramco and Japan’s Sumitomo Chemical – each has a 37.5 per cent stake – with the remaining shares having been offered via the Saudi stock exchange in 2008, when 4.5 million Saudi individuals oversubscribed five-fold for a stake.

Petro Rabigh shares have had a pretty torrid time, having been launched in the midst of a world financial crisis, which involved them dropping from a high after launch of 64 Saudi riyals to below 20 riyals. After a period of relative stability they have dropped to a recent low of 7 riyals as the oil price crash took its toll.

Still, says Mr Mohindra, Aramco officials have learnt from the experience and have made management changes at Rab­igh last year that should help to fix some of the issues it has faced, such as supply chain disruptions.

He says the most likely assets for Aramco to sell first would be similar joint ventures where there is already a degree of transparency via a publicly-listed partner and an operating history – Mr Mohindra points to Sadara Chemical Company, the US$20 billion Aramco joint venture with Dow Chemical, which recently began to ramp up.

“I don’t see any reason why that, or something like that, can’t be brought in part to the market,” he says.

Mr Besland agrees that the more mundane option of offering pieces of Aramco’s vast downstream operations is the strategy that best meets its goals.

“Really, the most sensible option and most probable option, in the short term at least, would be to float participation in the downstream businesses,” he said. “That makes sense and it is where they really need to invest in the future to create more economic development.”

In any case, “whatever they would like to IPO it will be too big to be ignored,” said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi. “Even the downstream part of the business might be interesting – margins have improved recently in that subsector, which can bring more attention from investors.”

That certainly wouldn’t be the radical free market jolt that the crown prince was musing over, but it would be a more realistic objective.

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Abu Dhabi GP Saturday schedule

12.30pm GP3 race (18 laps)

2pm Formula One final practice 

5pm Formula One qualifying

6.40pm Formula 2 race (31 laps)

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

In numbers

Number of Chinese tourists coming to UAE in 2017 was... 1.3m

Alibaba’s new ‘Tech Town’  in Dubai is worth... $600m

China’s investment in the MIddle East in 2016 was... $29.5bn

The world’s most valuable start-up in 2018, TikTok, is valued at... $75bn

Boost to the UAE economy of 5G connectivity will be... $269bn 

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