So The Saudi Aramco IPO Might Never Happen - Who's Surprised?

The "crude" vagaries of geopolitics.
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Back in May, when the U.S. pulled out of the Iran nuclear deal, some folks were skeptical about the prospect of the Saudis stepping in to keep a lid on oil prices by replacing any Iranian barrels lost to sanctions.

That skepticism was based on a number of factors, laid out in these pages as follows:

While the Saudis support Trump’s decision on Iran, they’re also pretty keen on seeing higher prices in the interest of driving up the valuation on Aramco and also for other reasons tied to the Kingdom’s fiscal position and financing the ongoing (and seemingly intractable) conflict with the Houthis in Yemen (bombs ain’t cheap, yo!)

And because there’s only so much money you can extort from your relatives on the way to replenishing your reserves, oil prices need to rise even if that entails otherwise uneconomic U.S. production comes back online or is further emboldened.

Given that, the assumption that Riyadh is going to be willing to step in and replace any lost Iranian barrels in the interest of keeping prices anchored seems a bit tenuous – no matter what the official word from the Kingdom is.

Trump's decision on the JCPOA came about three weeks after his now infamous "at it again" tweet, which suggested the administration might try and badger the Saudis into marshaling support within OPEC for a production hike in the interest of preventing rising prices at the pump from eating into the savings U.S. consumers were set to enjoy from the GOP tax cuts.

Fast forward to the end of May, and Saudi energy minister Khalid al-Falih confirmed that talks were in the works for a supply increase in the back half of the year. Apparently, Trump's tweets achieved their desired end.

By now, it's readily apparent that the promise of higher production from OPEC and Russia isn't going to be enough to offset supply concerns tied to the Iran sanctions and Venezuela's ongoing descent into failed state status. BofAML, for instance, is out suggesting that prices will likely head to $120/bbl if Trump adopts a "zero tolerance" policy when it comes to allies' imports of Iranian crude.

That brings us back to the prospect of Saudi Arabia intervening to keep prices low, something Trump is now literally demanding on Twitter (in all-caps). In a lengthy piece detailing how the Aramco IPO may never actually come to fruition, Bloomberg notes that part of the "problem" is the U.S. President. To wit, from an article out over the weekend:

In early 2016, Mohammed bin Salman said he planned to sell shares in the kingdom’s crown jewel: Saudi Aramco, the giant energy company that produces 10 percent of the world’s oil and finances the Saudi state. The initial public offering—planned for 2018—would be the deal to end all deals, raising more than $100 billion for a new sovereign wealth fund, creating the world’s most valuable listed company, and funneling hundreds of millions of dollars in fees to Wall Street’s elite banks. MBS, as the 32-year-old crown prince is known, said the company would be worth at least $2 trillion—more than double the current market valuation of Apple Inc.—and perhaps as much as $2.5 trillion.

[...]

[Now], the company finds itself caught in geopolitical crosswinds once again. Riyadh needs higher oil prices to fund its national budget and get the Aramco valuation closer to the $2 trillion target MBS wants. But that’s antagonizing Trump—Saudi Arabia’s most important ally—and other customers, notably China and India, the world’s second- and third-largest oil consumers. On April 20 the U.S. president took to Twitter to lambaste the Saudis’ push for higher oil prices. “ Looks like OPEC is at it again,” Trump tweeted. “Oil prices are artificially Very High!” Since then, Trump has issued more tweets about oil, Saudi Arabia, and the Organization of Petroleum Exporting Countries. In one, he said he’d persuaded Saudi King Salman to raise production in order to lower prices.

Earlier this year, Bloomberg got its hands on some leaked documents which gave the public its first glimpse into Aramco's finances. It is indeed the world's most profitable company (and by a wide margin).

Aramco
Aramco2

But Bloomberg's analysis also laid bare some of the details behind the tax regime Aramco is subject to. Additionally, a revised royalty system means rising crude prices entail larger payouts to Riyadh. Considering MBS's ambitious plans for the Kingdom and the ongoing war of attrition in Yemen, it's not entirely clear why potential investors shouldn't expect that, in the event it's "necessary", the Saudis won't simply raise taxes on the company to pay for shit at the expense of profitability.

Whatever the case, Aramco is now being dubbed "the zombie IPO" and you've got to believe that Trump's insistence on trying to drive oil prices down doesn't help the situation. Even if he's ultimately unsuccessful in engineering a correction, the fact that he's able to influence the Kingdom's decision making simply by tweeting is probably disconcerting for investors.

Don't let the irony here be lost on you. Back in November, just weeks after Jared Kushner made an undisclosed trip to Saudi Arabia to visit with MBS and just hours ahead of the Saudi purge, Trump tweeted the following about the IPO:

Would

Now, the bottom line appears to be that Aramco's IPO is stalled - indefinitely.

"Everyone is almost certain it is not going to happen", a senior executive told WSJ this week.

Perhaps the most amusing part of this entire saga is that thanks to the above-mentioned purge, MBS might not need the money as badly as he did last year.

There is indeed "only so much money you can extort from your relatives" (as I put it earlier this year), but the amount the Crown Prince managed to secure during the months-long charade that entailed locking up prominent Saudis (including Trump troll and international celebrity investor Prince Alwaleed bin Talal) in the Ritz-Carlton on "corruption" charges might have been enough to effectively backburner the Aramco IPO.

MBS extracted some $100 billion in settlement payments over the course of the corruption crackdown.

That, Bloomberg reminds you in the same post linked above, is "the same amount the Aramco IPO was supposed to provide".

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